GlobalInsuranceOutlook2012_011312US_FSI_

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2012 Global Insurance OutlookGenerating growth in a challengingeconomy takes operational

excellence and innovation


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Contents

Foreword 3

Executive summary 4

Generating growth in a tough economy 5

As the market turns 5

Target emerging markets 6

Growth via mergers & acquisitions 7

Enhance distribution options 8

Achieving operational excellence 9

Adapting to regulatory changes 9

Quality control: Taking enterprise risk management to the next level 11

Winning the war for talent 12

Driving innovation 14

New product offerings 14

Exploring new frontiers in predictive analytics 15

Tech can be transformational 16

Brand resilience 17

Marketing challenges 18

Where do insurers go from here? 19

Acknowledgments and contacts 20


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2012 Global Insurance Outlook Generating growth in a challenging economy takes operational excellence and innovation 1

Dear Colleagues,

These are extraordinarily d icult times or insurers to grow their business, with the U.S. and Europe struggling to jump-

start their economies and a double-dip recession not out o the question. But the economy is not the sole obstacle

conronting carriers. Theres also the more undamental need to change how the industry does business to meet rapidly

evolving consumer expectations in terms o products, distribution, service and technology.

To succeed in this demanding environment, insurers will need to come up with creative strategies to generate growth.

At the same time, they must keep striving to improve operational excellence to squeeze costs out o the system andadapt to domestic and global regulatory reorms. The pressure is also on or insurers to dierentiate themselves in a very

competitive market by driving innovation in products and services, deending their brands and winning the war or talent.

These are achievable goals, even in a tough economy, and insurers cannot aord to merely hunker down and wait or a

broad rebound to boost their bottom lines. Indeed, its looking as i high unemployment, low interest rates and a volatile

investment market may be the new normal or quite some time to come. Thereore, companies should remain on

the oensive by rethinking and reshaping the status quo so they can excel no matter what state the economy or their

particular markets are in.

This Outlook is based on original research combined with the insights and rst-hand experience o many o Deloittes

leading insurance practitioners. Our goal is to explore some o the biggest challenges insurers ace today and how they

might proactively respond to achieve a competitive advantage in the short- and long-term.

Rebecca C. Amoroso

Vice Chairman

U.S. Insurance Leader

Deloitte LLP

Foreword


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Insurance companies across the industry will have to

overcome signicant hurdles as they look to bolster their

top- and bottom-lines in 2012.

For one, the U.S. and Western European economies remain

in the doldrums, with gross domestic product (GDP) gains

likely to be slow and unsteady or the coming year and

perhaps well beyond. That means businesses may hesitate

to launch new ventures, expand existing operations or hire

aggressively, thereby limiting organic exposure growth orproperty and casualty (P&C) carriers.

Meanwhile, low interest rates in the United States are

making it dicult or lie insurance and annuity (L&A)

writers to deliver attractive returns to prospects (while

putting a damper on investment income or both L&A

and P&C carriers). At the same time, persistently high

unemployment and a sluggish recovery in the housing

market is putting a crimp in amily wealth perception and

disposable income, which could make it harder to expand

sales o discretionary nancial products such as ind ividual

lie insurance or an annuity or retirement.

Yet even in such uncertain economic times, there areopportunities to generate protable growth by attracting

new customers as well as taking market share away

rom competitors. Insurers can achieve this by tweaking

existing products and launching new ones, reevaluating

their distribution systems, reconsidering their marketing

strategies and reinventing their customer experience.

At the same time, insurers must keep transorming their

operations to improve margins and drive more prot to

the bottom line. They can adopt new technologies and

management strategies to squeeze unnecessary costs out

o the system, as well as employ their people and capital

more productively. They might also be called upon to

integrate operational and capital changes to meet thedemands o developing regulatory reorm initiatives, both

in the United States and globally.

In this Outlook, three areas o insurer ocus will be examined:

Generating growth: Changing market conditions

have created opportunities or organic growth.

However, insurers can also expand with strategic

Executive summary

mergers and acquisitions, as well as by moving into

emerging markets with aster-growing economies.

Closer to home, they can add new distribution outlets

and/or enhance their existing channels to capture

more market share or their product and service lines.

Achieving operational excellence: Insurers still have

many opportunities to improve their bottom-line

protability i they cut unnecessary costs and boost

the productivity o their people. The ability to adjust

to new regulatory demands being made in the UnitedStates and around the world is one major requirement.

Better integration o enterprise risk management (ERM)

throughout an organization is another important step,

particularly in bracing against black swan events that

could cause major disruptions to both clients and their

insurers. Winning the war or talent by improving both

recruitment and retention is also a major challenge

acing carriers today.

Driving innovation: Those insurers that stay ahead o

the game with their products, services and operations

are more likely to have an edge regardless o the state

o the overall economy or their particular market.

Carriers can introduce new products or revampexisting ones to better dierentiate themselves. They

can expand the use o predictive analytics to take a ar

more quantitative approach in managing everything

rom claims to distribution to talent recruitment.

Others are upgrading their technology and bringing

new tools and systems on board to transorm how

they run their business. Many carriers are enhancing

the customer experience by oering additional ways

to interact, including through social media and

mobile applications. There is also the potential to

reach underserved markets, as well as better manage

reputational risks through brand resilience initiatives.

While achieving growth, operational excellence andinnovation in such a dicult economic and competitive

environment might be easier said than done, opportunities

are available or insurers that can seize the moment. This

Outlook will discuss some o the options insurers might

consider to grow even in the toughest o economies, as

well as the obstacles they might have to overcome to keep

growing throughout what could turn out to be a very

dicult decade ahead.


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Generating growth ina tough economy

Daunting macro-economic problems are making it hardor insurers to generate consistent growth, with adverse

conditions likely to persist or at least the next 12 to 18

months and perhaps well beyond.

