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Insurance Scenario 2012 — Three Powerful Forces Drive Change

The Combination of Three Powerful Trends Will Force Insurers to Become More Nimble by 2012

The Proactive Regulator

The Empowered Consumer

ThePressureCooker

More Demanding, More Self-Directed

More Sophisticated, More Resources

Impact of Disasters, Pandemics

Viewpoint — Knowledge in key areas like consumer preferences, risk-based capital, and catastrophe modeling and response will make the difference between winning and losing.

Key Issues

1. What are the trends, strategies and technologies that will shape the Insurance industry through 2012?

2. How will these trends impact IT and business outcomes within the Insurance industry?

Trend 1: Insurance Buyers: More Equipped With Information and More Demanding

Aging Populations:– Longer life span and its impact on

quality of life (healthcare and retirement)

Availability of Social Security for Baby Boomer GenerationChanges in Position of Women

– Increasingly educated and opening up of a new economy

Growing immigrant population in the U.S.Growing middle class in emerging countriesEmerging "young consumer" market that is IT-savvy and have different information/transactional demands

Education Level IncreasesInternet Access:

– Free information available for retail and financial transactions

– Shift to a true global economy; geographic barriers are eliminated

– Ability to price-shop easilyNew Devices — Wireless, GPS, Telematics, Remote Monitoring Devices in Home for Disease ManagementEasy Ability to Search and Query for Answers (for example, Google)New Communication Methods Such as Instant Messaging and ChatMedia/Press — Coverage of World Events (for example, catastrophes)E-Visits to DoctorsHealth and Wellness Information Access

Information Rich and DemandingMajor Generational Shifts

Demographic Changes Information Access

Consumerization — Turning Information Into Profit

Consumers CustomersKnowledge

AttitudesBehavioral PatternsPreferencesAptitude

Techniques: Customer Profiling, Data Mining (for example, Segmentation and House Holding), Customer Analytics, Predictive Modeling and Next Likely to Purchase

Product Development

Marketing Sales/ Distribution

Customer Service

STP and Real-Time Interactions

BPM and Process Transparency

Security/Authentication

BI and Operational Performance Management

Themes

Improved Business Intelligence Will Allow Insurers to Act, Not React to Customer Needs

New Products

Targeted Marketing

New Sales Approaches

Faster Service

• Personalized and targeted marketing to individuals• Health insurers target individuals in addition to employers• Market to personality types — like Tonic Health

• Powerful decision aids on portals for consumers• Linkage of web to call centers — shared screens, IM, VoIP • Sales kiosks at Wal-Mart or your local physician's office for

the uninsured

• Integration of financial services and health spending accounts

• Integrated channels — Voice over IP, web to call center• Expanded, easier to use self-service portals

• Product configurators to speed product development• Consumers assemble products that meet their needs at

the chosen price points• Pay as you drive auto insurance — like Progressive

Bus

ines

s In

telli

genc

e Ti

es T

oget

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Red – needs attention, green – ongoing, yellow – getting started

Highly Refined Consumer Marketing Approaches Will Become Common

Trend 2: Regulators in North America and Europe Will Become More Proactive and Effective

Level 1

Level 2

Level 3

Insurers to better manage themselves while also being more tightly, though selectively, regulated

Governance

New Things

Governance

Regulators hire proven industry professionals

Refined approaches to

risk-based capital

A strong, primary regulator for producers

Suitability determined,

conflicts disclosed, privacy enforced

Fewer audits, more confidence in risk

management controls

Credit ratings more accurate

Solvency/ minimum

capital

Market conduct

Enhancements

Reactive regulatory response

Proactive supervision

Trans- parency

Solvency is for survivalSales conduct impacts

growth

Early examples

Privacy impacts survival and growth

Europe is leading the way:New opt-in rules in CaliforniaEU privacy rules becoming the de facto standard across the world

Type of regulation

Privacy:Who sensitive medical and financial data is shared withHow insurers use customer data to generate profit

Objectivity at point of sale:New NASD annuity rules in U.S.Mediation rules in EU, first adopted by U.K. and Spain

Bank regulation has led to:Solvency II in EuropeOptional Federal Charter regulation in U.S.?

Drivers

Market conduct:Suitable productsConflicts disclosed at point of sale to consumer

Solvency:Make sure industry players have enough capital to cover risks

Catastrophes, pandemicsIndustry credit ratings falling past 10 years

High profile abuses in U.S. and EuropeAttorneys general in U.S. have raised the bar for regulators

Recent onslaught of identity theftConsumers anxious about electronic access to their data

Insurers Continually Challenged and Disrupted by Regulations

Active regulationFewer

resources to grow

Less focus on innovation, efficiency

Lose customers

Profits fall

Weak insurers will

often be crippled by

active regulation

Savvy Insurers Will Use Active Regulation as a Catalyst for Operational Excellence

Active regulationImprove

operations

Become more effective in

marketplace

Gain customers

Strong insurers use regulation as a minimum

bar for operational excellence

Profits rise

Weak Insurers Strong Insurers

Trend 3: Catastrophic Events Go Beyond Disaster Recovery

Disaster vs. Catastrophe: The level of impact and effect is multifaceted

Disaster — Insured losses beyond planning or forecast

Catastrophe — Disaster plus unexpected and unanticipated business disruption for all parties, including the insurer

Catastrophic Events — Level of Impact and Effect Is Multifaceted

Catastrophe is a value chain disruption with unexplained, excess loss rippling into unexpected business interruptions — your clients' and yours'

Catastrophic Events — An Explicit Value Chain Disruption

By 2010, catastrophic recovery plans will be required for all large insurers. CAT modeling tools will require standardized and sharable formats for collaboration across multiple geographic boundaries and among all stakeholders.

