Insurance industry outlookHigh hurdles loom in 2011 & beyond

Contents

1 Foreword

2 Executive summary

3 Insurers can’t wait for the economy to rebound

5 Virtual consumers have arrived

7 Carriers and producers reassess relationship

9 Rules of the road uncertain

12 Data is a strategic asset, critical to ERM success

14 Tech to the rescue!

15 Where do insurers go from here?

16 Acknowledgments and contacts

DisclaimerThis publication contains general information only and is based on the experiences and research of Deloitte practi-tioners. Deloitte is not, by means of this publication, ren-dering business, fi nancial, investment, or other profession-al advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a quali-fi ed professional advisor. Deloitte, its affi liates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

As used in this document, “Deloitte” means Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP (which provides tax services), Deloitte Financial Advisory Services (FAS) and Deloitte Services LP (which includes Deloitte Research). These entities are separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.

Insurance industry outlook: High hurdles loom in 2011 & beyond 1

Foreword

Dear Colleagues,

Insurers are confronting a multitude of challenges in their quest to achieve top- and bottom-line gains in 2011 and beyond. Besides struggling to maintain growth in a slowly recovering economy, insurers are being called upon to meet the evolving needs of more price- and service-conscious consumers, brace for the potential impact of regulatory reform, enhance enterprise risk management (ERM) capabilities, reevaluate distribution strategies, work comfortably in an increasingly virtual world, and make effective use of technology in their operations.

This Outlook is based on original research combined with the insights and experiences of many of Deloitte’s insurance sector practitioners as well as industry executives. Interviews and research were conducted and the resulting Outlook was compiled by Sam Friedman, who joined Deloitte Research last fall as insurance leader after a 29-year career with National Underwriter, where he served as editor in chief as well as group editor of four additional magazines and websites covering the distribution, claims and technology aspects of the insurance business. Sam also wrote an award-winning blog and magazine column that regularly addressed the threats insurers would have to overcome, as well as the opportunities they might seize.

The goal of this Outlook is to suggest top agenda items and spotlight trends for insurers to ponder when considering how they might reposition their organizations to excel in the emerging economic, regulatory and consumer environment.

We look forward to receiving your feedback to make this Outlook a launch point for additional dialogue, as we continue to explore the road ahead for insurers in this rapidly changing market and economy.

Rebecca C. AmorosoVice ChairmanU.S. Insurance LeaderDeloitte LLP

2

Executive summary

What are property, casualty, life and annuity companies up against in the challenging year and decade ahead? What hurdles must they clear to win the race against their competition? What operational enhancements, distribution solutions and tech upgrades should carriers consider to reengineer and reposition their organizations so they have a better chance of succeeding over the long haul?

The bad news is that carriers face fundamental, potentially game-changing developments threatening their ability to achieve top- and bottom-line growth. However, the good news is that insurers also have a number of strategic options and support tools available to improve their chances, not just to survive, but to prosper.

Leading-edge carriers are responding proactively to these critical challenges in a variety of ways, employing new policies, practices and products to bolster their operational effi ciency and effectiveness. Among the primary takeaways from this Outlook:

• Insurers can’t wait for the economy to rebound. It could take years for a full economic recovery to be achieved, making organic growth and profi tability problematic, particularly for carriers that merely circle the wagons and try to maintain the status quo rather than experiment and innovate.

• Virtual consumers have arrived. Buyers of many types of coverage are increasingly living their lives and doing business online, and will expect their insurers to routinely communicate and provide services to them in the virtual world.

• Carriers and producers reassess relationship. Agents and brokers will remain a primary sales outlet for many carriers, but both parties are reexamining their relationship and considering alternatives. Insurers and producers need to distinguish their value proposition—for one another as well as for buyers.

• Rules of the road uncertain. With regulatory reform a work in progress, both in the United States and globally, carriers face an extended period in which they won’t know what will be expected of them, what compliance demands and costs they’ll face, or even whether they can remain viable in certain markets.

• Data is a strategic asset, critical to ERM success. Given the expected demand for additional information and enhanced enterprise risk management from internal and external stakeholders, insurers will be upgrading their data management and ERM systems, as well improving their operations based on what they learn from the numbers they collect.

• Tech to the rescue! Beyond data management, the use of advanced analytics, predictive models, underwriting and claims fraud software, cloud computing and other technology tools could make the difference between success and failure for many insurers.

Insurance industry outlook: High hurdles loom in 2011 & beyond 3

Insurers can’t wait for the economy to rebound

No matter how well-managed or fi nancially sound a given insurer might be, none are immune to the effects of a contracting or slowly growing economy. Business closures, millions of layoffs, the credit crunch, shrinking disposable income, the decline in new business launches and mounting home foreclosures over the past two years have made top- and bottom-line gains diffi cult for insurers to achieve.

