|
|
|
|
| | Back | |
|
|
NALC What's New... Read the latest NALC publications: In the News Upcoming Meetings REGISTER NOW!2010 Spring ConferenceApril 14 – April 16, 2010 |
Working RelationshipsBy Richard Hemmings, CEO of the Fidelity Life Association in Oak Brook, Illinois Leadership teams at small and midsize insurance companies face three unique challenges. For example, with a smaller scale of operation, they can have difficulty obtaining the overhead coverage necessary to drive down per-policy expense costs to the levels of larger competitors. Attractive new opportunities can appear risky since smaller insurers often are asked to put a lot of surplus eggs in an additional basket. And, even if the company's surplus position is healthy, diversification of risk can be difficult to attain. The answers to these three challenges can be found in a strategy built on partnerships, in which companies partner with one another to combine their strengths to create a whole that is bigger than the sum of the parts. Contrary to the results often witnessed with traditional insurance company combinations or acquisitions, relationships based on partnership principles can achieve superior results by tapping into the unique talents of individual partners. There is nothing radically new about these ideas. But taken together, they represent a powerful strategy for creating successful marketing, financial and operational partnerships that move beyond a "bigger is better" mindset to harness the creativity and capacity for innovation in small and midsize carriers. For instance, a midsize insurer may identify a promising niche within its established distribution channels but it is holding back, uncertain about production volumes and concerned about the investment needed to bring the new product to market. This is a classic example of where a marketing partnership can make sense. A marketing partnership can fall anywhere from a simple general-agency agreement to a full-scale private label arrangement, in which another carrier handles product development, filing and administration but the product is still sold under the first insurer's brand. In addition to taking advantage of the market investments that the other carrier has already made, the small or midsize company can take advantage of the second carrier's investments in ongoing product innovation. While ownership of distribution in today's market is going against the trend, companies able to manage channel conflicts can uncover some interesting controlled distribution opportunities. Insurers must be cautious, however, to focus their search on candidates who already have structured themselves to support partnership activity as a business within their overall operations. Otherwise, smaller insurers may invest considerable time and effort as they go through this learning curve. A carrier with an attractive partnership offering can find itself with partner-sales volumes that exceed its direct distribution volumes along with the corresponding support demands. An industry resource in this area is the Inter-Company Marketing Group, a membership-based forum specifically devoted to supporting networking among carriers, distributors and vendors interested in forming strategic alliances. Alliances for Growth On the other side of the partnership coin, small and midsize insurance firms sometimes develop expertise over the years in a given product or market segment. Here, too, partnerships with other carriers can help to identify opportunities for spreading that investment over a larger block of business. A good first step in this process is for the insurer to take an inventory of its strengths. In one case, a number of senior executives had experience in direct marketing. Five years ago, this group decided to focus on penetrating the middle market through product innovations designed for rapid underwriting decisions. This decision led to the development of product designs, reinsurance relationships and technology platforms that supported rapid underwriting decision-making. Once a company's leadership team becomes clear on the strengths their firm has to offer, and what it needs or lacks in-house, the next step is to identify the types of agreements or transactions to enter. For example, entering into a simple general-agency agreement is a relatively easy option and will probably just slot into existing distribution contract structures with only minor modifications. Acquiring distributors is more complicated, but ultimately may solve some of the problems created by the separation in recent years of manufacturing and distribution, such as aligning the interests of manufacturing and distribution and recruitment and training of agents. On the other hand, if the team decides to consider entering into full private-label relationships with other carriers, it needs to think through all of the issues surrounding pricing for that agreement. For example, which expenses does the company want to recover upfront in the product pricing and filing process, versus expenses it might be willing to recover via a reinsurance agreement or as a fee expressed as a percentage of premium? Of course, these pricing options may vary from carrier to carrier, based on the insurer's confidence level in production estimates and overall volume. But the idea is to understand costs well enough to avoid making expensive mistakes in pricing services. Financial Partnerships Financial partnerships also can cover a wide spectrum of structures, from basic reinsurance agreements to affiliations and acquisitions and customized joint-venture agreements. The key benefits sought from these partnerships typically include access to higher levels of combined capital, improved access to equity markets and the opportunity to manage risk more effectively on new ventures. A number of carriers have created mutual holding companies in recent years because the structure allows an existing mutual company to convert to stock-company status under an MHC parent while preserving the insurer as a separate operating entity. The stock subsidiary can retain a separate board of directors. Employees of the stock company can remain in their existing positions, allowing time and attrition to resolve redundancies created by overlaps at the group level. Companies partnering under an MHC umbrella can agree on board representation at the MHC level at the time of entry, which can be based on net worth, profitability or a separately negotiated formula. It may also be possible to permit partners to withdraw from the MHC by "mutualizing" the withdrawing carrier. Mergers of mutual companies, stock company acquisitions by a mutual holding company and even mergers of two mutual holding companies often are discussed but rarely executed because of the resulting dislocation of employees, managers and boards. The most important issues to think through in these combinations, assuming that the financial arrangements can be worked out to the satisfaction of both parties, are the governance structures that will be employed on an ongoing basis. Will current partners remain true partners in the combined group? Will the company have the option of maintaining a separate and independent board of directors? Does the group have intercompany structures that promote collaboration? The most important single issue in evaluating any prospective partner is cultural. Does the leadership team that's being considered for alignment have a strong commitment to the principles of true partnership? If not, walk away. But, when an agreement can be struck under a true spirit of partnership, the financial and operating efficiencies that can flow from these combinations can provide the capital and combined buying power to free small and midsize carriers to focus on creatively serving customers and distributors with innovative products and services. Operational Partnerships Operational partnerships can take many forms, but the overall objective is typically to deliver service, quality and scale economies enjoyed by competitors with larger production volumes or more cost-effective technology infrastructures. When considering partnership opportunities, many carriers will need to look only as far as their legacy mainframe policy administration system. These systems often generate expense levels far in excess of what the blocks of business running on the system can support. Some unlucky carriers may even find themselves with more than one of these old mainframe systems. Before beginning to search for an operational partner, insurers should develop a clear picture of exactly what they're looking for. Don't delegate this task to a lower level in the organization; adopting partnership as a strategy demands a very different management style when compared with managing a traditional hierarchy of company departments and vendor relationships. Senior executives should become heavily involved in partner selection, even interviewing the principals at partner firms, as they would when hiring a senior member of the leadership team. Outsourcing may mean not having to build and maintain it--but the company will still have to manage it. In today's financial environment, insurers find themselves challenging the conventional wisdom that the economies of scale, enjoyed by large carriers, are worth the sacrifices. Sometimes size crushes the creativity and innovation that can be found with smaller and more focused companies. And, as seen in recent headlines, sometimes size can create a combined organizational IQ that is lower than the sum of its parts. Adopting a partnership strategy is a key element in preserving the advantages of focus and innovation of a smaller company while accessing the benefits that partnership can deliver in terms of scale economies and diversification of risk. There may be no better time than today to chart a partnership course into the future.
|
|
| Back Copyright © 2003-2010, National Alliance
of Life Companies
|
|