While the U.S. economy has shown signs o picking up

in terms o consumer spending and GDP, there are global

obstacles that could impede growth, both in the short- and

long term. For example, the euro-zone nations continue

to struggle with sovereign debt. More governments are

imposing austerity programs to balance their budgets and

are unable to allocate additional unds to stimulate their

stagnating economies. This could impact the U.S. recovery

(and retard exposure growth or insurers) i exports begin to

slide. Euro woes could also keep investment markets volatile,undermining insurer earnings.

Such uncertainties have resulted in a classic chicken or the

egg scenario, with many U.S. companies hesitant to invest in

new production capacity or add employees until consumers

start spending more enthusiastically again. Yet consumers are

hesitant to spend beyond the essentials while the economy

particularly the job and housing marketsremains so weak.

However, despite these underlying macro-economic

conditions, insurers have opportunities to grow i they have

the resources and the will to seize the moment.

As the market turnsIn the P&C sector, insurer top lines will benet rom rising

prices, prompted in part by high 2011 catastrophe losses

and subsequent hikes in reinsurance premiums. In personal

lines, auto and homeowners carriers have both consistently

seen higher rates (although loss-driven rather than based

on exposure growth), while the sot market in commercial

lines appears to have bottomed out at last, with carriers and

brokers reporting signicant premium increases on renewals.

On the L&A side, while variable annuity sales are growing,

products with structured guarantees are likely to continue

to struggle in this low interest rate environment. Whole lie

insurance sales are on the rise, but there are undamental,

longer-term challenges conronting lie carriers as they

explore ways to reverse declining penetration rates while

modernizing and streamlining their marketing, sales and

distribution systems.

Overall, however, there are opportunities or annuity growth

as more consumers seek retirement income options. On the

lie side, ar rom being a mature market, carriers have a

large uninsured and underinsured population to target i the

right products, marketing messages and delivery systems can

be devised and implemented to bring these prospects into

the old.

Expand into

emerging markets

Consider strategic

M&A

Revamp existing

policies

Launch new

products

Add/enhance

distribution

outlets

Raise rates/

increase

penetration

Each option has the potential to provide a long-term boost in revenue

Growth possibilities

Figure 1: How might insurers buck economic trends?

Achieving growth in an uncertain economy might be

easier said than done, but insurers have a number

of opportunities to set the stage for both short- and

long-term expansion.


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Target emerging markets

With the U.S. and Western European economies ailing to

deliver consistent, large-scale growth, its only natural or

insurers to consider greener pastures in emerging markets

such as China, India and Brazil. While there are oten

obstacles to doing business in such countriesincluding

local regulatory hurdles, inrastructure and distribution

challenges, tax considerations as well as cultural

dierencesthe need or insurance coverage to meet the

nancial security demands o an expanding middle class

could provide signicant growth opportunities or those

with the resources and capabilities to capitalize on them.

Indeed, looking at insurance penetration rates in 2010,

the ratio o non-lie insurance premiums to GDP is just 1.5

percent or Brazil, 1.3 percent or China and 0.70 percent

or India, compared to 4.5 percent or the United States,

4.1 percent or Canada and 3.1 percent to 3.7 percent

or major European countries1, leaving plenty o room

or new insurers to set up shop and acquire a share o

these relatively untapped markets. Brazil, or instance, has

seen strong economic growth, ueled in part by a young

population that is increasingly in need o nancial products

and services.

Meanwhile, the Asia-Pacic region is already an attractive

target or carriers, accounting or 23 percent o global

M&A insurance activity in the rst hal o 2011, up rom

12% in scal year 2010 and scal year 2009.2

China, the biggest economy in the region, generated

GDP growth o 9.5 percent in the second quarter o

2011down a bit rom the prior two quarters, but still

bullish compared with the low gures produced by the

U.S. and European economies o late. In addition, wages

in China have been rising, and insurable exposuresboth

commercial and personalhave been expanding among

a growing middle class. However, there are caution signs

or those looking to invest in China, which is coping with

infationary pressure and an aging population.

Indias burgeoning middle class, rise in disposable income and younger demographic profle are attractive eatures or insurers

seeking growth, although regulations limit direct investment opportunities or oreign carriers.


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Another major emerging market is Ind ia, which reported

GDP growth o 6.9 percent in the second quarter

down rom the prior quarters 7.7 percent rate, but still

ar healthier than the numbers their U.S. and Western

European counterparts have been able to produce. The

countrys burgeoning middle class, rise in disposable

income and younger demographic prole are attractive

actors or insurers seeking growth. One hurdle, however,

is that the Indian government limits oreign direct

investment in cross-border M&A, meaning oreign insurer

participation in joint-ventures with domestic rms is

capped at 26 percent.3 A move to increase that ceiling was

recently tabled in Parliament.

India is one o the emerging markets where micro-

insurance is being more aggressively promoted to provide

nancial security to the poor. Indeed, Indias ederal

insurance regulatory body has relaxed rules or micro-

nance institutions, non-government agencies and

sel-help groups to act as micro-insurance agents to the

rural poor. Oering a wide range o services and products

through an expanded distribution channel will allow rms

to broaden penetration o this market, which currentlyonly covers about ve million or 2percent4 o the poor in

the country.

Similar eorts are underway in Brazil, with at least one

major U.S. carrier recently announcing plans to expand

micro-insurance in that country. In addition, U.S. insurance

groups have challenged recent moves by Brazils insurance

regulator to restrict the amount o coverage that the

countrys primary and reinsurance carriers can cede to

oreign reinsurers.

Markets in the Middle East and North Arica region also

oer a rich and sizable prospect base to tap, but therecent Arab Spring may not allow or insurer business to

bloom in the short term, as political instability is likely to

discourage investment while new governments take root.

Insurers might also need to tailor their product oerings

to be Takaul (Islamic) compliant, an area in which many

Western carriers lack expertise.

