New York, NY, August 7, 2003 � Distribution remains a top strategic issue for life insurance CFOs, according to a recent Tillinghast – Towers Perrin survey. Eighty-seven percent of respondents assign high importance to distribution relative to other key business issues, with nearly one-quarter saying it is their most important issue.
“The majority of CFOs are looking to grow their business across all distribution channels, and the pressure to boost sales figures is more intense than ever,” says Richard K. Berry, principal. “Tillinghast expects tension to continue between achieving top-line growth goals versus longer-term profitability. Insurers are competing for a shrinking pool of experienced agents and are struggling to find new ways to improve distribution effectiveness and productivity.”
The survey found that life insurance companies are stepping up their recruiting efforts to address these challenges, exploring alliances and acquisitions, and implementing new distribution performance metrics.
Experienced Agents in Short Supply
The majority of CFOs view recruiting experienced agents and producers as their company�s preferred growth strategy. Sixty-two percent of the companies that are looking to grow their life or annuity distribution channels are also planning to aggressively recruit experienced agents or producers. Attracting and retaining productive, experienced agents is becoming more difficult as the labor pool continues to shrink. Over the past 10 years, Tillinghast estimates that the number of full-time, active agents has declined from 250,000 in 1993 to less than 175,000 today.
“While most companies have made a significant shift to recruit experienced producers, many continue to recruit inexperienced agents,” says Mr. Berry. “While both approaches can be quite expensive, due to the high failure rate of inexperienced agents and the potentially high cost of attracting experienced agents, companies are pursuing diverse approaches with the understanding that competition for a shrinking pool of experienced producers is intensifying.”
Growth Through Alliances and Acquisitions
The majority of CFOs report the top three objectives of a distribution or agency acquisition are growth in production (87%), profitability (57%) and growth in the number of producers (39%). In order to grow life or annuity distribution channels, companies are pursuing a variety of strategies including investing in wholesaling (42%), investing in retail agencies or MGAs (42%) and forming partnerships or alliances with independent marketing organizations (39%).
“These strategies, coupled with aggressive recruiting plans, demonstrate that companies are making major investments in growth,” says Mr. Berry. “Achieving this will be all the more challenging and expensive given the limited pool of experienced producers and the mature nature of the industry.”
A New Performance Metric: Distribution Profit & Loss Statements (P&L)
Life insurance CFOs increasingly are using new metrics to support a more disciplined, business management approach to their companies� distribution function. Sixty-seven percent of respondents say they use fairly traditional measurements, such as sales growth and persistency, to evaluate performance. However, 73% of survey respondents are currently using or considering using distribution P&L statements for measuring distribution performance more precisely. Twenty-seven percent of respondents indicate that their company�s use of a distribution P&L is well established.
“The use of a single P&L with a bottom line that is well understood by the entire management team can be a powerful tool that provides a solid foundation for aligning a truly winning business team,” says Jack Gibson, Tillinghast�s North American Life Insurance and Financial Services Practice Leader.
By using a distribution P&L, management can refine and tailor financial goals, incentive compensation, internal performance measures and related planning processes for each member of the management team.
“It is striking to note that CFOs appear to be more concerned with growing distribution than they are with improving profitability,” says Mr. Berry. “For many companies, such a focus on growth may frustrate efforts to achieve profitable growth in the long term.
“A company is far more likely to succeed by establishing a consistent, integrated approach to business and performance management,” continues Mr. Berry. “Tillinghast expects more companies to begin to use a distribution P&L, which supports a more comprehensive and consistent approach to both wholesale and retail distribution management.”
Premiums and Revenue Growth Expected to Be Positive in Second Quarter 2003
Despite the continued weak economic environment, respondents expect positive growth in second quarter premiums and revenue versus the same quarter last year. Respondents are even more optimistic about net income, with over half expecting growth of 4% or more versus the same quarter last year. Seventeen percent of respondents predict an increase of more than 10% in second quarter premiums over the same quarter last year; 6% of respondents predict greater than 10% growth in revenues; and 27% of respondents expect net income to increase by more than 10%. Only 7% of respondents predict a decrease in net income.
“This positive outlook reflects the strong equity market performance during the second quarter, alleviating concerns about guarantees and DAC write-downs on variable products, as well as improvement in credit losses during the first half of this year,” says Hubert Mueller, Principal and survey sponsor. “However, given the overall decline in interest rates, we expect continuing pressure on earnings from lower spreads earned on interest-sensitive business.”
These results reflect CFOs� outlook at the time they completed the survey and may or may not reflect company performance that actually emerges. CFOs� views on future financial results for the industry will be a regular feature of the Tillinghast – Towers Perrin North America Life Insurance�s CFO survey for tracking the direction of the industry over time.
About the Tillinghast – Towers Perrin North America Life Insurance CFO Survey
The Web-based survey, which was conducted in June 2003, is the fifth in a series of Tillinghast pulse surveys that explore issues important to the North American life insurance industry and its CFOs. The two-part survey examined CFOs� current distribution approach and plans for the future, as well as their expectations for second quarter results. The fifth survey had a respondent base of 30, or 42% of the program�s approximately 70 registered program members. Respondents primarily include CFOs from large and mid size North American life insurance companies: 67% were stock companies; 44% had a premium income of $1 billion or more; and 13% were multinationals. For more information on the North American Life Insurance CFO program, please contact Michele Bacik, program leader, at 212-309-3921.
About Tillinghast � Towers Perrin
Tillinghast provides actuarial and management consulting to financial services companies and advises other organizations on their self-insurance programs. Tillinghast is a premier independent advisor to the insurance industry; its major clients include most of the world’s top insurers. It operates as one global business, through a network of 42 offices in 20 countries. Tillinghast is a division of Towers Perrin, one of world’s largest management and human resource consulting firms. The Towers Perrin family of businesses also includes Towers Perrin Reinsurance, a leading global reinsurance intermediary. Together, these businesses have over 9,000 employees in 23 countries. More information about Tillinghast is available at www.tillinghast.com
