Empowering leadership in the “technology millennium”

Reforming company management structures to deal with the rapidly evolving marketplaces of financial services formed the central focus of the International Insurance Association Inc.’s (IIA) 36th annual conference, which was recently held in Vancouver. The prime drivers of change impacting across international borders of the insurance market — and steadily drawing together the pillars of the financial services sectors — were identified by senior speakers of the conference as being corporate globalization and the increasing bearing of information technology on product design and distribution. An IIA survey of the 550 global insurance management attendees also targeted “technology and e-commerce” and “retaining and acquiring new talent” as the most significant issues insurers will face in the immediate future.

A sample survey conducted by the International Insurance Association (IIA) of the 550 insurance management attendees of its recently held annual conference identified five critical factors likely to affect the competitive standing of companies in the new “technology millennium”.

At the top of the list of the respondents from 55 countries was the unknown reach of technology and e-commerce, and how the spread of information technology will affect the corporate and management structures of insurers. The common thread of “technology change” was clearly evident in the all of the responses of attendees from across the major global trading blocs. The impact of technology also served as the foundation to the other major challenges expected of the future, with “sourcing and retaining management expertise” coming in a close second in the survey results, followed by “adapting products and services to a changing market”, “establishing effective distribution channels”, and lastly “creating an environment for ongoing innovation”. The host of CEO speakers outlined their views of market change and how companies will have to adapt their management philosophies and structures in the years ahead.

Diversification and the “demutualization stampede”

A significant trend having evolved from the recent years of global consolidation of the insurance industries has been demutualization, observes Seymour Sternberg, president of one of the U.S.’s largest life insurers New York Life.

In the U.S. market, which recently underwent legislative reform of financial services through the passing of the Financial Services Modernization Act, the move toward demutualization became a “stampede” in the lead-up to the new regulatory environment, he adds. However, as a strong supporter of the mutual concept, Sternberg believes the insurance groups who opted to go public will face competitive restraints in the years ahead — particularly life insurance operations. The nature of the insurance business lies in long-term risk evaluation, he points out, which flies in conflict to the short-term expectations of the stock markets. Management of companies having gone the “demutualization route” will likely face two hurdles in the future, he comments. The first being an inability to compete with mutual concerns with regard to products yielding long-term benefits (which could be up to half a century in the life business), and secondly a conflict between the interests of policyholders versus shareholders. “Will short-term pressures cause [public] insurers to forego investment in the future or to make expedient underwriting decisions in order to make the next big sale? Can the policyholders’ long-term interests be reconciled with short-term expectations?…We are in a business that does not measure success by the stock market close on a given day — but by the decade, by the score, by the half century.”

In addition, Sternberg questioned the value behind the concept of converged financial services groups — which has been one of the major drivers behind the demutualization push. The inherent danger of trying to serve all markets is loss of business focus, he notes. In that respect, he points out that there has not been significant merger activity between insurers and banks in the U.S. following the market’s regulatory reform. “The banks have been daunted by the complexities of insurance product design and underwriting,” the result of which has seen few major acquisitions. As such, Sternberg does not believe the benefits of raising shareholder capital justify the disadvantages of demutualizing. “Big is not necessarily better… Remaining a mutual builds on our culture… consumers are also more comfortable with the mutual concept.”

Although the traditional mutual structure of the insurance industry has been highly beneficial in the past, other CEO speakers drew focus to the market reality of having to adjust to modern business practices. Antoine Jeancourt-Galignani, CEO of France’s former government-owned insurance group, AGF, refers to his own company’s transition through privatization. In order to avoid hostile bids and maintain a competitive global presence, AGF was compelled to find a capital partner, resulting in the marriage with Germany’s Allianz group. To survive in a cost-competitive and “critical mass” international environment, the need to conform to the investment market’s expectations became essential, he says.

Similarly, Maurice Lippens, chairman of Belgium’s FORTIS financial services group, drew attention to the need of raising capital in the ever-growing globalization of the insurance sectors. “Demutualization is being driven by the need for capital for expansion…I expect further demutualization [internationally], particularly among the smaller players.” Furthermore, Lippens believes “shareholder value” has become a critical component in driving growth performance.

Although seemingly in favor of the mutual company structure, Josei Itoh, chairman of Japan’s Nippon Life Insurance Co., concedes that the movement to international deregulation and privatization of the financial services industries is prompting the need for insurers to raise expansion capital. Coupled to these events is global consolidation, which he expects will result in a fair number of major demutualizations within the Japanese marketplace.

Brian Duperreault, CEO of ACE Ltd., added support to the need for international diversification and ability to tap into the investment markets. From a relatively small player on the international insurance stage, the Bermuda market has become a significant player, he notes, with ACE having evolved to become a global insurer. Notably, he adds, ACE has maintained strong support from the investment markets for its diversified growth strategy.

Maximizing company resources

“As our industrial society gives way to a new digitized service oriented economy in which information processing, systems and networks are the norm, the ability to capture, create and share knowledge will be critical,” says Robert Mendelsohn, CEO of Royal &SunAlliance Group, U.K.