Because emerging markets have their own characteristics

to contend with, insurers looking to expand internationally

will be challenged to tailor their product oerings. China,

or instance, has more o an aging population, while India

and other emerging markets skew ar younger5. Local joint

ventures will have to be established, distribution strategies

must be customized, and dierent regulatory compliance

demands must be met by carriers looking to enter

these markets.

Its likely well see more multinational rather than ully

global players, as carriers pick their spots and invest

capital only in countries where they have a good chance

o achieving scale and making a prot, while others look

to divest and sell their holdings in selected markets to

consolidate positions and ocus on core competencies.

In the meantime, international expansion is not a one-way

street, as by the end o the decade, we are likely to see

a global or at least multinational insurance provider arise

rom one o the emerging economies that might look to

expand into the U.S. and/or European markets.

Growth via mergers & acquisitions

Insurers, hard put to grow organically in this struggling

economy, can still opt to expand by merging with orbuying other carriers. In act, the time appears to be ripe

or more consolidation in insurance, which suers rom

excess capital, bargain pricing ater years o cuts in P&C

rates, and low returns or both lie and non-lie carriers.

M&A volume was indeed on the rise in 2011. However,

deals tended to be strategic, bolt-on acquisitions,

with buyers adding new product lines and distribution

channels, as well as expanding their geographic reach into

emerging markets internationally. Sellers, on the other

hand, shored up their bottom lines by divesting non-core

or underperorming books o business and subsidiaries,

while withdrawing rom oreign markets where they lackedsucient scale.

Why wasnt there more M&A activity given the macro-

economic conditions insurers conront? For one, potential

buyers that are publicly-held may be under pressure rom

investors to pay dividends and oer stock buybacks rather

than devote capital to potentially risky takeovers. And even

or acquisition targets trading below book value, buyers

may be questioning the strength o a sellers reserves.


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Cash has also been king in closing deals, adding another

potential complication. Regulatory considerations

particularly with deals to enter oreign marketsmay give

buyers pause as well. Others may be discouraged by the

act that acquisitions could end up destroying value at least

in the short term, making buyers wary o pursuing this

option in such uncertain economic conditions.

Still, with more carriers undergoing strategic reviews or

potential M&As o late, the stage is perhaps being set or

an uptick in bigger deals in 2012, particularly i organic

growth remains as challenging as is expected over the

short- to medium-term.

Enhance distribution options

To increase market share and generate growth, carriers

have begun to reexamine and adjust their distribution

capabilities. For some, that means adding new channels

such as an online sales capability, either on a stand-alone

basis or to complement their existing agency distribution

orce. For others, that means changing who they

distribute through.

In the latter caseparticularly or those using independent

agentscarriers oten swing two ways in terms o

producer assessment. Traditionally, the pendulum has tilted

more towards the emotional side o producer relations,

which emphasizes the personal relationships maintained

over the years with carriers.

But the lack o growth and the need to invest more

strategically might very well motivate insurers to swing

more towards the scientic side, basing their distribution

decisions on analytics by delving into what kind o business

an agent is producing (and more importantly, what they

are likely to produce going orward), as well as how thecarriers strengths (brand, lead generation, transaction

turnaround time) meet the agents (and consumers)

needs.6 These decisions will become more pressing as the

agent population continues to age, with a growing share

o business produced by those nearing retirement age.

The lie insurance sector is particularly ripe or

transormational change when it comes to modernizing

its distribution system. The goal is to eventually become

ully integrated technologically or intermediaries and

consumers, with sales leads, illustrations, applications,

underwriting and policy issuance handled electronically.

Implementation o advanced predictive analytics is already

producing reliable underwriting using non-intrusive customer

inormation (no needles or medical tests!), with decisions

delivered within minutes or some and days or others, rather

than the weeks or even months it sometimes takes now to

nish a transaction.

Producers continue to be concerned about disintermediation

as more carriers add online capabilities. However, online and

agent channels need not be mutually exclusive, and in act

electronic and human inormation sources could be quite

complementary. Consumers are likely to increasingly go on

the Web to research and shop or insurance. Indeed, Deloitte

Consulting research into insurance consumer needs show

that an insurers ability to be accessible 24/7 by oering

multiple contact optionsonline, over mobile phones and in

personis becoming a very important consideration when

making a purchase decision.7

In the U.S. market, while a growing number o consumers

are likely to buy simpler, commoditized personal lines andlie insurance policies on their own direct rom a carrier

over the Web, a core o buyers will continue to do business

with agents or the added value they oer in terms o their

opinions about what to buy, explanations o coverage and

support when ling a claim. Indeed, Deloittes auto insurance

consumer survey ound that one in our respondents who

now buy auto insurance through an agent would not

purchase coverage without an intermediary.

On the L&A side, products beyond term lie are still primarily

sold via an agent or nancial planner, whose added value is

to educate consumers about their options, oer suggestions

on how to proceed and walk them through the transaction.But that doesnt mean lie insurers wont continue to expand

direct-to-consumer sales where possible, particularly because

its dicult to incentivize lie agents to service the middle-

and lower-income markets.

In the end, those carriers that are able to better integrate

data-based, analytical considerations to objectively assess

their sales orce while delivering a multi-channel experience

or both producers and consumers will likely be more

successul in achieving long-term growth and retention.


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For years, insurers have been striving to reorganize their

systems and upgrade their technological capabilities to

reduce unnecessary costs and improve productivity while

becoming more fexible and nimble. That quest continues

with even more urgency in the current economic climate,

with organic growth hard to achieve and bottom lines

driven more by how eciently insurers manage

their operations.

One major uncertainty in terms o cost is the impact o

regulatory reorm, both in the United States with the

implementation o the Dodd-Frank Wall Street Reorm and

Consumer Protection Act and in the European Union with

Solvency II capitalization requirements and new accounting

standards under development. Indeed, insurers that adapt

most eectively to the changing rules o the game could

gain a competitive advantage.

