Federal regulation of the US insurance industry is increasingly
becoming a potential reality that insurers cannot ignore.
Charles Davis spoke to Conning Research about its
new study which examines the significant change in current
state-based marketing strategies that federal regulation would
precipitate.
With the US Congress seriously considering federal regulation of
insurance, insurers are working to visualise how markets might
operate under a single regulator. A newly released report by
consultancy Conning Research indicates that such a regulatory
structure would alter the competitive landscape, particularly with
regard to the state-based approach most insurers follow.
Go deeper with GlobalData
For decades, life insurance strategy has been dictated by
differences in demographics and economics at the state level. A
combination of the recession and renewed regulatory aggressiveness
in Washington has increased the likelihood of a single, federal
regulatory system, potentially altering the state-focused nature of
the business, Conning said.
“In our review of state-level performance factors and metrics in
the life industry, we confirmed that larger insurers have been
thinking at a state level in making and managing big distribution
bets,” Greg Smith, an analyst at Conning, told LII.
“Over the past decade, large insurers have focused on explosive
growth states, but as state experience changes due to the
recession, insurer geographic distribution strategies may need to
change,” Smith continued. “For instance, the prospect of single
licensure would allow more flexibility in distribution
focus.”
The study analyses current state level performance and strategies
as insurers prepare for the possibility that at least some portion
of the US life insurance market will operate under a single,
uniform regulatory system in future. The study identifies
significant performance differences among states, along with the
underlying drivers of this performance.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataA potential focus change
“State level focus has made sense in the past, due to the high
barriers to entry at each state market,” said Stephan Christiansen,
Conning’s director of research. “That said, those insurers who are
prepared for the likely single-licensure, single regulatory system,
in terms of distribution, geographic focus, and other issues, will
gain a significant advantage. So, rather than committing to and
investing throughout a specific set of states, we may well see some
insurers shift to a metro-level distribution strategy as a result
of falling barriers.”
Examining market share at the national level, the report found that
market share for the top 20 groups increased nominally from 68
percent in 1997 to 70 percent in 2007. With the exception of
Lincoln National, Protective Life and Genworth, the same groups
appear in the top 20 rankings in 1997, 2002, and 2007.
Direct premiums, however, are not distributed uniformly across the
states. In order to see this more clearly, Conning identified the
states that generated 80 percent of each group’s premium in 2007
and designated those states as key states. Using graphs of premium
distributions, some insurers established a broad-based “strength
over a wide span of states” strategy. At the other end of the
spectrum, groups had depth in one state and relatively shallow
penetration in a number of other states. The report called this
second state strategy “great depth, narrow breadth.”
Insurers with a “strength over a wide span of states” strategy are
less vulnerable to current threats from competitors, but may have a
more difficult time defending their key states under uniform
regulation.
Insurers following a “great depth, narrow breadth” strategy are
vulnerable to current threats in their most important states, but
may be able to make a land grab under uniform regulation if they
can replicate their “deep penetration” strategy in states beyond
their top producers.
Insurers pursuing a regional strategy and smaller groups outside
the top 20 can benefit by deepening their ties to both metro areas
and non-metro areas, since having strength in non-metro areas will
serve as a hedge when metro areas heat up under uniform
regulation.
With few exceptions, all of the states increased their individual
life premiums between 1997 and 2007, but Conning’s research shows
wide disparity in the competitive landscape from state to state.
States with the highest population predictably receive the greatest
attention from the top 20 insurers and tend to be more deeply
penetrated by entrenched players, while other states are relatively
lightly touched by the largest insurers, leaving the door cracked
for new entrants to earn market share.
Looking at organic factors underlying growth in a single regulatory
model, Conning found that life insurance premiums by state are
positively correlated to a combination of two factors: growth in
adults age 25 and older and growth in wages at the 75th percentile
in metropolitan areas.
Insurers losing ground
The report also contained some troubling news, namely that spending
on life insurance as a percentage of personal income is declining
even as personal income increases.
“Insurers need to reverse the trend in wallet share,” the report
said. “Given the pressures on retiring Baby Boomers, insurers
should develop markets beyond the Baby Boomers as a hedge to
slowing life insurance sales.”
In addition, the fact that per agent productivity decreases as the
number of agents increases may be due to too many distributors
chasing the same customers. Insurers need to help distributors
concentrate on the portion of the market that is currently being
missed.
“Costs of acquiring new business are simply too high to risk
missing new markets,” the report said. “Therefore, market research,
prospecting tools, brand building, and strategy alignment must be
brought to bear in order to drive growth in individual life.”
In a world where there are no states with differing regulatory
regimes, metro areas will become the future battleground, Conning
said.
The focus on metro markets may lead to a “super metro” model where
adjacent metro areas are combined into a single regional market.
For example, a group with a strong Midwestern brand may decide to
build their base in the cities of Chicago, Milwaukee, Minneapolis,
and Des Moines. Over time, non-metropolitan regions within a
super-metro territory may also be locked up as well.
“As state licensure impacts fall away, it will be that much easier
for distributors to work with customers regardless of where they
are located,” the report said. “The internet will also serve as a
way to deepen relationships through social networking – a medium
that insurers need to develop expertise in.”
