After attending a meeting of the International Insurance Society in Taipei, Jean-Paul Louisot considers some of the challenges beyond the cycle for the insurance industry

What impact is the subprime crisis likely to have on the insurance industry? The sub-prime crisis is still unfolding, and it is hard to predict at this stage what the ultimate impact on the economy will be, let alone on the insurance industry. Estimates of the final tally vary from US$1 trillion ($1.07 trilllion) to $7 trillion.

However, some lessons must be learned from what may well prove to be a turning point for the global economy, after the “defeat” of communism and the great Asia deflation, and with the end of easy cheap money based on loose monetary policies. Several speakers at the meeting emphasised that the crisis’s main origin was greed. In their race to increase short-term return, many operators in the financial markets had lost track of the underlying equation linking risk and return.

In the short term, it seems that the direct impact of the crisis should be limited because the “asset side”of the insurance balance sheets did not seem heavily invested in mortgage derivatives. Some companies may, however, be hurt on the “liability side” if they have covered losses from the derivative markets.

There remains an ancillary issue: the surge in most commodity prices will have an impact on insured losses when plant and equipment will have to be replaced following an insured event. The impact on the income statement may be limited if the premium takes into account revised value for the insured sites, significant if the soft market being experienced stops increasing premiums following the “economy of the foreseeable losses”.

In the long run, however, the insurance industry may suffer from a moderate to severe downturn of the global economy. There is a risk of declining standard of living everywhere; hence, solvent demand for coverage in property and casualty may decrease and the savings available for life insurance also.

The increased vigilance of the supervisors and notation agencies may increase the solvency of the insurance companies and public “safety”, but it may have a negative impact on return on assets.

What are the strategy options for different markets?“Innovation is the new currency of competition. It is the key to organic growth, the lever to widen profit margins, the Holy Grail of 21st Century Business.”–Businessweek 19 June, 2006.

The world economy is going through a period of turbulence accompanied by uncertainties that bring both opportunities and threats. In such an environment, how does an insurance company plan for strategic growth?

Clearly, the only course of action that would not be sustainable would be to wait and see. When focusing on “strategic” rather than organic growth and/or market expansion, we open a complex field with an array of alternatives, depending on the maturity of the market.

At the IIS seminar, one executive from Sun Microsystems came up with a list of questions to challenge the status quo that should be addressed in any market, whatever its level of maturity:

• What is the impact of social computing on our future? How do we handle Gen Y?

• Are customers expecting a new channel experience?

• Should we move the customer experience from simply transactional to one of community participation?

• Can we make doing business with the bank/insurer as simple and as seamless as possible?

• Do we really want to do business with our customers on their terms?

• How can we enrich the customer experience?

They summarise the basic question of Marketing 101: Listen to your customers. However, mature markets offer different challenges to those of emerging markets, and there are regional differences that require specific understanding of cultural, legal, economic differences to ensure sound long-term planning and strategic development.

In emerging markets where regulatory environments are continuously evolving to catch up with an expanding market – and foreign multinational companies are competing for market penetration – the playing field can be somewhat erratic. In the end, if the long-term success of any player rests in his clear definition of tailored growth strategy, it is even more dependent on a precise and careful execution.

One of the speakers at the meeting went so far as saying: “insurance is all about execution”. In fact, this is probably mostly true in emerging markets with growth potential in the double digits in the foreseeable future; hence the major importance of quality service and quality staff.

For the mature market, the question is to set reasonable goals, because market share has to be gained over the competition, or from other financial services.

What are the insurance needs for an ageing population? Sherry Manetta, director at Conning Research and Consulting, calls for the industry to innovate to answer the needs of the baby boomers entering the retirement era. “The industry is at an inflection point” she says. “There needs to be an emphasis on what impact the impending retirement will have on the marketplace.”

The industry must address the concern that the baby boomers have about the longevity risk of the pension funds, whatever their structure, financing mechanism – repartition or capitalisation – and nationality.