Another goal is to improve the quality o an insurers

decision-making process by taking enterprise risk

management to the next level. Insurers can benet by

making the ERM discipline part o their operating DNA,spreading ownership o risk across the operation and

improving risk disclosure and governance. In addition,

sound ERM better prepares companies or worst-case

scenarios such as black swan eventsthose low

requency but high severity developments that not only

can disrupt their clients (resulting in insured losses), but

threaten the viability o an insurers own operations.

Another threat to operational excellence is the aging o the

insurance workorce, with shortages anticipated in claims

and sales, as well as among actuaries, nancial managers

and systems analysts. Recruiting new blood to ll these

highly skilled positions is just one part o the process. The

other is retention, as workers seek career growth and

competitors move to convince experienced talent to join

their team.

How might insurers overcome these challenges to achieve

operational excellence?

Adapting to regulatory changes

Regulatory Anticipation Fatigue is one way to describe

the current state o the insurance industry in reaction

to nancial regulatory reorm. The erce urgency o the

immediate post-Dodd-Frank era has given way to a hurry

up and wait interlude on both sides o the Atlantic,

leaving the industry aware o the impending burden o

new regulations, but unable to prepare denitively or

what is oten no more than the ghost o regulationsyet to come.

Achieving operational excellence

Figure 2: Putting the regulatory reform pieces together

The initial urgency of regulatory reform on both sides of theAtlantic has given way to a hurry up and wait interlude,leaving the industry unable to prepare definitively for new rulesyet to come.

Solvency II

Internationalfinancialreportingstandards

Systemicallyimportantfinancial

institution

Dodd-FrankAct

Own riskand

solvencyassessment

VolckerRule Federal

InsuranceOffice

NAIC solvencymodernization

Ratingagencies

One regulatory change that has already happened

and may have a long-term eect on the industry is the

unanimous adoption by the International Association o

Insurance Supervisors (IAIS) in October 2011 o revised

Insurance Core Principles (ICPs). The ICPs, while not legally

binding, essentially are the best practices o regulation

and supervision, and orm the basis o the evaluations o

national or other regulators by the International Monetary

Fund (IMF). Notably new in the revised ICPs is an emphasis

on market conduct.


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Policyholder protection has long been an integral part

o insurance regulation in the United States, but some

jurisdictions have been particularly active this past yeara

trend that may reasonably be expected to continue because

part o the mandate o the new Federal Insurance Oce (FIO)

is to prepare a report or Congress by January 31, 2012, listing

ways to improve insurance regulation, including i consumers

could be better protected by ederal oversight.

Notable has been the move by numerous states to monitor

the use by insurance companies o the Social Security

Death Master File (DMF). Some companies allegedly

have used the DMF to stop paying annuity benets, but

not to pay benets when the policyholders death is not

otherwise reported to the company.

Regulators led by Florida, New York, Caliornia and

others, as well as the National Association o Insurance

Commissioners (NAIC), have begun vigorous eorts to

investigate the concerns raised and provide remedies. The

New York Attorney General and Comptroller launched an

investigation o lie insurance claims payment practices.The National Conerence o Insurance Legislators (NCOIL)

passed a new model act in November that, i adopted

by states, would impose on insurers more stringent

requirements or actively seeking out deceased insureds.

Combined with previous press and political concerns

raised about Retained Asset Accountssome o which

also became unclaimed benetsthis issue may stimulate

a more in-depth look by regulators at other previously

accepted industry practices.

The prominence o market conduct concerns may also

be seen in the structure o New Yorks new regulator, the

Department o Financial Services. This new agency has a

special Division o Enorcement, apparently co-equal in

power to its insurance regulatory division, the Division o

Insurance, and charged with criminal as opposed to civil

enorcement. Whether this move in the worlds seventh-

largest insurance market by premium volume is a harbinger

o things to come may become evident over the upcoming

year, but it is worth noting the NAIC is using its consumer

protection record and ocus as one o its main deense

platorms as it seeks to position itsel to protect state

regulation against possible ederal intrusion.

Against the backdrop o consumer protection activism,

solvency concerns and eorts to address them seem

to have slowed down. For example, while group

supervision is still o prime importance, IAIS discussions o

ComFramethe common ramework or the supervision

o internationally active insurance groupsrevealed a deep

divide between European and American regulators on the

inclusion o capital standards and metrics. The Europeans

see those as necessary, while the Americans do not seethese standards as becoming a part o ComFrame in the

near uture. This would seem to indicate that a common

solvency ramework remains years away.

While the NAIC continues work on its Solvency

Modernization Initiative (SMI)including an Own Risk and

Solvency Assessment (ORSA) that would shine a spotlight

on ERMthe European Solvency II initiative seems to have

hit some snags. Recently, the Europeans have indicated

the implementation o Solvency II continent-wide will be

delayed until the beginning o 2014. This delay may raise

issues or companies operating in the United Kingdom,

which the Financial Times said on October 4 may not beable to avoid running two sets o capital models and

reporting standards in parallel during 2013, when the

[United Kingdom] Financial Services Authority runs its

triennial capital adequacy test o the industry.

Meanwhile, the FIO, while not a regulator, is tasked with,

among other requirements, reporting to Congress annually

on the status o the insurance industry. Its director has

been empowered to require inormation rom insurersby

subpoena i necessary. So ar, aside rom seeking public

input into its January 2012 report on state regulation,

there has not been much public activity by the FIO, and the

enthusiasm or additional regulatory enorcement appears

to have been dampened on Capitol Hill.

In addition, certain insurers may ace increased regulatory

burdens i they are designated as a systemically important

nancial institution (SIFI), either nationally or globally. The

Financial Stability Oversight Council (FSOC) has issued

revised proposed criteria or comment, and the rules are

expected to go into eect early in 2012. Internationally,

the IAIS is on track to issue its denitions or Global SIFIs

by early next year.


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Another potential concern is the impact state budget

crises may have on the speed o regulatory decision-

making at insurance departments. While many states levy

assessments on the industry to und their regulators,

these are not necessarily kept separate rom the general

state budget, and insurance regulators are not immune

to budgetary pressures. Any signicant cutbacks to

state insurance departments could slow the approval

process and speed to market or rates or new products.In addition, premium taxes could go up in certain states

as legislators look to close budget decits.