For the property and casualty sector, billions of dollars in insurable risks evaporated during the economic downturn that began in fall 2008, and the slow recovery continues to dampen pricing and premium volume growth today. In fact, the soft market cycle has gone on for so long that many in the P&C industry are referring to fl at and declining rates as the “new normal,” with a major turnaround unlikely absent a major catastrophe or series of disaster losses.

For life and annuity carriers, consumer interest has also been depressed as disposable income available to invest in retirement products or even plain vanilla life insurance shrunk considerably, thanks to job losses or the fear of possible unemployment, mounting credit card bills, a dramatic drop in home values and accelerating foreclosures.

A small but vocal minority in the P&C industry have raised red fl ags about the threat of infl ation, given record defi cit spending by the federal government and expansion of the money supply in attempts to stimulate economic growth. If hyper-infl ation ever does materialize, it would hike claim costs substantially and undermine the value of insurer reserves.

However, the majority dismisses the threat of damaging infl ation anytime soon, expressing confi dence that whatever money the government is pumping into the economy can be easily drained once the private sector is revitalized.

More pressing is the fact that the growth in P&C claims costs has already been much higher than the general economy’s low infl ation rate over the past two years—particularly when it comes to medical care in workers’ compensation and automobile insurance injury claims, as well as for vehicle repairs and reconstruction materials for damaged homes and commercial buildings, especially in areas prone to catastrophes.

In addition, as health care reform is fully implemented, tens of millions currently uninsured will get coverage and are likely to make more use of medical services, which could raise the cost of claims for health, automobile and workers’ compensation insurers at an even faster rate.

Meanwhile, life and annuity writers are less concerned with the potential for out-of-control infl ation than with persistently low interest rates on fi xed investments, which limit profi tability as well as the return that can be offered to consumers on their products. For some carriers, the longer interest rates remain at historic lows, the deeper the hole they may fi nd themselves in when it comes to making good on return rates set in older policies.

Overall, insurers remain bearish about the prospects for rapid economic growth in the next year or two. There are signs of a recovery slowly emerging, albeit with setbacks expected along the way. Private sector hiring has turned positive again, although job growth is so weak that it could take years to replace the millions of positions that were lost since 2008. While the unemployment rate might have peaked, it is likely to remain relatively high throughout this year and perhaps well into 2012, as the business community cautiously regains its footing, and as state and local governments shed workers to close budget defi cits. States might also be tempted to bolster revenue by raising taxes, including those on insurers, as well as become more aggressive in their collection of taxes on insurance companies and their affi liates.

4

Still, commercial P&C carriers will likely have more exposures to cover this year and next as sales pick up for existing fi rms and more businesses are launched, with more workers hired. And while consumers remain wary about spending on big-ticket items, such as cars, and home sales are slow to rebound, pricing in the personal lines market is fi rmer and more stable than in commercial lines, and volume is poised to quickly grow as the economic recovery gains momentum.

However, insurers don’t have to simply wait around for a broad recovery to boost sales and profi ts, as there are opportunities to grow despite the weak economy.While many sectors are still in the doldrums, such as housing construction and manufacturing, other areas—including healthcare, technology and environmental sustainability—are seeing more rapid growth, presenting greater opportunities for P&C carriers targeting those niches on the rise. There are also regions and specifi c states that were not hit as hard, and are likely to recover faster than others. And while the latest census indicates that some areas of the country have lost population (and insurable exposures along with them), other regions are gaining on both counts. These trends provide insurers with an opportunity to rebound more quickly if they target their capital—fi nancial, technological and intellectual—on areas where growth potential is strongest.

In addition, many P&C companies have excess surplus in their prime lines of business, prompting them to consider expanding their nets to seek out growth in other specialty markets. However, this is a strategy that could present its own risks, particularly in such a soft commercial market, with premium rates falling and competition stiff even for less-than-prime risks.

With the sluggish economy hampering growth for life insurers and particularly annuity writers, gains are more likely to come from sales of the simplest products, as consumers seek to cover their basic risks with the cheapest coverage available. Others are adapting by offering more hybrid products, such as including a long-term care option on life insurance policies.

As private sector employment rebounds and consumer confi dence grows, interest in life insurance, and perhaps annuities as well, could be rekindled if carriers effectively call attention to the ongoing challenge of adequately fi nancing one’s retirement. Indeed, the life and annuity side of the business is anything but mature, with plenty of room for expansion among a public that remains largely unaware of how much savings and income they will need to maintain their standard of living after they stop working. Better consumer education is one way carriers might boost sales by pointing out coverage needs.

The latest “Trends in Life Insurance Ownership” study by LIMRA, released in September 2010, found that less than half (44 percent) of U.S. households have individual life policies. Thirty percent have no life insurance coverage today—up from 22 percent when the study was last done in 2004. Among households with children under 18—a prime market for life insurance protection—11 million were found to have no coverage. In other words, there are plenty of prospects for L&A carriers to pursue.

