In the news today

A couple of notable items relevant to the insurance industry:

• President Bush is expected to unveil the terms of a 5-year rate freeze for homeowners with mortgages that they can afford now, but wouldn't be able to once their rate resets. My gut says that this is probably good for financial service stocks in the short run, but that in the long run, the implications on the broader mortgage market are unclear and possibly not good. Are we doing away with the entire concept of charging high interest to poor credit risks? Are we giving up on the idea that the lending industry has been stung badly enough that it now knows better than to give low-rate 100% financing to people who won't prove their income? Stay tuned...
  
• Fitch predicts a modest drop in profits for life carriers, and also lower profits for P&C carriers in 2008. I'm inclined to agree with this, because the interest rate situation is unfavorable for carriers right now, and most life carriers have squeezed as much cost as they could out of their organizations already - that is, without replacing that old batch admin system they love to hate, which takes time, money and hard work.
• Bill Gross (bond guru and manager of PIMCO Total Return) sees the federal funds target rate dropping from 4.5% to 3%, starting with a quarter-point cut next week, to avoid a "near-recessionary economy". Now, full disclosure here; I owned PIMCO Total Return for many years, only selling due to a 401(K) rollover, and I owned it because I consider Bill Gross to be a LOT smarter than me. I have to disagree with him on this one, though. Things have been tough for bonds lately, of course, because rates had been going up; but a "near-recessionary economy"? Forgive me, but I just don't think we're closing in on that just yet. However, if he's right about the Fed, that's not good news for life carriers.

H/T Walt Podgurski.

The Complexity of the Global Economy

The weak US dollar has been in the news lately. The dollar's value has dropped significantly enough against other currencies that newspapers are starting to do human interest stories about how tough it is for expatriates to live on a US-dollar salary these days.

Considered in a vacuum, the US dollar's weakness can be touted as a sign of US economic weakness, which will surely bring about a global economic catastrophe. However, currencies do not exist in a vacuum.

When it first became apparent that the markets were truly global, it seemed like a threat to me. Something was always bad SOMEPLACE, right? And if Hong Kong crashed one night, it would take Tokyo with it, and the Dow would follow the next day. But after a few years, it is apparent to me that market movement still goes back to plain, old investor emotion; are we a herd, following the others right off the cliff during the selloff, or are we a pack, waiting in the brush to pounce and split up the carcass? The difference is that now, it's easier for other predators from far away to share in the spoils.

I think that weak-dollar policy has helped the trade deficit, and that the markets will correct for it. As dollar-denominated investments lose value, many overseas will continue to sell... but there's always someone waiting in the weeds to take a bite.

So what does this mean for US insurers? I think it means more and more foreign investment in US financial services companies in the short-term, as investor overreaction to subprime issues allows long-term investors to snap up shares of good companies at garage-sale prices. Over the long term, it's harder to say, although I'm optimistic that there is enough foreign cash out there to avert a potential stock market crisis over the next ten years... but more about that later.

The subprime liquidity problem, interest rates, and insurance companies

So... just how bad is the subprime mess? In my opinion, it's pretty bad, but it's not nearly as bad as its press. I think that the absence of a secondary market for mortgages and fear of draconian federal regulation has iced up the lenders a bit, but in the long run I think that the market forces at work here are simply going to encourage smarter risk-taking. I think that's a good thing.

The bad news for insurance companies is that it sounds like we may be looking at yet another rate cut, due to concerns about slowing economic growth related to the subprime debacle. It's shaping up to be another tough year for the carriers with more potential for drain on surplus. The carriers who are still running old batch systems won't be in a position to make a technology investment, they're going to miss the start of the $41T revolution, and they may never get a chance to recover. Ditto those who dumped huge dollars into the technology flavor-of-the-month, and are continuing to do so, despite little progress.

There are a couple of technology solutions that can help. I can help you sort through the noise and the hype. You can reach me at my gmail account. My user id is keithguard.

Don't wait. And if you do wait, please don't say I didn't warn you.