One clear expectation is an increased emphasis by

regulators on ERM. Europes Solvency II and the NAICs

SMI both use ERM-based ORSA as an integral solvency

assessment tool. Meanwhile New York regulators are

issuing guidance to their regulated entities, saying a

dedicated ERM unction is a best practice and will be a

subject o examinations going orward.

Quality control: Taking enterprise risk management

to the next levelEven without regulatory pressure, more companies have

adopted enterprise risk management programs, yet much

work remains to be done at many carriers to increase the

depth and sophistication o ERM to evolve into a truly

strategic risk management system. This trend is being

driven both by external orces (such as new demands

rom regulators and rating agencies) and internal orces

(such as demands rom boards o d irectors or greater

accountability and transparency on how risk is identied,

quantied and managed).

Meanwhile, while tornado, earthquake and other regular

natural disaster losses made a big dent in the industrys

bottom line in 2011, more threatening, out o the ordinary

Black Swan events could result not just in widespread

insurance claims, but in severe operational disruptions or

insurers as well. Black Swan losses could result rom the

collapse o a government, the ailure o power grids or

communications networks due to unusual solar storms, the

possibility o a devastating cyber-attack and the potential

or another major terrorism assault. An ERM-based

approach could better prepare carriers or such events,

both as underwriters and day-to-day operations managers.

Many insurers are already doing a better job integratingERM into their standard operating procedure while

spreading ownership o risk into each acet o the carriers

strategic decision-making process. Such work goes

beyond the creation o quantitative models, with more

emphasis being placed on governance, inrastructure

and disclosure. Insurers are also looking to break out o

exposure assessment silos to better consider potential risk

correlations that could have a multiplier eect, such as

how Japans 2011 earthquake and fooding in Thailand

triggered losses across a global supply chain.

ERM should encompass tax risks too, including, or

example, the tax implications o strategic and operationalrisks as well as compliance and nancial reporting risks

regarding income taxes. The emphasis on tax risk has

increased because a leading cause o material weakness

in internal controls at publicly-held companies involves

income tax reporting, and with more states struggling to

close budget decits, state taxing authorities may be more

aggressive in pursuing examinations.

Insurers may also begin to employ ERM to capitalize on

how risk is managed to dierentiate them rom their

competition. In this context, ERM could be a tool or

growth, not just a deensive speed bump. The challenge

is or carriers to use risk to achieve a competitive

advantageor example, by determining how some

initiatives might require less capital than is being

committed by rival insurers.


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Winning the war or talent

With insurance such a knowledge-based business, those

carriers that can develop and retain valuable workers,

attract the brightest recruits out o college and graduate

schools, as well as draw top talent away rom their

competitors and other industries altogether will be in a

better position to excel long-term.

Insurers, brokers, industry associations, university academics,service rms (including Deloitte Consulting LLP) and students

studying or a career in insurance and risk management

gathered in late September to tackle the recruitment

challenge as part o the Insurance Education and Career

Summit, launched by the Grith Insurance Education

Foundation.

The 110 attendees identied three o the biggest obstacles

to attracting new blood into insurance (the industrys poor

image as a career destination, uncoordinated recruiting

resources and the lack o a compelling recruitment

message). They also achieved a consensus in recommending

three initiatives to overcome these obstacles (research intostudent and parent attitudes towards insurance, crating a

catchy, compelling recruitment message and creating an

inormation hub or students).

Eorts are underway to organize the summit participants

to implement these recommendations, but even those

who dont hop on this particular bandwagon can improve

recruitment with proactive outreach, scholarship and

internship programs. And there are broader, deeper

worker satisaction issues insurers can address ind ividually

to make both recruitment and retention o current

employees more eective.

For example, insurers can better retain new recruits and

develop their existing talent base by emphasizing career

growth and job mobility, providing more cross-training

so employees continually learn new skills and broaden

their capabilities, both through ormal instruction and

hands-on experience.

Individual insurers might also consider creating a more

fexible workplace to recruit and retain talent by adopting

fex-time, acilitating work-at-home options and providing

opportunities or their people to make a dierence

beyond just earning a paycheck. And insurers could make

their organizations a more inclusive, diverse, dynamicplace to work.

Figure 3: Insurers face talent shortages

Accounting& Auditclerks

2%4%

11%

14%

-4%

3%

7%

21%

Claimsadjusters

Systemanalysts

Insurancesales

agents

Systemanalysts

U.S. Insurance Industry Critical Workforce Requirements Projection Through 2018

The insurance work force is aging, with shortages anticipated over the rest of this decade in core competency areas, prompting arethinking of how the industry recruits and retains knowledge workers.

Shortage

Surplus

* Source: Bureau of Labor Statistics, Occupational Outlook Handbook, 2010-2011 Edition

-5

0

5

10

15

20

25

Underwriters

Accountants& Auditors

Actuaries Financialmanagers


13/24


Carriers can also employ work orce analytics to prole the

characteristics o roles they are looking to ll, and then

broaden the recruitment pool through predictive modeling

(as in, what other types o proessionals would make a

good actuary or agent?).

Still others could turn to outsourcing to better manage

their work orce, with the ocus on creating a variable

cost structure or certain labor positions. Call centers orclaims processing units, or example, could be handled

on a transaction model to hedge against the possibility

o slow growth or even contraction in individual product

lines. Others are already outsourcing regulatory reporting

unctions and procurement services (such as travel

management). Analytics are also being outsourced or

raud investigations, marketing research and underwriting.

Insurers are increasingly leveraging a global talent supply

to meet their personnel needs. Some U.S. insurers, or

example, are o-shoring certain jobs to oreign laborcenters, while others are moving unctions domestically to

lower-cost venues within the country.


