For technological adoption in this industry, 34 of the past 35 years have been relatively quiet…
By Tom Scales
Mr. Scales leads the life & health insurance practice in the Americas for Celent. He has been in the industry for over 35 years, primarily focused on at software solutions. He was the COO and CIO at Crump Life insurance services (formerly BISYS), and more recently led the operations and technology groups from the agent-based life insurance companies of AEGON/Transamerica.As an analyst, I have the opportunity to spend time with and talk to a wide range of people in the insurance industry. I regularly speak to carriers and vendors in the space and also get the opportunity to learn from agents selling in the space. It is a wonderful role, as I get an outside, and inside, view of the entire industry.
Our company focuses research exclusively on the global financial services industry, and I have come to a conclusion.
The life insurance industry has room for improvement.
That statement may not be a big surprise, but I thought I would go into more detail to give a perspective of where the industry is and some suggestions on where it needs to be. Much of this article is from the focus of the carrier, but hopefully will be of interest to the advisor as well.
I have been in the industry for over 35 years. My first years were at vendors that focused on the insurance industry, with an emphasis on life and annuity. After that, I held the COO and CIO position at a large BGA and then the same COO and CIO position at a large life carrier. I’ve been a licensed agent for almost 30 years, although my primary role has never been as an active agent. My background is quite technical too.
In other words, I have lived and breathed the industry for a long time.
I made an observation recently at an industry conference that I think applies: “I’ve been in the industry for 35 years, the first 34 of which we didn’t change much.”
So why are we where we are? What are the fundamental reasons? This article is based on a longer report recently published by Celent entitled Why Are There No Drones in Life Insurance?
Inflexibility in Thinking
Life insurance is an inherently risk-averse industry. By definition, the product is insuring against catastrophic risk for a family or business. Realistically, this seeps into the mindset of all in the industry and tends to stifle change. The industry is caught in a “that’s the way we have always done it” vortex, and it is difficult to break out of this trap.
New Product Innovation Has Been Flat – For 30 Years
For decades, if not centuries, the products available in life insurance were term and whole life. In the 1980s, there was a flurry of innovation, which resulted in the introduction of universal life policies. Since then, we have done variations on the theme – from VUL to IUL to combo products – but the underlying components are the same.
Agents
A reality of our industry is that the agent force is aging. Our recent research shows that more than half of insurance employees are 50 or older.
This is positive, from the perspective that there are seasoned, successful agents that are focusing on increasing your company’s market share. However, the corollary is that the sales force entered the industry before the application of significant technology to the sales process (such as electronic applications), which means the process is still too paper based.
Insurance Is Not an Exciting Career Direction
If we asked the average college student, even one studying in an area of financial services, what their dream job would be, we would not expect many to leap at life insurance. The top tier recruits are being lured to consulting and private equity firms at salaries impossible for insurers to match.
Buying a Policy Is Complicated
The Application Is the Customer’s First Novel
Fundamentally, the process to apply for life insurance is broken. The average life insurance policy is around 30 pages. This is more than it takes to buy a car or, in some cases, a house. The life insurance industry gathers an incredible amount of information before there is a decision on the price of your product or whether the insurer will even sell you a product. It is like joining a select club, where you are only allowed in if you are healthy and boring.
You Want to Know What!?!
As part of this massive insurance application, we expect an agent to ask amazingly intrusive questions. When the questions get the most embarrassing, then we drill down into the detail.
Cycle Time Is Measured in Days and Weeks
The time between applications being taken and policies being issued is way too long. Recent Celent research shows that the average time is almost 35 days for simpler products to 45 days for more complex products. This is an improvement on 2007, but the number needs to be ZERO.
Our Technology Is Dated. Ancient. Prehistoric.
Our Technology Is Older than Our Employees. Celent speaks with insurers on a regular basis, and one of the most common topics is the limitations of their policy administration system (PAS). Life insurance is an industry that uses systems whose age is measured in decades.
If you look at the true beginnings of many of these systems, they are derivatives of IBM’s CFO II, with roots back into the 1950s. We regularly speak to insurers whose primary system was put into production in the 1970s, or even 1960s. It is a rare insurer that does not have at least one system greater than 20 years old.
This is probably not the tech Amazon is using.
Risking Meltdown as Key Resources Retire or Die
This situation is made even worse by the lack of resources familiar with these systems. Many are written in COBOL, and some are even written in Assembler. Neither is being taught in US schools. In a Computerworld survey (Mitchell, 2012), 50% of the respondents said the average age of the COBOL staff was over 40, and 22% said that the average age was over 50, across all industries. What makes this worse is the survey was from 2012. Even if these languages were being taught, no programmer entering the IT field wants to program with them. They want to work on modern systems, in modern languages — the fun stuff.
Amazon Did What?
We use Amazon as an example here because it is easiest to see how their marketplace could be effective in our space. We will use a simple product as the best example.
Medicare supplement products are standardized throughout the US industry. All companies offer exactly the same products. Their only real levers are price, agent compensation, and service. The products are also fairly simple, filling the gap left by Medicare.
The costs and complexity of moving these products online are low. The primary reason that direct-to-consumer sales through the Internet or Amazon are not higher is that the target demographic, by definition, is 65 or older.
Now translate the concept to a simple term product. Moving this into the direct space is also fairly simple. The challenge, again, comes back to sheer volume of data.
So Do We Just Give Up?
Of course not. The exciting thing is that companies are investing, changing, and reinventing themselves. The industry just has a ways to go. So how do we get there?
Socialize the Issue
The most obvious starting point is to have the discussion at the highest levels of the organization. Talk about your aging technology with the CEO, COO, and particularly your Chief Risk Officer (CRO). Discuss the need to innovate and change thinking in your organization. Talk about the limitations of your new business and underwriting process and the expectation for instantaneous gratification.
Extend these conversations outside the walls to your vendor partners. Challenge them to help solve the problem.
If you are an agent or financial advisor, challenge your carrier partners. Push them to underwrite faster, to provide higher quality services, to give you excellent tools.
Talk to everyone
Invest in an Innovation Culture
After you have talked about it, you need to work throughout the company to build a culture of innovation. Hopefully your company already has this in place and you have made great progress; many companies have. This should not be an IT-driven initiative, but IT has a key role and may be closest to the concepts of innovation. A true innovation culture involves the whole company, and the head cheerleader is the CEO.
Some companies, such as John Hancock with Vitality and MassMutual with Haven Life, have set the example.
Invest in Your Aging Technology
This may be the single most difficult suggestion. If your company is like most, you are running aging, but paid for, systems. These systems have a very low transaction cost and a fully amortized infrastructure, and long-term employees are comfortable with them.
In other words, it is very difficult to build a compelling business case for replacing core systems. This is exactly why the discussions of the issues outlined above need to be at the highest levels of the company. Competing in the market, for the long term, requires a leap of faith that the technology underpinnings must be modern.
The capabilities of modern systems dwarf those in production today.
The Good News
There is good news, although at this point you may not be seeing it. Carriers are making major investments in technology. Many have started venture capital funds and are investing in insurtech with millions, if not billions of dollars. Companies large and small are doing large-scale operations and technology transformation projects. Online portals for consumers and advisors are rolling out at an increased pace.
As I said, the first 34 years were quiet. Not anymore. ◊
Thanks for your insights! For product innovation that would be disruptive I think we would need designs that simplify and stabilize the net insurance amounts and the related cost structure. This then can simplify risk management, policy systems and policy service. However, such changes may not come from traditional business cultures. I suspect that new business units or new players would be needed. That may not happen for a long time, but would love to be surprised.
See http://www.lifehealth.com/the-illustrated-plan/