Catastrophic Events — Level of Impact and Effect Is Multifaceted

Hidden impact — CAT losses directly affect insurers' ability to conduct business. CAT events are shared events.

ClientImpact

Enterprise IT Impact

High

High

Low

Low

Business as Usual

• Rolling blackouts• Web linkage errors• Short-term power loss

IT Overtime

• Fire in IT area• Rare weather events

• Hurricane• Blizzard/ice storm• Tornado

Business as Unusual

• Branch office flood• Gas rationing• Docs destroyed, such as birth/death certificates

All Hands on Deck

• SEC investigation• Full-scale terrorist attack• Pandemic• Breakdown of domestic order

Disaster to Catastrophic Severity Index

ClientImpact

Enterprise IT Impact

High

High

Low

Low

Business as Usual• Implement various sections

of disaster recovery plan• Web, IVR, branch access

offline for limited periods• Resource management• Temp/peak resources

IT Overtime

• Self-service on Web• CAT modeling (before and

after)• Claim admin. workflow

changes• Excess resource availability

Business as Unusual

• Client impact assessment — CRM

• Document management/archive/ imaging

• Collaboration tools

All Hands on Deck

• Dynamic financial modeling tools

• Backup site operations• Collaboration tools• Wireless connectivity• Onsite adjuster teams

Technology Response to Catastrophe

Catastrophes — Constituencies' Responses Vary

BI toolsPredictive modelingCRM enhancementsWorkflowCAT models

Dynamic financial and geographic enhancement

Wireless a "must"Collaboration tool

Multilingual

Technology Response

Integrate components developed by a third party with legacy

and proprietary

components

Market Response

Government Response

Solvency vs. insolvencyInsurers have more feet on the groundConsumers —individualized attentionCapital markets shrinksNew value chain entrants (third-party partnerships & niche providers)

Bigger government footprint

CDC

FDIC

Optional charter

Government-backed catastrophe support

Catastrophes Breed New Business and IT Outcomes

Business Outcomes IT Outcomes

New innovations

Speedy results

Government intervention

New regulations

Collaborative interchanges develop

Policy simplification

Consumer alerts for flood insurance, building hazards, fault lines, etc.

New innovations

Unsupported processes the norm

Message standardization mandatory

Alliances form using SOA and Web standards

Indirect and discretionary spending and cost increase

Front OfficeBack Office

• Web-based new business systems to monitor activities of producers

• Capabilities for monitoring opt-in selections of consumers

• Multifactor authentication for online interactions

• Use of BI and predictive modeling for better targeting marketing

• More advanced use of CRM to make the sales offers at right time

• More-granular pricing• Decision aids at point of sale• Product configuration

Personalized Sales Approach

• Common administration, claims, and accounting platforms

• Re-usable components• Active use of data standards like

ACORD to manage customer data more effectively

• Powerful risk analytics/models

Manage Risk, Be Efficient, Be Flexible

• Web-based claims and policy administration systems

• BPM for faster, more-reliable service through all channels

• More self-service and better integration of Web with call centers

Faster Service

Technology Implications of the Three Disruptive Trends

Manage Risk, Be Efficient, Be Flexible

New Capabilities Will Be Possible With Upcoming Technology Improvements

BPM/SOABPM/SOA

g

Support creation of detailed time and unit cost metrics

g

Tighter linkage of business and IT

g

More focus on process outcomes

CommonCommonCore SystemsCore Systems

g

Geographic expansion much easier

g

Real time, gold copy view of customers

g

Financial transparency

g

Expanded use of BPO — outsource and stay in control.

g

Virtual supply chain for P&C claims — better vendor management

g

Patients/doctors/payers — better disease management

Dynamic Collaboration Dynamic Collaboration ToolsTools

g

Personalized marketing offers/scripts

g

Segmented claimsg

Online sales with less adverse selection

g

Price risks faster and more accurate

BI/Predictive ModelingBI/Predictive Modeling

BI Competency Centers: A "Turning Information Into Profit" Must-Have by 2012

Business Skills

Business needs

Organization andprocesses

BI Skills

Tools andapplications

Business needs

Data integration andmanagement

Tools andapplications

Develop user skills

Control funding

Define BI vision

Manage programs

Organize methodology leadership

Build technology blueprint

Establish standardsBICC

IT Skills

Technology Is Not the Only Challenge — Management Practices Need to Radically Improve

BusinessProduct and

Process Domains

Information and Business Intelligence

Operations

Increasing Emphasis

on BPM

Moving FromReactive toProactive

Data How should we clean up, describe, and convert our data to standard formats?

Organization How should we organize to be more nimble and efficient?

BusinessFundamentals

Applications How should we upgrade our core marketing, distribution, underwriting, rating, commission, administration and claims applications?

Good Early Progress

StrategicFocus

Strategic Planning

Perform

ance

Disconnected

Highly Disconnected

How can we connect our plans to our operations?

How do we motivate employees to do the right things?

BusinessMethodologies Building

Some Progress

Incent, Inspect and Measure

Where should we focus our resources long term?

How can we use methodologies to embed discipline?

How can we become more effective, not just efficient, in key process areas like underwriting and claims?

How can we use BI tools to convert data into knowledge?

Recommendations

Forget your process — for now …Immediately investigate and categorize the best practices of consumer products companies.

Make the consumer experiences comparable to his/her best retail experience.

Begin building your processes for data collection, management, and analysis around the customer expectations of "must have" information for decision aides and self-servicing.

Use creative scenario planningCreate scenarios for the unforeseen — go beyond the past and the expected.

Use dynamic modeling tools to help quantify the impact of the extreme.

Make prospective regulatory requirements a catalyst for change

Manage your balance sheet using dynamic, risk-based capital and hedging approaches — like you're an investment bank.

Help justify previously unjustifiable data and application upgrades.