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12

Driving innovation

In a struggling economy such as this, insurers still have

opportunities to innovateor example, by adding new

products and reinventing existing ones, as well as by

improving the customer experience they provide, the way

they manage their business, and how they promote and

deend their brand.

Meanwhile, insurers are making great strides when

it comes to leveraging their data, not just in terms ounderwriting and claims, but in marketing and talent

recruitment as well. New technologies are allowing

insurers to do a lot more, at a lot less cost, a lot aster.

Recent consumer surveys by Deloitte Research also ind icate

opportunities to market to the uninsured and underinsured

lie markets, while more eectively approaching dierent

consumer segments in auto insuranceparticularly

younger buyers.

In any case, those insurers that can dierentiate and

distinguish themselves among consumers while more

eciently deploying their people and capital will be in a

position not just to survive but to prosper despite the stateo the economy or their individual markets.

New product oerings

Carriers continue to explore new niche markets and

develop specialty products to generate additional sales.

On the commercial lines side, emerging exposures

are prompting coverage responses or cyber-liability,

green construction, nanotechnology, the political risk

o globalization and the proessional liability o meeting

new regulatory demands. On the personal lines side,

new products are being launched to oer private

unemployment insurance, as well as protect those whose

home values decline below their mortgage level.

On the lie insurance and annuity side, more hybrid

products are emerging to meet multiple needs. One such

example is incorporating a long-term care benet into a

lie or annuity product. There are also more products that

combine term and universal lie policy attributes. And the

demand or new solutions to retirement security needs

is likely to generate additional product development and

better marketing o existing options.

Insurers can also dierentiate themselves in a tough

economy and competitive market by revamping existing

products. One example is the spreading use o telematicsamong personal and commercial auto carriers, oering

the possibility o premium discounts to those willing to

have their driving electronically monitored. A number

o carriers have introduced this option, and research

by Deloitte Consulting LLP indicates that a good many

policyholders would be open to such an oer under the

right circumstances.

The trend is already catching on. In The Voice o the Auto

Insurance Consumer Survey,7 conducted over the summer

o 2011 by Deloitte Research, one in ve respondents

among a sample o 1,080 auto insurance policyholders

said a discount or installing a driver monitoring device wasextremely or very infuential (about 10 percent or each) in

their last policy purchase decision. Looking ahead, about

30% said they would install a monitoring device or a

discountbut it depended on the savings oered. Nearly

hal o those who would agree to install such a device

would do so i they received a discount greater than 20

percent, but only a handul (2 percent) would or one-ve

percent in savings. One in 10 would get on board or a

6-10 percent discount, one in ve or 11-15 percent, and

one in ve or 16-20 percent.

New twists in distribution are possible as well. For

example, at least one auto insurer is providing coverage

through auto dealers as part o the purchase price o a

vehicle, although regulatory concerns have been raised

about the program.


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Exploring new rontiers in predictive analytics

For an industry as dependent on numbers as insurance,

its remarkable how much room or expansion there is

in terms o using quantitative measures to make better

business decisions. As noted earlier, carriers continue to

make great strides when it comes to predictive analytics in

terms o claims management and underwriting, assessing

distributors and recruiting talent. But there are additional

areas where advanced analytics could make a signicant

impact or insurers.

Social media appears ripe or greater analytic scrutiny.

Many insurers have a presence in various social media

communities, but the question is how to evaluate the

impact o their eorts and benchmark their work against

what competitors are doing in the same public space.

Insurers could benet by developing metrics that matter,

to determine whether social media is attracting and

retaining customers.

Insurers can also use analytics to gather more insights

on buyer needs or better cross-selling. Such data could

serve as an advanced orm o customer relationship

management, as insurers ollow the development o

clients to be in position to oer additional coverage and

services throughout their lie cycle (such as marketing

renters insurance to the college-bound children o

personal lines clients).

In terms o ghting raud, analytics can play a major role

not just in exposing hard-core cheatingthe types o

alse claims that result in people being handcued by law

enorcement. Soter raudsuch as infating legitimate

claims to cover deductiblescan also be spotlighted by

predictive analytical tools.

Insurers are already collecting much o the necessary data

to enhance their analytical capabilities. The challenge

is to correlate the data in such a way that it becomes

actionable on a number o levels8.

Insurers are already collecting much o the necessary data to enhance their analytical capabilities. The challenge is to correlate the

data in such a way that it becomes actionable on a number o levels.


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14

Tech can be transormational

Beyond the expanding use o analytics, there are a

number o tech trends on which insurers can capitalize to

improve customer experience as well as the eciency o

their operations.

Social media can serve both external and internal

stakeholders. Beyond providing a platorm or

policyholders to share inormation and create acommunity to make interactions with insurers more

requent, relevant and meaningul, social computing is

being used more regularly within insurance companies

to improve collaboration, particularly as carriers expand

domestically and globally.

In addition, insurers can more creatively capitalize on

the rapid growth o smart phones, tablets and other

mobile, Web-connected devices. To this end, insurers

are increasingly adding mobile applications to their

service oerings. Some enable claims reporting and

documentation to be led rom the site o a loss over a

smart phone. Others allow prospects to get quotes, checktheir coverage, make payments or track claims progress.

Others are more prospective and educationalassisting

prospects in determining how much lie insurance they

might need, or example. Many carriers are experimenting

with QR codes in their advertising and marketing

materials, which when scanned take consumers to

specic Web pages or inormation or quotes.

Some insurer mobile apps are internally oriented, to

support agents as they prepare or discussions with

clients, or to acilitate the work o claims adjusters in the

eld. For example, some carriers provide lie producers

with the ability to build and present illustrations

right o their tablet device. Insurers will continue to

innovate in this area, transorming tasks into mobile

apps, as well as using mobile technology to extend

their ease o doing business with clients, agents,

employees and business partners.

Capability clouds are also on the rise, delivering

service capabilities while adding computing andstorage capacity or insurers more quickly and less

expensively than i they tried to launch the same

applications in-house.

