A four-year study of how the life and annuity industry functions found a "striking" variance in approaches to dealing with the industry's most pressing issues.

"An Industry in Transition," published by Robert E. Nolan Co., examines a cross section of the industry: 35% mutual and 65% stock companies. More than a quarter (27%) have fewer than 500 employees, 20% have 500 to 1,500 and 53% have more than 1,500 employees.

Nolan, which conducted a similar survey in 2006, pointed to the findings by Moody's and A.M. Best that mutual insurers have become better capitalized and more resilient to market swings — despite the governance created by Sarbanes-Oxley required for publicly traded companies, which is intended to help manage some of the risks of these last few years.

"As we developed our findings, the consistency of issues and observations relative to the previous survey was striking, especially regarding the areas of opportunity that exist for companies today," the report says.

"While the fundamentals of the business remain largely the same, the economic turmoil of the past few years has amplified the payoff for those who act on these opportunities, and likewise amplified the price to be paid by those who don't. As each dollar of revenue and expense has become more precious, one might say that any remaining slack has been taken out of the operational 'rope.' A comparison of 2006 and 2010 observations clearly profiles the consistency in theme but variation in implementation of key strategic issues."

The Nolan report underscore the need for companies to re-examine the way they manage risk. In fact, an overall increase in focus on risk management has been the clear, self-selected outcome of the recent difficulties.

Insurers' management of traditional risks (credit exposures, regulatory capital levels, hedging techniques) remains fundamental. But, the report says, insurers are facing new examples of less obvious but nonetheless important risk dimensions, such as the risk of not addressing the cost of a product portfolio overburdened with features in which investment cannot be justified; the cost of excessive underwriting of risks, where the expense does not match the benefit in mortality or morbidity improvement; or the cost of not eliminating paper when cheaper electronic alternatives are available.

In technology, life and annuity providers are faced with the emergence of the functional data warehouse, straight-through processing, and a sharper focus on how customers view service outcomes. This, Nolan says, has led to new and innovative performance metrics.

"Many insurance companies like to describe themselves as 'fast followers' who let others innovate; they intend to pounce on the value identified by the innovator while avoiding innovation's cost. In reality, this leads to a circular outcome that never introduces anything truly original, as each company waits for another to break new ground. Once again, this amplifies the opportunity for reward for those bold enough to innovate."

During the survey's four-year span, the way life and annuity carriers view growth appears to have been determined by exogenous factors, such as a sagging economy.

"From the carrier's viewpoint, with the dramatic drop in the S&P from its highs — and with interest rates remaining at historically low levels — the appeal for variable products, both annuities and life, dried up as buyers shifted to whole life and term to preserve their assets. Hedging and risk management techniques, combined with unexpectedly underpriced guarantees linked to variable products, put many insurers at an extremely high exposure level. This will continue to wash out over the coming year and beyond," notes the report.

This means the adviser will continue to be important to the client — at least for the foreseeable future, Nolan says. It predicts that changes will occur in the structural elements of the channels themselves, the blend of products offered and the methods for offering them, and how that expertise will be accessed, used and compensated. "Due to channel aging, there is a potential for a void as top producers retire and aren't replaced in like numbers by new agents entering the system."

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