Archives for November 2011
I recently spent two days at the Richmond Convention Center at a Latin Convention. Yes, a Latin Convention. I was a parent chaperone of 59 middle school Latin students who, along with 1600 secondary school students from around Virginia, came together to share their love and knowledge of Latin and everything related to the Classics. It was my second Virginia Junior Classics League convention, so I guess I can say I am a believer in what Latin does for the student. I mean if they choose to go to a two day convention and take up to 9 TESTS on subjects related to Latin and Classics, is that a bad thing?
The theme of this year’s convention was “Dimidium facti qui coepit habet.” It was Horace who said, “He who has begun has the deed half done.” It’s an interesting quote and one that was discussed in oratory sessions throughout the two days. But can one really say that? Is the starting of a task half the difficulty in getting it done? Using the analogy of an IT project, perhaps Horace was right if we consider that the beginning of an IT project is often defined as the day the vendor walks in the door or IT and Business kick off the in-house project. If that is deemed the beginning of the project then I would argue that the project better be half done! Let’s consider what should have been done before that day. . .
Sometime before the kickoff someone identified the need for a new system. From there an analysis was conducted to determine who and what was involved in maintaining the current system, and what does that system really do? Another analysis was conducted to determine what needed to be replaced, or wrapped, and should it be all or only part of the current system. Yet another analysis considered buy versus build. If buy was determined to be the best method, a vendor selection process was conducted. All the while the insurer is identifying who and what is impacted by implementing a new system: processes are identified, people are interviewed, and hopefully a change management program is created to deal with the issues that will accompany the new system. A steering committee was formed and all the key players in the IT department and affected business units were identified and given tasks associated with the system project. I could go on and on about what was done before the project started. Or should I say, the things that should have been done before a project started. If even one of the major tasks is not completed before that day the project kicks off, then Horace will have been wrong and the project will be nowhere near half done on the day of the kickoff. And, sadly, the resulting implementation is going to be much longer than promised.
Horace of course was not talking about IT projects. He probably meant that taking that first step, or being willing to fight, is half the battle. One Latin student made the perfect analogy: Nike’s motto is “Just Do It!” If we apply the Nike motto or Horace’s quote to our life, to IT projects, to anything that may at first be uncomfortable, or a change from the norm, just being willing to begin the deed means you are half way to succeeding.
And, for all those who have begun their IT project journeys, per aspera ad astra!
This week, Celent hosted a London event on the UK regulatory topic of Retail Distribution Review (RDR) that will impact the entire life insurance industry. As Jamie Macgregor, pointed out, there are a little over 50 planning weeks until the deadline for implementation.
Matt Browne from the FSA covered key points and intentions of the regulations, and reminded the audience that this is the time to take action, not to debate. The essence of RDR is to fix the retail long term savings and investment market which many consider is not working for the mass market customer.
Jamie Macgregor presented key points from Celent’s recent research. Insurers that were interviewed for this paper highlighted that 2012 will be a “horrible year” with the barrage of regulatory deadlines including Solvency II, EU gender directive and RDR whilst continuing to focus on new propositions for growth and profitability. The level of change and effort in Q2 and Q3 will be massive. Even with the delay in Solvency II regulations, many organisations are still committed to the same level of project effort to meet the revised deadline.
It is Celent’s view that the biggest risk facing product providers is around orchestrating the end-to-end delivery of the change program across multiple partners both upstream and downstream. This risk is then made worse by dependency on outsourced relationships within product providers and the visibility of their readiness. Effective communication across all parties involved will be a critical success factor of many programmes.
Martin McKenna from Focus solutions presented a view from a distribution perspective. He noted that IFAs had originally seen the regulation as a threat but that there was a shift in views. IFAs are starting to see this as an opportunity to de-risk the business model. It’s clear that IFAs don’t have the capacity to serve HNW, the mass affluent and the mass market . IFAs will refocus their businesses towards what they see as high value clients and this may result in orphaned clients . This is a great chance for new players to enter the market, particularly those with strong brands. New distribution opportunities become available like online only, retail outlets , and mobile. Martin went on to note that whilst the appetite for advice will still be there, consumers will want to choose companies they know and trust. This creates a space for larger brands like banks and insurers to offer products directly to the customer. His view was that the winners would be those companies who could understand the cost of servicing the customer, and who had the scale and brand to respond to the market opportunities.
Yesterday, we held a successful event in London on the key challenges and implications of implementing RDR in the UK following our report issued earlier this month. The event was supported with some great and insightful content from the FSA, Focus Solutions and Altus – oh, and of course ourselves.
At the event, the FSA told us that the long awaited final guidance on the rules for handling legacy assets were imminent. What they didn’t tell us was how imminent…the consultation paper was issued this morning with a target response date of 16 January 2012. It is already generating plenty of debate in trade articles. From our research, the treatment of ‘legacy assets’ was considered to be one of the key final pieces in the jigsaw that would enable product providers to complete their designs for RDR readiness at the end of next year.