Labor isnt the sole unction being outsourced,

as more insurers are going outside their own

organizations to implement tech solutions to achieve

operational excellence. In some cases, insurers are

moving their systems into virtual cloud computing

acilities, while others are replacing their legacy

systems by outsourcing their platorm and even sta

to third parties rather than building and maintaining

such programs internally. Some are outsourcing entirebusiness processes, such as claims administration.

As tech transorms insurer operations, chie

inormation ocers are becoming more than just

stewards o systems and processes. As high-level

strategists, CIOs will perhaps become revolutionaries

within their companies as they are increasingly called

upon to suggest how insurers can break out o

traditional ways o thinking and operating.9

Insurers should also keep in mind that some o their

eorts to upgrade their tech capabilities could qualiy

or research and development tax credits.


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Brand resilience

Insurers have long grappled with the problem o

reputational risk management, given the lack o public

awareness and requent misunderstanding about how

the industry operates. Indeed, as noted earlier, negative

perceptions about the insurance business was one o the

chie actors cited as undermining eorts to recruit new

talent into the business.

One potential innovation would be to more

proactively track and respond to negative publicity or

misinormationnot just in the mainstream media, but

delivered via individuals using social media. Anyone can

be a high-impact critic or investigative journalist these

days given the viral nature o Web communication, with

the potential to sway the perception o a carrier or o the

overall industry among hundreds, thousands and even

millions o consumers.

Treating threats to an insurers brand with a

counterinsurgency strategy is one way carriers could

perhaps more eectively deal with events that may

undermine their reputation and brand value. Early warning

systems can be deployed so insurers are not caught o

guard, allowing or more timely responses to criticism or

misinormation. A brand resilience10 program could also

involve galvanizing brand troops to deend the company,

including both executives and ront-line employees.

Some might even consider raising a volunteer army

o brand deenders, providing support rom satised

policyholders whose personal property and businesses are

restored thanks to insurance. Again, analytics could play

an important role as insurers track and measure their brand

resilience perormance.

Assess brand risks

Galvanize your

brand troops

Deploy your

brand risk early

warning systems

Repel the attacks

on your brand

Learn and adapt your

brand deenses

Measure and track

brand resilience

Counterinsurgency

Brand Resilience

Program

Generate popular

support or your

brand resilience

campaign

Figure 4: Reputational risk management

Insurers looking to more proactively defend and promote

their brand reputation might consider a counterinsurgencyapproach that marshals both internal and external resources.

Source: Brand Resilience: Managing Risk

& Recovery In A High-Speed Worldby

Jonathan R. Copulsky, Deloitte Consulting LLP,

Palgrave Macmillan, 2011


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16

Marketing challenges

The 2011 Voice o the Lie Insurance Consumer7

survey, conducted last summer by Deloitte Research,

revealed signicant marketing challenges acing carriers.

Two-thirds o the 1,000 respondents currently without

coverage said they had never looked or lie insurance

on their own initiativea act echoed by 46 percent

o the 1,071 surveyed who do have lie coverage.

This indicates that insurers cannot aord to wait orprospects to come to them.

At the same time, the survey showed that 62 percent o

non-buyers and 44 percent o buyers had not received

any oer to buy lie insurance in the prior 12 months.

One-third o non-buyers said one main reason they

didnt have lie coverage was because no one had

oered to sell them a policy. In addition, o those who

said they had been solicited or coverage in the prior

year, 46 percent o buyers and 40 percent o non-buyers

said the solicitations were not at all infuential in

convincing them to buy coverage.

Thus, large segments o this survey sample dont look or

coverage on their own, have not been oered coverage

recently, and were not infuenced to buy i they did

receive such oers. This would seem to call or a more

innovative approach to prospecting and closing sales.

On the auto insurance side, the consumer survey

conducted by Deloitte Research showed that those under

35 are more likely to change carriers, as well as to droptheir agents and buy directly rom a carrier. Younger

buyers also were more aware o and interested in Web

services, social media and mobile applications.

Overall, Deloitte Consultings auto insurance survey

indicated that buyers across age segments are very

interested in having multiple points o interaction

with carriers (in-person, by phone, over the Web, via

social media and mobile technology), with a particular

emphasis among younger policyholders, which should

prompt insurers to build and maintain multi-platorm

marketing, sales and service systems.


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Where do insurers go from here?

There are no easy answers or insurers looking to grow

their business in this volatile environment. Whether a

carrier chooses to launch a new product line or reinvent

an existing one, expand abroad through a joint venture or

acquire an existing operation closer to home, add a new

technology in-house or enhance their tech capabilities via

a third-party cloud, branch out with a new distribution

system or revamp the one they already employ, there will

be obstacles to overcome and risks to take.

Even in economic conditions as challenging as these,

however, insurers can make a positive impact through

sound, strategic investments to secure growth, achieve

operational excellence and drive innovation.

The main ingredient is a willingness to remain proactive

rather than hunker down until overall economic conditions

improve. While the economy no doubt has a major impact

on insurer growth, carriers need not wait or a rising tide

to lit all boats to bolster their bottom lines.

Even in economic conditions as challenging as these, insurers can make a positive impact through sound, strategic investments to

secure growth, achieve operational excellence and drive innovation.

End notes

1 Insurance Inormation Institute (III) Presentation Overview o the economy and P/C insurance: Globally and in Canada (October 4, 2011)

2 Insurance Industry Capital Strength: Carriers Invest Excess Funds or Long-term Growth Presentation Deloitte Intelligence FY11 Market Report

3 Insurance M&A dynamics: Volume Grows, Values Drop - Deloitte Intelligence FY11 Market Report

4 Microinsurance Can Build Security or the Poor in India, (http://www.undp.org.in/Microinsurance_Build_Security_Poor_India)

5 The Economist A tale o three islands, Oct. 22, 2011 (http ://www.economist.com/node/21533364)

6 Voice o the Producer: Deloitte Lie & Annuity Producer SurveyLessons or Carriers that Want to Grow, 2011 (https://deloittenet.deloitte.com/

RI/RI/TLH/Pages/Insurance1.aspx)

7 Voice O The Insurance Consumer, (Auto, Homeowners, Lie Insurance Buyers and Non-Buyers o Lie Insurance), Deloitte Research Survey, 2011

(To be released March/April 2012)

8 More inormation about analytic developments is available rom Deloitte's report, "Forward Focus, Analytics: Turning Data Into Dollars."