In any case, while economic cycles rise and fall periodically, there are more systemic, structural challenges for insurers to tackle if they are to better position themselves to prosper over the coming decade.

Insurance industry outlook: High hurdles loom in 2011 & beyond 5

Virtual consumers have arrived

One fundamental challenge is how to meet the evolving needs and demands of consumers who are living a growing portion of their lives in the virtual world, particularly in social media communities. More buyers are routinely accessing the web on the go via their mobile devices, including when shopping for goods and services.

Indeed, more buyers are already using mobile applications to shop for a better price online for a product they see right in front of them on a store’s shelf, as reported by The Wall Street Journal on December 15, 2010, in an article headlined: “Phone-Wielding Shoppers Strike Fear Into Retailers.” It might not be long before individual consumers routinely check their insurance options in this fashion as well.

Personal lines carriers have led the fi eld with online sales and service, making a splash recently with web-based claims fi ling options available via mobile applications. Some carriers are selling small commercial policies online, with others likely to follow suit. Many are dabbling with social media to raise their online presence.

Yet many insurers and producers are still struggling to come to grips with how to integrate their traditional operations with the virtual world. There remains much upside potential for those that pioneer useful interfaces with prospects and customers over the web.

If this trend gains momentum, the result could be disintermediation of some smaller commercial agents, an even greater emphasis on price in buying decisions, and the need for more simplicity in policy coverage.

Agents and brokers are keenly aware of this threat. Deloitte’s Property & Casualty Producer Survey, conducted in 2009 in conjunction with National Underwriter magazine, found that nearly 83 percent expect more competition from alternative distribution channels, while almost 70 percent are concerned about online price-quoting services. Three out of four fear more competition from carrier direct sales, much of which will take place over the web.

Indeed, producer groups are taking bold steps to capitalize on the web to remain part of the purchase chain. The Independent Insurance Agents and Brokers of America, for example, is planning to launch a Consumer Agent Portal that will direct prospects to agents in their area selling auto and homeowners insurance. The initiative is designed to move the independent agent option higher on search engine results, as well as to better position independent producers against captive agents and direct writers on personal lines.

We can also expect more online aggregators to emerge to serve as wholesalers for independent agents as well as a market source for small-business owners and personal insurance consumers. Additional online facilities are likely to gain steam as small-commercial products are increasingly commoditized.

The infrastructure for more web-centric interaction on the back end between producers and carriers is being developed as well. The Council of Insurance Agents and Brokers (CIAB) is helping launch a new web-based insurance exchange to allow participating producers to see product availability, pricing and coverage differences from multiple carriers, and to place business accordingly, rather than separately interface with the systems of each carrier being considered, which requires application data to be submitted multiple times. The exchange—which will be open to wholesalers—initially will concentrate on commercial lines, but CIAB says additional lines of business will eventually be supported on the platform, including group benefi ts.

Overall, however, the insurance industry has a long way to go to become a major player in the online market. While a number of carriers have already taken the plunge into a multi-channel distribution strategy, the majority have not, particularly in commercial lines.

6

Large commercial accounts are likely to continue buying coverage via agents and brokers, but small-commercial and certainly personal lines carriers that sit on the sidelines when it comes to online sales may soon fi nd themselves at risk of losing market share to more aggressive, innovative and web-savvy competitors. The same can be said for standard life insurance sellers.

While consumer demands for virtual touch points may be on the rise, there remains a huge knowledge gap—particularly among individual consumers—about what products the industry has to offer, why consumers need them and the value insurers bring to the market. Many are unaware how much income they will need for retirement, including long-term care costs. Others are in the dark about basic coverage for renters or home-based businesses launched by those who lost their jobs in the past two years.

Carriers can use the web to get these messages out to prospects. Indeed, those that can educate the buying public more effectively—particularly by expanding their outreach efforts via social media—will likely increase brand recognition and bolster their reputations for service, while setting the stage for increased sales and retention.

Source: Deloitte P&C Producer Survey, 2009

Figure 1. What’s keeping producers up at night?

Very concerned/concerned Neutral Unconcerned/very unconcerned

Carrier direct sales

Online quoting services

Carrier website

Call centers

Other

9.5%

19.2%

10.1%

22.4%

9.2%

47.1%

46.9%

19.3%

14.4%

32.6%

19.6%

29.0%

45.0%

69.4%

75.0%

Th ree out of four property and casualty producers fear more competition from carrier direct sales, much of which will take place over the web.

Insurance industry outlook: High hurdles loom in 2011 & beyond 7

Carriers & producers reassess relationship

The arrival of the virtual consumer is not the sole distribution challenge on the minds of insurers and producers.

Agents and brokers are undoubtedly here to stay. While the demise of the agent has been predicted periodically, they are still the dominant players in middle-market and smaller commercial accounts, as well as higher-level life insurance and annuity sales, and are likely to remain so for the foreseeable future. They also have managed to retain a signifi cant share of the personal lines market despite the branding advantages of direct writers and captive agency competitors, although as such products are increasingly commoditized and sold online, this segment will be harder to retain.