Ping An invests $2.7B in Fortis

Chinese insurance company Ping An has paid $2.7 billion US (about 1.8 billion euros) for a 4.2% stake in Dutch insurer Fortis.

This deal gets Ping An's President a seat on the board. Ping An says they may increase their stake to 4.99%.

Big Change.

Well, I'm officially no longer working for my employer of over 13 years.

For carriers, I can offer a solid understanding of the software search process - what works, what doesn't, and what to avoid at all costs. I know the vendors well. I know that most RFPs are too big to be of any use, and I know which parts to just skip. You can't just do the 200-pound RFP anymore because there's no time. If you don't have the systems in place that will let you get your share of the $41 trillion dollars that's about to change hands, your company is going to get swallowed in the next 10 years. Don't let it happen to you. I can help you pick a set of solutions and start your implementation before Thanksgiving if you get in touch with me today.

For vendors, I bring a solid, proven contact list, a fundamental understanding of insurance products, and an understanding of where the life and annuity market is likely to be headed over the next few years (check out the rest of this blog to see if you agree). If your product works, and has value, I can help the carriers see it.

Email is the best way to get me. It's a gmail account, and my userid is keithguard.

There's $41 Trillion out there.

Come and get it.

LOMA and LIMRA to merge, subject to member vote

The boards of LOMA and LIMRA have decided to merge the two organizations.

September 11

Sometimes, we let the day-to-day struggles of our work get in the way of remembering why we're here, and what we do. On this day 6 years ago, we turned on our televisions in the morning, and we saw unspeakable horror. We simply could not understand how someone could actually do something like that, and we couldn't imagine what our lives would be like going forward. We were, as a nation, possibly more unsure about our own future than we had been in my lifetime.

That's why we're here. That's what we do.

We provide certainty. We provide guarantees. We provide protection. We, the life insurance industry, make it possible for a man to look his child in the eye, tell them that everything's going to be all right, and go off and be a hero knowing he's done all he can to provide for his family.

So as you go through your day today, doing your usual things, dealing with your typical frustrations, please remember... our job is to make someone's worst day just a little better. It's admirable work, and it's very important, and only we can do it.

The Optional Federal Charter

These days there is a lot of discussion about the potential implementation of an optional Federal insurance charter. It would allow insurance carriers to opt-in to regulation at the Federal level, and free them from the constraints and restrictions of attempting to comply with up to 50 unique state regulations.

For many carriers, this could dramatically simplify operations. No more state-specific requirements for products, pricing, print, and systems. You would have to believe that the cost of doing business nationwide would be a fraction of what it is today, for many carriers, if they properly take advantage of the opportunity.

State insurance commissioners, predictably, are strongly opposed. They argue that they provide a valuable service to their constituents by protecting them from manipulation and predation by potentially unscrupulous insurers.

From the systems perspective, I think that state-specific regulations are a huge barrier to bringing a new enterprise system to market. You are forced to build enormous flexibility into a world-class system, so that you can try to bring some sanity to the world of 50-state compliance. If you fast-forward to the day when most carriers are chartered at the Federal level, all of that development can be eliminated, and the developers can focus on insurance product features, where the focus belongs.

So, the key question is this; do the state commissioners provide a valuable service, or simply introduce a level of bureaucracy that results in higher premiums for everyone? My gut tells me that it's possible that state regulation has outlived its usefulness, and the writing may be on the wall.

Interest rates, and the insurance industry

This morning, Merrill Lynch downgraded a bunch of large-cap banks and said that there is a 60% chance of a recession. And in response to this...

The market's up. Pretty substantially, too. So what gives? You'd think that with all of the liquidity concerns, a wholesale downgrade of banks would be taken as bad news.

That's the problem, though. I think the market is buying on bad news, in the hopes that bad news will spur a rate cut by the Fed. I've heard predictions of 50 basis points, and hopes of 100 basis points.

