Insurance Outlook and Strategic Agenda: 2004 and Beyond

Celent's latest report examines the challenging environment that insurers face, and the strategic, technological, and organizational imperatives that they must address in order to succeed.

Although both the market and business climates seem to be improving, insurers still face tremendous challenges. Increasing competition, unknown looming potential losses, over-extended enterprises, and a general over-reliance on the investment markets for profit all threaten the industry.

"To meet these challenges, insurers are refocusing on their core businesses," says Matthew Josefowicz, manager of Celent's insurance group and co-author of the report. "During the boom, many insurers expanded their companies and their ambitions beyond their abilities to execute and profit. Although the boom ended nearly three years ago, the inertial battleship of the industry is only really starting to turn around now. Effective and successful insurers are refocusing their strategies, ambitions, and operations in order to do profitably what they do best. The recent wave of M&A activity sweeping the market is part of this renewed focus, as some companies shed non-core assets and others acquire strategic complements."

In addition to weak investment markets, each sector of the industry is feeling distinct pressures. Property/ casualty companies are being squeezed by increasing reinsurance premiums and the threat of massive litigation for the next asbestos-class liability. Life/annuity firms face market erosion from the high end and increased competition from non-traditional competitors on the low end. Health insurers must grapple with an uncertain regulatory environment, rising provider costs, outmoded distribution models, and market resistance to further price increases.

In the face of these challenges, insurers will need to focus on three key strategic areas: operational profitability and sustainability; delivering their unique value proposition to customers; and offering high service levels to critical stakeholders.

In order to achieve these strategic imperatives, insurers must make sure their IT systems are able to support their new initiatives and their ongoing operations. Celent believes that insurers should strive for a "AAAA" rating for technology洋aking sure their systems excel in business/IT alignment, agility, accessibility by key stakeholders and ancillary systems inside and outside the firewall, and affordability.

Although investments in technology are a crucial step for insurers, and one that they are increasingly taking, insurers must also pay attention to a key organizational imperative, namely aligning company structure and staff incentives with overall strategy. "The best systems in the world will fail if they are not aligned with company structure and staff incentives," adds Josefowicz.

Celent urges insurers to focus on the following seven areas as they move into 2004 and beyond: (1) profitable underwriting driven by careful profitability analysis and accurate pricing, (2) strong reserves and credit rating, paring operations if necessary to achieve this, (3) focused target markets and core value propositions, (4) appropriately high service levels for valuable key stakeholders, (5) organizational alignment with strategic goals, (6) aligning compensation structures to drive profitability, and (7) aligning IT investments with business goals.

The 24-page report contains 13 figures. A Table of Contents is available online.

of Celent Communications' Life/Health Insurance and Property/Casualty Insurance research services can download the report electronically by clicking on the icon to the left. Non-members should contact info@celent.com for more information.