However, even those carriers committed to traditional distribution outlets are reviewing the profi tability and growth potential of their current agents and brokers, while many are exploring the possibility of multi-platform marketing and sales.

At the same time, many producers are doing similar strategic reviews. And with more direct options available, consumers are likely to reconsider the value offered by both their agents and carriers to determine whether to remain with their current providers or seek alternatives.

While carriers and producers have routinely reassessed their relationship annually, there is more of a sense of urgency to the process in recent years given the diffi culties in the market and overall economy. Also heightening the tension is the fact that carriers will likely be competing for market share among a shrinking number of retail outlets, thanks to mergers and acquisitions.

In addition, more agencies are consolidating their books of business among fewer carriers to increase leverage and boost compensation. With large commercial accounts, business is being concentrated among a relatively small number of national and regional brokerages. The agency force is also aging, yet the industry on the whole has not effectively recruited a steady stream of new talent into the distribution system.

Carriers will therefore likely need to identify and invest more resources on those agencies positioned to grow with them, and focus retention and recruitment efforts accordingly. This is particularly challenging for smaller and regional carriers, which are concerned about losing market share to larger, national insurers.

To solidify their position, carriers will also be called upon to promote a strong value proposition beyond their commission structure to maintain producer relationships and expand market share in this competitive environment. The same can be said for carrier interaction with prospects and current customers.

To respond to these challenges, and make sure they are aligned with a distribution force that has strong upside potential for the long term, insurers are using advanced analytics to determine which producers are more likely to increase sales and attract good risks not only in the market overall, but for their particular company. They are fi nding that even agencies they had considered to be among their elite performers are in fact either lagging in profi tability or failing to grow. Some carriers may fi nd they have maxed out with certain top producers wary of placing too many of their policy eggs in one basket.

Deloitte’s Property & Casualty Producer Survey spotlighted what carriers need to do to improve retention and recruitment of top agents. Among the recommendations was the need for carriers to seek more input from producers and be more diligent in reporting back to them about what actions are taken in response.

There were also complaints about a lack of communication between claims and underwriting, with producers saying adjusters and claims managers don’t often appear to be aware of what risks the agent and underwriter believed would be covered when policies were sold, with the suggestion the two departments train together to avoid a silo mentality and open more regular lines of communication.

8

In dealing with prospects and current clients, both insurers and producers will likely be called upon to deepen their customer insights and increase their relevancy. By learning more about the life situation and evolving needs of clients, they will be better able to retain their top customers, in part by selling more coverage to round out existing accounts.

Life insurance and annuity agents are facing many of the same challenges. (The results and implications of a Deloitte survey of life and annuity producers will be released this year.)

Source: Deloitte Consulting LLP

Figure 2. Insurers reassess distributor potentialGrowth among one carrier’s leading agencies

High growth

Growth

No growth

Decrease

Major decrease

Agency growth direction with company

Agency growth direction within marketplace

196

57

14

Insurers are using advanced analytics to determine which producers are more likely to increase sales not only in the market overall, but for their particular company. Th ey are fi nding that even agencies they had considered to be among their elite performers are in fact not likely to provide more business for them.

Major decrease

No growthDecrease Growth

High growth

387

335

602

186

765

564

Insurance industry outlook: High hurdles loom in 2011 & beyond 9

Rules of the road uncertain

The insurance industry lobbied hard to minimize the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), and to a large degree was successful in arguing that insurers pose no systemic risk to the economy, have suffi cient state regulation, and do not require the level of federal oversight and restrictions handed down against their banking colleagues.

However, insurers were not excluded from the law’s purview. Thus, the battle over Dodd-Frank is far from over, and the fallout is anything but clear. In fact, there are a number of elements in the law that will likely have a direct and lasting impact on insurance operations and costs. A Federal Insurance Offi ce (FIO) was established to gather information and provide analysis for the executive branch and Congress, as well as to facilitate global insurance activities. In addition, Congress established a Financial Stability Oversight Council, which could end up exerting some authority over the biggest players in the industry. Carriers and insurance associations that own thrifts will see a change in regulators for their banking subsidiaries as well under the new law.

On a positive note, state oversight and tax collection rules were streamlined for excess and surplus lines writers, as were regulations governing domestic reinsurance carriers—at least in theory. But it remains to be seen whether regulations to implement the reform law will fulfi ll the goal of Congress to concentrate authority, establish uniformity and lower compliance costs, with objections already voiced against proposals issued by the National Association of Insurance Commissioners.

A vexing problem in the short- to mid-term is the uncertainty over how regulatory reform will play out. It remains to be seen how those appointed to head the new agencies will defi ne their missions, shape their agendas and write regulations to implement their visions.