Cheap money's great, don't get me wrong. However, I don't think it's the Fed's job to try to stabilize the stock market, or the housing market. Using interest rates as a tool to control across-the-board price inflation is one thing; micromanaging individual components of the economy that are correcting, or overbought, is another thing altogether, and it's not a good thing.

Especially for us in the insurance industry. Carriers are limited in their investment options. They're also not necessarily as efficient as they could be, often due to substandard backoffice technology and a reluctance to upgrade. Combine that reluctance with a drain on surplus, and you have a recipe for more of the same headaches for carriers - headaches they've been living with pretty much since Y2K.

Let's hope that the Fed does the right thing, and keeps the rate where it's at in two weeks. The market will sell that day, but in the long run, we'll be better off.

Fed cuts discount rate by 50 basis points

In reaction to the current liquidity crisis, the Federal Reserve has cut the discount rate, the interest rate that the Fed charges to make direct loans to banks, to 5.75 percent, down from 6.25 percent. The target for the Federal Funds rate remains unchanged at 5.25%.

In a statement explaining the board's action, Federal Reserve Chairman Ben Bernanke and his colleagues said that while incoming data suggest the economy is continuing to expand at a moderate pace, "the downside risks to growth have increased appreciably."

This is a mixed bag for insurance companies. We've already seen Lincoln Financial sell 50% of their GMWB rider business to Swiss Re via a reinsurance agreement to raise cash. Obviously, global financial crisis is no fun for anyone, but the insurance industry really doesn't need another stretch of historic-low interest rates pressuring surplus. Neither do the vendors who serve.

Stay tuned.

I'm just askin'

So, when a policy administration vendor tells you that the neat thing about their system is that your non-technical people can build everything they need without vendor involvement, and then tell you that they've grown by 5 times in the last 5 years... doesn't that make you wonder what all those new people were doing?

I'm just askin'.

Aegon to buy Merrill Insurance for $1.3B

KPMG Insiders is reporting that Aegon will buy Merrill Insurance Units for $1.3B.

ACORD, after the honeymoon

There's a Dilbert cartoon in which the pointy-haired manager announces that the team is to use only open-source development tools, because "they're free". One of the realities about technology today is that once you've lost Scott Adams, you've lost the free marketing ride.

In our industry, the ACORD standards got a free ride for a long time. For several years, most decision makers at most carriers were watching, exploring, studying, contemplating, and analyzing the ACORD standards, and feeling just a little bit guilty about not actually USING them.

In many cases the entire discussion about interfaces just went away. All you had to do was say 'ACORD' and suddenly nobody was worried about integration. For the application vendor, this was always a huge relief, because any world-class enterprise system that is backed by a professional services organization can integrate with any other world-class enterprise system that is backed by a professional services organization. In other words, it got the conversation focused back upon what the system does, rather than how to connect the system with a bunch of stuff that needs to be replaced. That was good.

The trouble is that to many carriers, ACORD promised all of the integration flexibility without the expense of the professional services, and this caused the carriers to actually try to use the standard. First they had to join, and pay, and then they got what some (but not all) vendors had cautioned was a messaging format that was becoming useful, but that was by no means complete.

At some carriers, the inability to instantly integrate everything quickly translated into 'ACORD doesn't work'. That's a drastic oversimplification; the truth is that ACORD was simply expected to be a silver bullet, and as we learn, time and time again, there are no silver bullets.

The lesson here is that there will never be a substitute for seasoned technical professionals who understand your business. Also, these professionals will never be free or cheap. The insurance technology industry processes the most complex financial products ever conceived, often in astronomical volumes. No technology - rules engines, industry standards designed by a committee of competitors, or whatever silver bullet comes along next - is going to replace professional software development in our industry in the near future. Bet on it.

The ACORD standards provide the best industry-standard messaging today. They can be very useful. They are not magical.