(http://www.deloitte.com/view/en_US/us/Industries/Insurance-Financial-Services/5b6dd7971e3310VgnVCM2000001b5600aRCRD.htm)

9 More inormation about technology developments is available rom Deloittes report on Tech Trends 2011: Insights or Insurers on the Natural

Convergence o Bus iness and IT. (https://deloittenet.deloitte.com/RI/RI/TLH/Pages/Insurance1.aspx)

10 Brand Resilience: Managing Risk & Recovery In A High-Speed Worldby Jonathan R. Copulsky, Deloitte Consulting LLP, Palgrave Macmillan, 2011


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18

Acknowledgments and contacts

Author

Sam Friedman joined Deloitte Research in October 2010 ater 29 years at National Underwriter, where he served as Editor In Chie o the companys

fagship property and casualty insurance weekly newsmagazine and daily online news service, while also supervising our additional monthly

publications and websites covering the industrys distribution, claims and technology sectors. In addition, he shared his views about the business in an

award-winning blog and magazine column, A View From The Press Box. Today Sam continues to write columns on industry trends twice monthly or

National Underwriterand once a month or Claims Managementmagazine, while also serving as a charter member o The Blog Squad or Deloittes

Insurance Practice.

Co-authors

Emerging Markets

Aditya Udai Singh

Senior Analyst, Deloitte Research

Deloitte Services LP

+1 615 718 3990

[email protected]

About Deloitte research

Deloitte Research, a part o Deloitte Services LP, identies, analyzes and explains major issues driving todays businesses and shaping tomorrowsglobal marketplace. From provocative points o view about strategy and organizational change to straight talk about economics, regulation and

technology, Deloitte Research delivers innovative, practical insights designed or companies to use in their eorts to improve their bottom-line

perormance. Operating through a network o dedicated research proessionals and senior consulting practitioners o the various member rms o

Deloitte Touche Tohmatsu, Deloitte Research exhibits deep industry knowledge, unctional understanding, and commitment to thought leadership.

In boardrooms and business journals, Deloitte Research is known or bringing new perspectives to real-world concerns.

Acknowledgments

Insights in this report were also generated by ndings rom three proprietary Deloitte surveys: Voice o the Lie Insurance Consumer and Voice o

the Auto Insurance Consumer, conducted by Deloitte Research, and Voice o the Lie & Annuity Producer, conducted by Deloitte Consulting LLP.

In addition, marketing and project management assistance rom Laura Hinthorn and Bridget Sweeny is grateully acknowledged.

Regulatory Challenges

Andrew Mais

Senior Manager, Insurance Industry Group


+1 203 761 3649

[email protected]

Sam Friedman

Insurance Leader, Deloitte Research


+1 212 436 5521

[email protected]

Executive Sponsor

Rebecca C. Amoroso

Vice Chairman

U.S. Insurance Leader

Deloitte LLP

+1 212 436 2998

[email protected]


21/24


Contributors

Analytics

John Lucker

Principal

Global Advanced Analytics &

Modeling Market Oering Leader

Deloitte Consulting LLP

+ 1 860 725 3022

[email protected]

Distribution

Richard Berry

Director


+ 1 212 313 2622

[email protected]

Economic Outlook

Carl Steidtmann

Chie Economist, Deloitte Research


+ 1 303 298 6725

[email protected]

Enterprise Risk Management (ERM)

Renetta Haas

Principal

Insurance ERM Leader

Deloitte & Touche LLP

+1 213 996 5683

[email protected]

Mike McLaughlin

Principal

Global Actuarial Leader


+1 312 486 4466

[email protected]

Global Insurance

Joe Guastella

National Managing Director,

U.S. Financial Services Consulting

Global Insurance Leader


+1 212 618 4287

[email protected]

Insurance Markets

Gary Shaw

Partner


+1 973 602 6659

[email protected]

Lie Insurance and Annuities Market

Neal Baumann

Principal

U.S. Insurance Consulting Leader


+1 212 618 [email protected]

Mergers & Acquisitions

Matt Hutton

Partner


+1 212 436 3055

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Stephen Packard

Director


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David Simmons

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Deloitte Tax LLP

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20

Christopher Tutoki

Principal

Deloitte Tax LLP

+1 212 436 3375

[email protected]

Property & Casualty Market

Boris Lukan

PrincipalU.S. Property & Casualty Consulting Leader


+ 1 312 486 3289

[email protected]

Regulation

Steven Foster

Director


+1 804 697 1811

[email protected]

Howard MillsDirector

Chie Advisor, Insurance Industry

Deloitte LLP

+1 212 436 6752

[email protected]

Reputational Risk

Jonathan Copulsky

Principal

Deloitte Consulting LL

+1 312 486 3751

[email protected]

Talent

Daan De Groodt

Principal


+1 404 631 2814

[email protected]

Theodore Goldberg

Director


+1 312 486 3049

[email protected]

Sean Goldstein

Senior Manager

Deloitte Consulting LLP+1 617 437 2134

[email protected]

Andrew Liakopoulos

Principal

U.S. Insurance Talent Leader


+1 312 486 2777

[email protected]

Tax Issues

Richard Burness

PartnerNational Insurance Tax Leader

Deloitte Tax LLP

+1 860 725 3034

[email protected]

Technology

Linda Pawczuk

Principal

U.S. Insurance Technology Leader


+1 720 264 4854

[email protected]


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About Deloitte

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