In the interim, insurers do not know what exactly will be expected of them, what information they will be required to produce, what changes (if any) in their operations they will be forced to make, or what expenses they might have to incur to meet new data and regulatory demands. Once

reforms are in place, however, insurers are likely to face additional capital and data reporting burdens.

At the same time, work continues on Solvency II regulatory reform in the European Union, which will impact U.S. insurers with European subsidiaries as well as those with European parents. In addition, the International Accounting Standards Board is fi ne-tuning its International Financial Reporting Standards (IFRS) for insurers. Once in place, Solvency II will pose tax-planning challenges and opportunities, while IFRS will also likely have an impact on tax burdens outside the United States, and perhaps even within the country.

For the moment, however, the biggest wild card in regulatory reform is how the FIO will develop. While Dodd-Frank did not grant much overt regulatory authority on paper to the new agency, it could very well end up having a signifi cant effect on insurer operations and costs.

For example, FIO has the authority to demand data from the industry to produce a series of studies mandated under the law. Although FIO is required to seek out existing sources fi rst, it can compel carriers to produce data if the information needed is not accessible otherwise. That has the potential to put a greater strain on insurer operations as well as raise compliance costs.

Of particular concern to personal lines carriers is that FIO can gather information about the ability of minorities and low-income consumers to access affordable insurance products. The subject has been raised by a number of state regulators in the past, generating controversy about insurer underwriting and pricing decisions.

In addition, FIO must report to Congress in January 2012 on the state regulatory system. Among the questions to be considered will be the costs and benefi ts of enacting federal oversight of insurance, whether across-the-board or for specifi c lines—perhaps via the creation of an optional federal charter. Given the proclivity of regulatory agencies to seek more power, and prior Treasury Department statements favoring more national insurance regulation, FIO is expected to conclude that a greater federal role is required.

10

However, industry concerns about FIO’s impact are tempered by the reality that the agency has limited resources, with staff allocations likely to be minimal in the current budget-conscious environment. With smaller-government sentiment running strong in Congress (particularly in the Republican-controlled House), even if FIO eventually recommends full-fl edged federal regulation, the odds are against Congress voting to create a new oversight agency with hundreds and perhaps thousands of employees, at least in the short term.

FIO is expected to play a bigger role on the global insurance regulatory stage, as the agency is supposed to facilitate international agreements. The law puts FIO in a prime position to shape U.S. policy when it comes to reconciling domestic regulations with the demands of multinational protocols. FIO was even granted legal options to preempt state laws that may be deemed inconsistent with global requirements (although a number of procedural hurdles and restrictions were imposed to severely limit this authority).

One major point of contention is the fate of collateral rules governing how much capital foreign reinsurers must post to do business in a U.S. domicile. Foreign carriers and global regulatory offi cials have long condemned such requirements as a protectionist trade barrier, and would like to see these rules lifted entirely. A few U.S. states (such as Florida and New York) have modifi ed the mandate to ease entry for top-fl ight carriers, but at some point FIO might support a deal that would preempt state laws on collateral and set a national standard for compliance.

Association leaders believe there is actually an opportunity for the FIO to be a positive force if its infl uence results in more uniform regulatory practices across the country. But it remains to be seen if the new agency will have the resources and the inclination to be an active player, rather than merely serving as monitor and data collector.

Still, an infrastructure has been created, so even if FIO is not a major factor right away, the potential for it to become a more formidable regulator remains, leaving insurers to face the prospect of perpetual uncertainty. For the foreseeable future, however, state insurance regulators will remain the prime arbiters over industry conduct, operations and solvency, and the National Association of Insurance Commissioners will carry on as the leading body in setting national regulatory standards, for better or worse.

Beyond Dodd-Frank, health care reform will likely have a major impact on the industry—and not just on health insurers. As this report went to press, a heated debate was underway over whether to include agent commissions in the Medical Loss Ratio (MLR) calculation established by the Patient Protection and Affordable Care Act, which requires that at least 80% of premium be spent on medical care and quality improvement costs for individual and small group policies, rising to 85% for large group plans.

Producers lobbied during the rule-making process to have their commissions excluded as a pass-along sales charge, similar to how taxes and fees are being handled by the law, but were at least initially unsuccessful. Should the current standard remain, agents face stiff cuts in their commission income, and perhaps an inability to remain viable in this market. The same effect could result if private carriers are unable to meet MLR standards and are eventually forced out of the business.

Since many top commercial insurance agencies and brokerages earn a high percentage of their revenue and profi ts from group health sales, seeing this income stream limited or dry up entirely could pressure a number of agencies to consolidate or go out of business, thus disrupting the distribution force even for those carriers that do not sell any health policies. Carriers might therefore be wise to gauge the potential implications of health care reform on the fi nancial health of their agency force, and to formulate strategic plans to cope with the aftermath if the worst-case scenario comes to pass and signifi cant numbers of producers are affected.