Mendelsohn and several of the CEO speakers tackled the growing challenge of information harnessing and maximizing on professional talent within organizations. The problem bringing together information and use of professional talent becomes exasperated in a global environment, Mendelsohn observes. “The financial services industry is going to become unrecognizable over the next ten years…This means we have to create ‘knowledge organizations’ in order to succeed… through technology we need to create knowledge sharing platforms.”

Mendelsohn cited “globalization” and “knowledge empowerment of the consumer” through the Internet as the two critical factors likely to sway the future direction of the financial services industries. To compete effectively in such an environment, insurers and intermediaries need to realize that “no one owns the customer”, with the balance of power having shifted from product suppliers and sellers to the consumer. The successful enterprises of the future will be those which have realized the full “brain power” of their professional resources. As such, the course of management has shifted to what Mendelsohn describes as “knowledge management”, adding ” empowering people is what leadership will be about in the 21st century”.

In response to this changing management field, Royal & SunAlliance has created a worldwide “group practices unit” connecting over 50,000 people through an email and group intranet system to facilitate information sharing, and thereby knowledge building.

Having guided AGF through its privatization process, and subsequent merger with the Allianz group, Jeancourt-Galignani agrees that future success is dependent on the quality and effective use of professional talent. AGF has since brought in a system of profit share-based remuneration subject to performance of both the individual and business unit levels. The group also began evaluating the professional management abilities of each business unit and shifting its manpower accordingly to maximize on the various talents. In so doing, the group was careful to ensure the “new generation” of employees wanting to take on greater responsibility are given the opportunity to do so. And, Jeancourt-Galignani notes, in a globally competitive landscape, “you have to ‘multi-nationalize’ your managers’ skills. Unfortunately, I believe the banks are ahead of us in this regard.”

“I’m a decentralist,” Duperreault adds to the debate. Through ACE’s global expansion and diversification strategy, the company has pursued development of local management, thereby maximizing on their local expertise and where necessary providing further international training. It is also important to give local management a sense of “ownership” in the enterprise in question, he adds.

Furthermore, ACE operates internationally on what Duperreault describes as “informal and formal management resources structures” in the sharing of information and ideas. The objective being to enable a potential solution generated in one region to be utilized where demand may exist in another country. In a global and information-based economy, responsiveness and knowledge have become the new management tools, he says.

Regulators get hip

Internationally, regulatory barriers governing financial services need to be reduced with greater focus applied in harmonizing complacency standards, says Howard Davies, chairman of the U.K.’s Financial Services Authority (FSA).

The FSA was established by the British government in early 1999 to regulate all sectors of financial services operating in the country. The passing of the Financial Services and Markets Act in June of this year provided the FSA with the regulatory teeth to operate across the markets (including regulation of Lloyd’s).

Several factors are influencing change in the regulatory world, Davies notes, the first being the convergence of the financial services pillars, new technology delivery capability and the increasing competitiveness of different jurisdictions to encourage location of companies.

Firstly, he points out, “we must look at the linkages between the insurance industry and the rest of the financial sector…it is increasingly clear that to understand the direction the industry is taking, and the risks inherent in it, one needs to see insurance within a broader context”. In that respect, Davies sees the areas of “bancassurance” and “securitization” in the transfer of risk as being the biggest challenges facing regulators. The growth and diversity in structuring of combined banking/insurance operations has in many instances superceded the effectiveness of the “old world” regulatory approach. As such, regulators need to focus on risk management modeling of companies rather than prescriptive and separate rules previously applied to industry interests (the FSA recently introduced a single risk model to be applied to all financial services companies). Regulators also need to focus on the transfer of risk resulting from securitization transactions. As Davies sums up, “where the risk is going,” which will require greater cooperation between regulators on an international level. Overall, he comments, “In the medium to long-term, I would hazard a guess that regulatory structures will need to adapt to market forces”.

The growth of financial services over the Internet has also provided regulators with opportunity and new challenges, Davies says. The Internet allows for real-time communication and makes moves by companies in the market “more visible” to regulators, he notes. However, the Internet also presents a problem in terms of operating outside of legal jurisdictions. “To some extent, the Internet does drive a hole through the regulatory environment.” Once again, Davies comments, effective and fair regulation of the future will depend on international cooperation between regulators.

And, he notes, progress is being made at an international level to apply common rating standards and information sharing. Although the International Association of Insurance Supervisors (IAIS) is a recently new initiative, the group has made significant progress in certain areas, he comments. However, the organization still has a long way to go toward achieving harmonization of the rules. “It is notable, for example, that in the insurance sector there is as yet no agreed capital adequacy or solvency standard, and there is no consistency of approach to the supervision of reinsurance and reinsurers.” Davies predicts, however, that the pace toward international standardization of regulation will increase dramatically as a result of the recently created Financial Stability Forum by the G-7 members. “The Forum has made it very clear that it wants to see more rapid progress on key elements in the IAIS agenda.”

The third area where Davies sees change affecting the regulatory environment is competition between countries for location of company operations. “Regulation is a relationship business,” Davies adds, and regulators are having to adapt their procedures to avoid becoming an overly costly factor in the decision of location. Which does not mean that companies will automatically select the cheapest regulatory environment to locate their business, “customers clearly see some value in the protections they are offered in the major financial centers…But if a center imposes regulation which is not cost-effective, and which does not present a good balance of benefits and costs, then businesses will move elsewhere.”