Distribution Channels of the Immediate Future, Part 2

As demographics shift, and as $41 Trillion passes between generations, you, the insurance carrier, have a serious shot at a lot of that money. The wealthy in this country will be looking for ways to protect their assets. Mortality and morbidity products are the answer in many cases, and you understand them better than the rest of the financial services industry. Now you just need to reach the customer. Here's how.

First of all, you will need new products with new features. An Annuity-LTC combo product would be nice. Then you'll need some leadership so that inter-silo sniping doesn't wipe out your initiative (you've seen it, I've seen it, don't let it happen this time). Then, you need to make it easy to buy.

Here's the cold, hard truth about the next generation of financial services clients... it's not that we don't like to wait, it's that we simply WILL NOT wait. You need to find a way to make buying your products as easy as buying a mutual fund, or your customers will just go buy something else.

Yes, I understand the regulatory environment. Yes, I realize the complexities of state regulation. What I'm saying is that our industry needs to DEAL WITH THESE THINGS NOW, or be swept aside by clients who will be starting with a total asset base of $41 Trillion.

Make buying a VUL as easy as dropping a ticket for a stock. Your new customers expect it. Do it now, because the clock is ticking.

Technology is NOT Functionality

For the past 10 years, South Carolina Blue Cross has been successfully training its own programmers.

"Colleges were teaching students how to build operating systems for PCs, develop client/server systems or game software, but they didn't understand legacy systems or large-scale computer programming," said BlueCross CIO Stephen K. Wiggins. "So, we started our own internal program."

Many times I've heard insurers argue that no matter what a system DID, it simply HAD to be written in a particular language because that language is ALL the colleges teach, and they CAN'T hire people who are willing to work with anything that's more than a couple of years old.

I never understood this. Can you think of another industry that determines it's technology strategy based on the whims of soon-to-be-hired entry level staff?

Me either.

I have a B.S. in Computer Science, and I'll tell you this... if you hire a solid student from a good Computer Science program, the kid can learn absolutely any language you throw at him or her.

If, on the other hand, you decide to save some money and hire a so-so student from a mediocre program, he or she may never learn another thing after the diploma shows up.

Technology is NOT functionality. Focus on what the system does, how much it does, and how well it does it. If it's any good, you won't care what it's written in.

Distribution Channels of the Immediate Future, Part 1

In my opinion, distribution of insurance products is about to change in a BIG way. Along with the changes in demographics in the US, as well as the immense transfer of wealth creating a new breed of affluent investor, mortality and morbidity products will break out of the current box.

One of the most significant growth areas, I predict, will be in worksite marketing. Employers, for good reason, are scared to death of long-term health care commitments. The idea of having someone come into your office, sell in-demand individual products at essentially a group rate, and having to do nothing beyond providing the conference room and handling the payroll deduction... well, that's a good deal. And it's something I believe more and more employers will seek out in the years to come.

For so many years, margins in the worksite marketing arena have been so small that there has not been much of a market for truly automated technology. Everyone I talk to in worksite says that there just aren't many specialized, highly-automated solutions out there. My employer is in the process of building one out, right now. We've had an excellent foundation for a long time, and we're now bringing together everything that we've heard over the years to create the ultimate worksite system. I've been involved in some of the high-level design, and it looks like it will incorporate everything necessary for case setup, enrollment, payroll deduction, group management and billing, and portability.

The carriers that put themselves in a position to capitalize on this opportunity will have found one of the cheapest ways to reach a large volume of prospective customers with relatively minimal expense. Even as automation increases, and margins go up, this will still be about VOLUME. Make sure you're ready at the enterprise level to get your share.

Rules-based packaged solutions

Insurance and Technology cautions carriers about the effort associated with implementing a "flexible" solution...

The strategy that is most in favor these days -- at least among the analyst and the vendor community (no surprise) -- is to invest in a flexible, services- and/or rules-based packaged solution. Yet many insurance technology executives think that implementing a package can turn into a kind of back-door in-house development project once all the necessary integration and customization has been accomplished.

I guess I've never understood how people could get so excited about first buying a system and then having to build it. I thought we'd figured that one out a long time ago.