Insurance industry outlook: High hurdles loom in 2011 & beyond 11

On a more positive note, the expected infl ux of tens of millions of new customers into the health insurance market as a result of the law’s coverage mandates will provide more cross-selling opportunities for producers marketing life, annuity and personal lines products. In addition, fewer fraudulent medical claims may be fi led against auto and workers’ compensation carriers if more people have health insurance to cover their care and recovery. The impact on cost-shifting from health care providers due to falling reimbursement rates under public and private health insurance plans remains to be seen.

There are some who fear that the state health insurance exchanges to be established under the new law could squeeze agents and perhaps carriers out of the business. In addition, some raised a broader concern that if health insurance exchanges succeed, the model could be replicated for other lines of business—particularly automobile and homeowners coverage, and even small commercial. If realized, such a development could facilitate the expansion of direct-to-consumer sales and force many agents and selected carriers out of markets.

While the insurance industry lobbied hard to minimize the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, there are a number of elements in the law that will likely have a direct and lasting eff ect on insurance operations and costs, including the creation of a Federal Insurance Offi ce.

12

Data is a strategic asset, critical to ERM success

As new regulations and accounting standards are adopted, additional reporting burdens and other compliance challenges for insurers are likely. Companies will have to spend time and money getting up to speed.

But regulators are not the sole constituency demanding more data. Other stakeholders both internal (senior management, risk managers and board members) and external (rating agencies, stockholders and consumers) will also seek more detailed and transparent information about a carrier’s fi nancial position, exposures and operations.

This will prompt more insurers to upgrade their data management capabilities. Many have already responded proactively, recognizing that data is a strategic asset, and that those with faster, more effi cient and transparent information technology systems—as well as the ability to analyze the numbers and take action to improve their operations based on the results—are likely to enjoy a competitive advantage.

More insurers are making data quality management a primary value driver and a core consideration within their operations and decision-making processes. Insurers that have taken this path often establish a data management mission statement to guide them, then reevaluate existing sources, map how data is used to generate risk reports, and benchmark their systems against similar organizations.

Some may go so far as to appoint a chief data offi cer to champion and supervise data production effi ciency and provide accountability, supported by data stewards across the enterprise’s business units and functions. Data integrity, disclosure and access can also be a factor in setting compensation incentives throughout an organization.

Some carriers are appointing chief analytics offi cers, emphasizing not just the collection and processing of data, but more effective, strategic use of the numbers generated as well. Their focus is on implementation of data insights to improve business processes and operations, as well as performance management, measuring the outcome of new initiatives and the value of data services.

Yet while information is the lifeblood of ERM initiatives, there appears to be much room for improvement in data management. Indeed, Deloitte’s 2010 Global Risk Management Survey of chief risk offi cers (CROs) at global fi nancial services fi rms found that only small percentages of respondents characterize their organization’s risk data strategy and infrastructure as “extremely effective.”

Whether it comes to data controls or checks (8%), data management and maintenance (7%), data standards (6%), data governance (5%), data process architecture and workfl ow logic (5%) or data sourcing strategy (3%), very few respondents see their company’s systems as “extremely effective.” Indeed, in each category, less than one-third of respondents even rated their carrier’s performance as “very effective.”

While information technology departments will play a major role in the formation and execution of upgraded data management systems, data quality improvement is also being driven by the enhancement of ERM at a growing number of carriers.

More insurers are appointing CROs and elevating the function within the company by having them report directly to their company’s board of directors. Beyond compliance concerns, more are involved with business units on strategic planning. Thus, the concept and practice of ERM is being integrated throughout the operations and culture of more insurance organizations.

The challenge facing CROs is to raise red fl ags without unreasonably restricting growth opportunities, whether in terms of new products, new markets, or fi nance and investment opportunities.

CROs are also striving to more effectively quantify the value of the work they do. How can companies measure the impact of risks not taken, or of losses that did not occur due to ERM processes?

Insurance industry outlook: High hurdles loom in 2011 & beyond 13

Can metrics be developed to document ERM’s efforts in balancing growth against the potential cost of risk? How might individuals be compensated for effective risk control, as opposed to incentives for achieving growth? How can ERM’s effectiveness be benchmarked against the work of similar fi rms?

Greater data access, transparency and reliability are critical to solving these conundrums.

Source: Deloitte Global Risk Management Survey, 2010

Figure 3. Risk managers have doubts about data management effortsHow effective do you think your organization is in the following aspects of risk data strategy and infrastructure?

Extremely effective Very effective

Data management/maintenance

Data controls/checks

Data governance

Data sourcing strategy

Data process architecture/workfl ow logic

Data marts/warehouses

Data standards

31%

29%

28%

28%

24%

27%

21%

38%

37%

33%

31%

29%

28%

27%

7%

8%

5%

3%

5%

1%

6%

While information is the lifeblood of ERM initiatives, there appears to be much room for improvement in data management. Indeed, only small percentages of CROs at global fi nancial services fi rms characterize their organization’s risk data strategy and infrastructure as “extremely eff ective.”

