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.