From a quick scan of the consultation paper, it would appear that the original intent has been maintained. My current interpretation (pending a more detailed review) is that if advice has been given on a ‘top-up’ decision, then adviser charging applies and not commission. Trail commission on products sold prior to RDR continues and is unaffected. If the client decides to ‘top up’ their policy themselves without advice, then existing product rules on commission continue.
Beyond the obvious behavioural and motivational implications, from an operational and technology perspective, this presents some interesting challenges – especially from the view point of a product provider facilitating charges on behalf of an adviser.
- How does the product provider (or the regulator for that matter) know if advice has been given or not? What is the nature of the ‘hand shake’ that needs to take place between adviser and the product provider to determine whether the ‘top-up’ needs go via the advice charging route or the commission route?
- Each product open to ‘top-ups’ (and therefore the system supporting it) will need to be able to manage both adviser charging and commission and switch between them depending on whether advice has been given or not.
- Likewise, illustration systems, documentation, and financial performance reporting will need to change to cater for advice charging and commission in a similar way.
The best way to bring this to life is through an example. From my understanding, if a client has £50k invested in their pension, has an additional £50k to invest, and takes advice resulting in this new amount being paid into their existing pension, then trail commission will be paid on the original £50k and an advice charge will be payable on the additional new £50k.
In this scenario, the system supporting the product will need to differentiate which part of the investment pot was advised and which part was not. If you consider that most product providers do not have just one system supporting multiple products and that commission logic is often embedded inside each legacy product system, then this change may need to be repeated for as many systems as there are open products.
Sounds like a pretty tough and complex implementation challenge – especially when you consider that there are now less than 283 working days between now and the RDR deadline, and that the consultation paper is not yet final.
Product providers now need to work through this paper to assess the impact on their plans and finalise designs if they are to be ready in time. It will be interesting to see if any product providers choose to close books to ‘top ups’ owing to the inability to make a solid business case to keep the books open, or if any product providers seek to secure direct ownership of the client to avoid the complexity. This is an area that we will be watching with interest!
In my previous post: “Latin American Markets Are Hot for a Reason”, we discussed about the significant growth of this region compared to industrialized countries and how GDP of emerging markets was expected to match their industrialize counterparts 10 years from now. For those joining just now, growth expected for the Latin American region in 2011 is 4.5%; the world rate will be 3.2%; and in industrialized countries, growth will only be 1.4%. The trend since 2002 has been more growth from emerging markets than industrialized countries and we expect this to continue this way for the next 10 years.
Has the Insurance Industry in Latin America gained any benefit from this growth?
Equally to the economic growth trends described before, Life insurance in Latin America has been experiencing an average premium growth rate of 8% for the period 2000-2009 while non-life insurance premiums have grown an average of 6.5% in the same time. North America instead has been very steady in the life insurance market and only in non-life has experienced some growth at an average of almost 2.5%. Europe has not done much better with just over 3% increase in premiums in non-life and almost hitting 3% increase in life insurance in the same period.
Last year, Latin American life insurance market experienced a 12% growth in premiums with Brazil, Chile, Argentina and Peru as main contributors and expecting to maintain double digits growth rates next year although some challenges remain. Also as a consequence of the good economic performance of the region, non-life insurance premiums increased 5.5% and we continue to expect growth driven by investments mainly in infrastructure and energy in the short and medium term.
On the other hand and considering 2010 figures, North America and Western Europe count for 60% of the world market share of life insurance and 72% of non-life, Latin American and Caribbean life insurance market represented only a world market share of 2.2% and non-life 4.0%.
So, evidently the opportunity is not in the current size of the market. Where to find it?
I believe that insurers are seizing opportunities of a market that will continue to grow and that has the potential to drive premium to similar ratios than the ones found in industrialized countries.
Consider for example the insurance penetration ratio (premiums as % of GDP). In 2010 Latin American insurance penetration ratio was 2.7% very low compared to 7.9% for North America; 8.4% for Western Europe or even Asia with 6.2%. Emerging markets have a ratio of 3% and industrialized countries 8.6%. The world in average has a ratio of 6.9%.
As for insurance density (premium per capita) in 2010, Latin America shows a low ratio of 219.1 USD per capita when compared with 3724.4 for North America´s; 2890.3 for Western Europe or even Asia with 281.5. The world in average has a ratio of 627.3.The insurance industry clearly understands the unique opportunities this ratios bring into their business. That is why we have more insurers looking into build or grow capacities in Latin America. What to expect? Looking in the future we should expect a very positive trend overall. Many things have changed in a positive way in the region and those companies taking advantage of it, will be able to produce extraordinary benefits and value for shareholders and stakeholders.