14

Tech to the rescue!

Technology appears destined to play a far more prominent role within the insurance industry, beyond data management. Indeed, the effective implementation of a number of technology tools and strategies might be the differentiator many carriers need to stay ahead of their competitors.

Earlier, the potential for increasing sales and market share through the effective use of social media and mobile technology was highlighted. But there are numerous other technologies that insurers are employing to improve effi ciency, increase accuracy, bolster effectiveness, cut costs and interact more directly with clients.

Cloud computing, for example, allows insurers to expand their technology capabilities without having to invest in additional on-site hardware, software or personnel. Full-blown applications as well as additional storage capacity can be purchased and quickly implemented, with servers and support staff housed off-site.

Cloud alternatives lower operational barriers and entry costs considerably for new insurers, while offering long-time carriers with legacy systems an opportunity to add functionality without replacing existing infrastructure, or expanding in-house information technology departments.

Meanwhile, advanced analytics and predictive modeling is another rapidly growing technology option for insurers, supporting a wide variety of functions beyond traditional catastrophe assessments. The challenge for carriers will be to go beyond simply installing new software or employing a new data tool—a means to an end, rather than an end in itself—by effectively using the new information produced to make better strategic decisions.

For example, modeling software is a powerful tool to support underwriters in making competitive pricing decisions, while improving effi ciency by facilitating straight-through processing.

In addition, analytic models can be used by carriers to assess the strengths, weaknesses and growth potential of individual agencies within their distribution force—a strategic necessity cited earlier in this report—in addition to supporting product development, target marketing, assessments of customer lifetime value and other capabilities.

Claim analytics is also emerging as a growth area as carriers look to better control both the hard and soft costs of fraud, while getting legitimate claims paid in a timelier manner.

On the advanced life insurance side, better upfront screening of prospects using predictive analytic models can achieve quicker turnaround of applications and improve effi ciency without sacrifi cing underwriting integrity or effectiveness. (A November 19, 2010 article in The Wall Street Journal, headlined “Insurers Test Data Profi les To Identify Risky Clients,” prominently noted Deloitte’s work in this fi eld.)

Down the road, insurers may be able to capitalize on more advanced interface technologies, such as the expected expansion in the use of driver monitoring systems for automobile insurance, and the growth potential in telemedicine as millions more gain health insurance and seek care amid a decline in primary care physicians. Indeed, if a doctor can diagnose a patient over the web, why can’t underwriters use the same technology in assessing a variety of risks? Claims adjusters might be able to make use of such virtual technology as well.

Insurance industry outlook: High hurdles loom in 2011 & beyond 15

Where do insurers go from here?

Insurers are in the business of risk. They put their capital and reputations on the line each time they write a new policy. They face potentially catastrophic threats—natural or man-made disasters, terrorism, emerging exposures on the order of “the next asbestos” liability, as well as economic bubbles and collapses.

In this Outlook, however, Deloitte focused the spotlight on more fundamental trends that could reshape the property, casualty, life and annuity industries over the long haul, beyond any one particular event.

To summarize, among the critical questions confronting insurance leaders today:

• How might lingering weaknesses in the economy impact insurer growth, and what long-term threats and opportunities loom on the horizon?

• What will virtual insurance consumers expect from carriers, and how might insurers reassess and modify their distribution systems and service operations to respond?

• What may carriers need to do to adapt to new demands made upon them as a result of regulatory reform, both in the United States and globally?

• How might insurers capitalize on opportunities to upgrade their technology systems and capabilities, particularly in data management, analytics, predictive modeling, cloud computing, underwriting and claims administration?

• How can implementation of enterprise-wide risk management systems reasonably balance the need for growth against the potential exposures incurred? How can ERM’s value be quantifi ed to document its impact on the bottom line?

• How can carriers close the knowledge gap so that consumers better appreciate their insurance protection and fi nancial planning needs?

• What can individual insurers and the industry as a whole do to improve the reputation and credibility of the business, as well as recruit the best and brightest young people into the industry?

By placing these challenges prominently on their agendas and tackling them proactively and creatively, leading-edge insurers can position themselves not just to survive in the short term, but to succeed over the long haul as the economy recovers and new consumer and regulatory demands emerge.

Those insurers that consistently strive to stay ahead of the curve, regularly reassess the status quo, are prepared to experiment, achieve total command over their data, and are open to investments in new systems, technologies and people are more likely to overcome the challenges they face, whatever they may be.

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Acknowledgments and contacts

AuthorSam FriedmanInsurance LeaderDeloitte Research+1 212 436 5521samfriedman@deloitte.com

Sam Friedman joined Deloitte Research in October 2010 after 29 years at National Underwriter, where he served as editor in chief of the company’s property and casualty insurance weekly newsmagazine and daily online news service, while also supervising four additional monthly publications and websites covering the industry’s distri-bution, 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.”