They want a regular income stream, to leave money to their heirs and the flexibility to have their funds available to pay for other needs such as long-term care.

However, the insurers are also competing with banks and mutual fund companies. In some respects, the competitors enjoy a favourable competitive environment, at least at the regulatory level in the US, when they can create structured pay-out products where the reserving regulations are more onerous for insurers.

Therefore the burden is on the insurer to come up with the right product structure to meet the needs of retirees, sometimes to balance them because they may prove contradictory. How well they meet those needs will determine the market share they can win from the competing industries. However, it will fall on the legislators to create an optimal regulatory environment and appropriate incentives.

Some changes to guaranteed benefit products in the US are addressing some of those fears. New guaranteed minimum withdrawal benefits products are being developed that provide the policyholders with the assurance that their ultimate withdrawal will be no less than the initial investment.

The last real evolution for the insurance market seems to have been the introduction of service access in case of an event, rather than a financial compensation for losses. As a baby boomer, I would feel far more protected by an assistance-like product guaranteeing my long-term care, should I become dependent. Long-term care facilities coupled with coverage could prove a more profitable investment for insurance companies than office buildings.

How can the insurance industry compete for talent?

When considering long-run strategies, ie a seven to 15-year horizon, this may prove to be the crucial issue facing the insurance industry because GenY will clearly be in hot demand and the talented may not see insurance as their first choice when so many industries will try to attract the best.

This issue of human capital remains at the forefront of C-suite and boardroom priorities and constitutes probably the greatest asset in most companies.

With the baby boom generation reaching retiring age, and even if we assume that many will work well past the “generally accepted retiring age,” it will become more and more difficult to develop a skilled leadership team.

If the challenge is more immediate in emerging markets, where the demand for proficient distribution teams is fuelled by a tremendous growth in the demand for insurance coverage – particularly in the life sector – the talent squeeze is looming even larger in mature markets.

Specialised and technical talent such as actuaries, risk specialists, underwriters, and claims managers are also in great demand, no matter the level of sophistication of computer based processes.

However, if all the panellists on the topic at the IIS meeting agreed that talent management is a definite priority for CEOs, there was not a consensus on whether retention of existing staff or recruitment of new people should be the bigger priority in a highly dynamic and competitive environment, especially for the time being in the Asia-Pacific region or the emerging BRIC (Brazil, Russia, India, China) countries.

As chair of the panel, Michael Magsig, managing director of Korn Ferry USA, noted that growth and demographics are driving disparity, especially in Asia, where demand is outstripping supply for talent. This has operated as a swift elevator with younger people landing bigger jobs sooner, but also led to higher premiums paid for experienced staff, and a greater turnover of staff magnetised by a fiercely competitive environment.

Shikita Sharma, managing director, ICICI Prudential Life Insurance – the largest private sector life company in India with close to 30,000 employees and 300,000 agents – has emphasised that taking into account the high cost of training, retention should be the highest priority. She insisted that most people who leave do so because they feel undervalued.

Michael Casella, managing director, Asia Pacific, at Chubb, proclaimed a 98 per cent retention rate among those executives that attended the company’s action learning and executive leadership program. However, he warned against a self-defeating cycle, should the industry allow the bright young sparks to join other industries.

In keeping with the new generations’ expectation, Casella said it was essential to focus on broad skill development to create a culture that “would sustain and encourage learning, adapting, and executing”.

As far as Gen Y is concerned, all agreed that they are characterised by their aspiration to be more involved in decision-making, to get more responsibilities, and to move up the ladder faster. There is even an urgent need to “retrain” the older managers who are managing GenY because they need more than any previous generation to be individually valued, and become easily bored if things do not move quickly enough for them or around them.

Jean-Paul Louisot is senior director of knowledge resources at the Insurance Institute of America, and Dean of Curriculum – CARM_Institute