Technology will play a very important role for insurers competing in this market. There is a need to replace legacy systems and continue to incorporate best practices. Rules based underwriting, Straight Through Processing, standardized xml for data interchange, cloud computing, BPO and improved CRM techniques just to mention some. I hope to have some new reports on this subject soon for you, in the mean time I am available for some one-to-one consulting on Latin American issues.
To anyone who is considering doing business in Latin America just have in mind that although the region presents significant and unique perspectives of growth it comes along with some challenges. You should expect some countries to react defensively at the sight of the international crisis. Some protectionism should be also expected along with setbacks for commerce and investment. Companies will need to consider these in their plans and have a management team, processes and technology to overcome them.
Also bear in mind that although Latin America is always seen as a region it has its significant differences between countries not just cultural but social, economic and political as well.
We at Celent can now help you to navigate through the Latin American experience.
One of the great things about being an analyst is that you’re expected to challenge the status quo on behalf of the companies you work with. The analyst-as-gadfly model was on display at Celent’s Creative Disruption workshop in Boston last week. Someone later told me, “You looked like you were having fun!” I surely was.
Celent’s message of “healthy discomfort” as a driver of positive change seemed to resonate with attendees, both carriers and their vendors. It came into virtually every conversation in some way. Here are a few nuggets I noted throughout the day.
- Disruption is generally respected but only lightly pursued. Like “change” and “agility,” disruption is a term with positive connotations for most people. But when you ask companies what they are doing to make it a reality, you mostly hear the sound of crickets.
- Agile methodologies are enabling change. And they’re not all about technology. They seem to serve as a signpost that corporate cultures are changing, giving staff a reason to rethink their traditional behaviors.
- Vendors have an important role to play in driving change. This is well understood, by players on both sides of the vendor/carrier relationship. But it’s easy to revert to old models, where vendor and insurer interests are in opposition rather than being aligned.
- Leadership will determine where disruption can thrive. Front line staff are thirsty for productive change. Being part of something bigger and more exciting is on most people’s wish lists, even if they don’t know it yet. But absent some passionate vision from the top, “big D” disruption projects are doomed.
You can expect more coverage from Celent on this topic in the coming months, as we think it is vitally important. Your ability to keep operational concerns and creative, disruptive thinking in a healthy balance will be essential for you to get to the top of a competitive heap.
The insurance industry is not immune from changes occurring at the marcroeconomic level. Based on our frequent and periodic discussions with European CIOs we have noticed that the level of uncertainty prevailing in the economy right now has contributed to reduce IT budgets (for more about this, read the following reports from Celent: Insurance in France 2011: The CIO Perspective and Insurance in the United Kingdom 2011: The CIO Perspective).
Much has been said and much has been proposed to solve the current Euro zone crisis initially triggered by the Greek sovereign debt issue during the first quarter of last year. But nothing and even the decisions made in the frame of multiple political meetings (G7, G20, etc.) prevented the issue to spread over to Ireland and Portugal later that same year. Nowadays, the Euro-zone is still in danger of disappearing – at least under its existing form – despite its member state political leaders’ latest decisions last week in the G20 in Cannes. Italy is the new country in the line of fire and it seems that as time passes, the problem is getting worse. I personally think there are three interesting lessons we can learn from this crisis:
- Nations are here to stay: it is impossible to create a successful monetary union if the participating countries do not tend to form a single nation. On the first hand, the single Euro-currency decision makers have neglected this political aspect and on the other hand they have based the single currency construction almost solely on economic principles.
- Democracy always wins: solidarity among countries part of the same currency zone works as long as there is the outlook of stable prices and sound future economic conditions. Manifestly this is not the case in these turbulent times. Directly or indirectly populations of France and Germany will let their politicians know that they do not agree to sacrifice their already decreasing well-being for other populations especially when some of them have been cheating to get funding from other members of the single currency area. According to me we might expect French citizens to express their anger before the next presidential elections through demonstrations against new public spending reduction plans to be announced in the coming weeks.
- It is not recommended to solve a credit problem with more credit: it is Euro-zone member states who contribute to the European Financial Stability Facility (EFSF). In other words, Greece, Portugal and Ireland contribute to this fund at respectively 2.82%, 2.51% and 1.59% . Italy and Spain represent together almost 30% of the EFSF contribution. In other words, some countries are wrecked and rescuers in the same time!
In conclusion I think that we have reached a point where the magnitude of the Euro-zone problem is too big for policy makers ability to find a successful plan. To me the time has come to plan the end of the Euro-currency under its current form and the more we wait the more difficult it will be. For insurers, there is more uncertainty ahead. We are currently reaching out to UK and French CIOs to update our CIO survey reports. These two reports will be published in Q1 next year and I invite our subscribers to stay tuned.