About Deloitte ResearchDeloitte Research, a part of Deloitte Services LP, identifi es, analyzes and explains major issues driving today’s businesses and shaping tomorrow’s global marketplace. From provocative points of view about strategy and organizational change to straight talk about economics, regulation and technology, Deloitte Research delivers innovative, practical insights designed for companies to use in their efforts to improve their bottom-line performance. Operating through a network of dedicated research professionals and senior consulting practitioners of the various member fi rms of Deloitte Touche Tohmatsu Limited, Deloitte Research exhibits deep industry knowledge, functional understanding, and commitment to thought leadership. In boardrooms and business journals, Deloitte Research is known for bringing new perspectives to real-world concerns.

Executive SponsorRebecca C. AmorosoVice ChairmanU.S. Insurance LeaderDeloitte LLP

AcknowledgmentsDeloitte Research would like to thank the following Deloitte professionals for their contributions to this report:This Outlook was developed under the stewardship of Rebecca C. Amoroso, vice chairman and U.S. insurance industry leader at Deloitte LLP, and with subject matter guidance from Amy Allen, Richard Berry, Richard Burness, Bertha Fortney, Steven Foster, Joe Guastella, Laura Hinthorn, John Lucker, Boris Lukan, Howard Mills, Mike McLaughlin and Gary Shaw.

Besides interviews with Deloitte practitioners, this Outlook is also based on background discussions with leaders of insurance industry associations representing property and casualty as well as life insurance and annuities carriers and producers, who spoke with Deloitte about their members’ concerns on condition of anonymity.

Insights in this report were also generated during the Deloitte Enterprise Risk Management Forum on December 2, 2010 in New York City, led by Bertha Fortney, Mike McLaughlin and Naru Navele of Deloitte, as well as from Deloitte’s 2010 Global Risk Management Survey and 2009 P&C Producer Survey.

Marketing and project management assistance is gratefully acknowledged from Laura Hinthorn and Liza Benner, as is design assistance from Nancy Holtz, all of Deloitte Services LP.

Insurance industry outlook: High hurdles loom in 2011 & beyond 17

Industry LeaderRebecca C. AmorosoVice ChairmanU.S. Insurance LeaderDeloitte LLP+1 212 436 2998ramoroso@deloitte.com

Leadership TeamRobert AxelrodDirectorNational Insurance Financial Advisory Services LeaderDeloitte Financial Advisory Services LLP+1 212 436 2137raxelrod@deloitte.com

Richard BurnessPartnerNational Insurance Tax LeaderDeloitte Tax LLP+1 860 725 3034rburness@deloitte.com

Tom CarrollPartnerMidwest & North Central Insurance LeaderDeloitte Services LP+1 312 486 2123tcarroll@deloitte.com

Mark CharronPrincipalNational Actuarial, Risk & Analytics LeaderDeloitte Consulting LLP+1 860 725 3088mcharron@deloitte.com

Dave FoleyPrincipalBermuda Insurance LeaderDeloitte Consulting LLP+1 860 725 3040dfoley@deloitte.com

Bertha FortneyDirectorNortheast Region Insurance LeaderDeloitte Services LP+ 1 203 905 2631bfortney@deloitte.com

Steven FosterDirectorNational Insurance Risk & Regulatory Services LeaderDeloitte & Touche LLP+1 804 697 1811sfoster@deloitte.com

Joe GuastellaPrincipalNational Insurance Consulting LeaderDeloitte Consulting LLP+1 212 618 4287jguastella@deloitte.com

Laura HinthornSenior ManagerNational Insurance Marketing LeaderDeloitte Services LP+1 212 436 5324 lhinthorn@deloitte.com

Mike McLaughlinPrincipalGlobal Actuarial LeaderDeloitte Consulting LLP+1 312 486 4466mikemclaughlin@deloitte.com

Howard MillsDirectorChief Advisor, Insurance Industry GroupDeloitte LLP+1 212 436 6752howmills@deloitte.com

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Francine O’BrienSenior ManagerAssistant to Insurance LeaderDeloitte Services LP+1 516 918 7073frobrien@deloitte.com

Mark ParkinPartnerNational Insurance Audit & Risk LeaderDeloitte & Touche LLP+1 973 602 5396mparkin@deloitte.com

Donald SchwegmanPartnerNational Insurance Professional Practice LeaderDeloitte & Touche LLP+1 513 784 7307dschwegman@deloitte.com

Gary Shaw PartnerNational Insurance – SRM LeaderDeloitte Services LP+1 973 602 7025gashaw@deloitte.com

Ed WilkinsPartnerDeloitte & Touche LLP+1 312 486 2318ewilkins@deloitte.com

Insurance industry outlook: High hurdles loom in 2011 & beyond 19

This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, fi nancial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualifi ed professional advisor. Deloitte, its affi liates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

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