This is the first article I've seen that doesn't revere rules engines and SOA as a magical, one-size-fits-all silver bullet that solves all of your problems. It's also apparent that those "insurance technology executives" who have tried a "rules-based packaged solution" are being more public about their disappointment.

There has been an astronomical amount of money spent on solutions like these, without a single conversion block of any substance to point to. Someone's going to get called on it, and soon.

Stay tuned. I predict this is only the first crack in the dam.

Combo Products - The Product for the Next Era

"This will guarantee you income for as long as you live, and it covers you if you end up in a home".

That one sentence is the start of a revolution. Combo products, especially life and annuity products with an LTC rider, are going to be the next big thing in our industry. The combo product addresses EXACTLY what the affluent retiree is worried about - outliving his or her assets, or depleting his or her estate due to an extended stay in a nursing home.

It solves everything that was wrong with long-term care in the first place; the morbidity risk is mitigated by the fact that in most cases, you're just giving the guy or gal his or her money back early.

So, what's stopping you? At least one carrier actually sold the lights out of this product - but they had to pull it, because they couldn't administer it. Other carriers are so hung up on their own silos that they are letting an opportunity pass them by. The LTC folks want it to be the annuity folks' problem, and vice versa. DON'T let this happen to you! There's no time.

Make sure that your Retirement Services division (or whatever you call it) knows it's not just going to be dealing with payout annuities. Make sure that they can administer these products! As I'm sure you're aware, most admin systems can't handle a required-premium LTC rider on a flex-premium base. If yours can't do it, go get one that can!

Don't miss this opportunity.

How an insurance company should look for software

I've been working in insurance software for 13 years. I've seen plenty of carriers get what they needed, but more often I've seen them get little or nothing for their efforts. The successful ones have done the following:

• They focused on the specific task (policy administration, illustrations, imaging) and didn't clutter up the search
• They made the decision in a reasonable amount of time
• The decision makers were directly involved
• They dispensed with buzzwords and looked at what the system DOES

Now, as a software sales guy, there are also some things that you can do to help me help you. Here are some tips.

• Make sure I understand what you want. I'll make sure you can see where my solution can help.
• If you have already decided who you're going with, by all means, pick 'em and start your project! Don't involve me just to make it 'fair'. Save yourself some money. Don't initiate a formal search if your mind's already made up.
• You go to all the same conferences I do. You meet all of the same people that I do. Most of them are quite willing to tell you who's good, and who will rip you off. LISTEN.
  
• Use the smell test. If it doesn't pass, blow it off. If it sounds too good to be true, it is.
  
• Remember - there is no magic in insurance technology, only unscrupulous vendors willing to prey on ignorance.
• Any vendor can say anything. It's all about the references. Find another carrier who has used the system for a long time and get the pros and cons. Find someone you trust - don't just use the vendor's reference list.
  
• Be realistic about industry analysts. They have absolutely no financial incentive to recommend anything that is straightforward and easy to understand. On the other hand, if they can sell the industry on something that it DOESN'T understand, they can make a fortune. They're trying to turn a profit. It's not wrong; just be aware.
  

The Opportunity of a Generation

I think that the insurance corporate landscape is going to change - substantially - over the next decade. As the baby boomers move on into greener pastures, the products that sell will change, and they'll change fast.

Business as usual isn't going to work for insurance carriers. The old product-development life cycle (distribution asks for it, marketing creates a concept, actuarial prices it, IT says it can't be done) will result in carriers missing out on their share of as much as $41 TRILLION dollars that is changing hands.

If you can't get new products up quickly, and you can't squeeze out costs, and you're letting your strategy get in the way of your tactics, you'll miss the whole thing.

Welcome to KeithGuard

Here, I'll discuss the life insurance industry and the technology it depends on. Please note that the opinions discussed here are my own, and are not necessarily shared by my employer. However, my employer hires some really sharp people, so in many cases they've colored my view of the world. Here, however, I do not speak for them.