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Insurance and financial services practices within other consulting firms espouse similarly revolutionary thinking. One of the biggest changes that insurance companies need right now relates to the transformation of an internal function, notes Eva Dewor, the Accenture Managing Director responsible for the firm's Risk Management and Insurance practices in Europe, Africa and Latin America. "Risk management has to move out of the ivory tower," she asserts.

That's hardly the only moving assistance insurance companies are seeking from their consulting partners. Insurers also want to kick their innovation capabilities into a higher gear so they can develop new operating models, better penetrate more geographic and generational markets, and move into new product lines, new technologies and new marketing and distribution channels.
Making these moves requires a clear grasp of the forces that make these ground-breaking changes necessary.

Trends With Mega-Impact

Analyzing and interpreting "trends" and their implications on client companies no longer seem to suffice. Instead, insurance consultants seem eager to take a page from "Megatrends" pioneer John Naisbitt's playbook.

A separate KPMG report identifies four "global megatrends" that the firm sees shaping the future for insurers: demographics, technology, environment, and social values and ethics. For example, massive urbanization, growing global wealth and climate shifts will present new challenges and opportunities. "These global trends have a lot of tentacles," Hay explains. "Look at transportation—people who live in cities drive cars less frequently, so what does that mean for the future of auto insurance? From a global perspective, people who live in cities also tend to have better access to health care. Better access to health care tends to extend life expectancy, which creates other healthcare challenges."

The global megatrends will interact in ways that create new risks within four areas of an insurance company's business model, according to KPMG: products and markets, distribution and operations, governance and people, and reputation and capital management. Insurance practice leaders from other firms tend to agree. Insurance consultants most frequently point to the following four areas:

REGULATIONS
A Wall Street Journal editorial bemoaning the U.S. Federal Reserve's new Dodd-Frank-mandated regulatory oversight of systemically important insurers AIG and Prudential appeared in April. The piece was titled, "Dodd-Frank Comes for the Insurer." If anything, the column may have been understated: More new rules are in store for insurers of all sizes. Dodd-Frank's federal oversight is "starting to have a trickle-down effect on other [insurance] companies," observes Gary Shaw, who leads Deloitte's insurance industry practice. "There's a heightened expectation around what it means to be properly supervised, and that's also putting pressure on the state regulators to up their game.

They're also very, very proactive now – more so than they've ever been." Shawn Seasongood, managing director in Protiviti's risk and compliance group, points out that regulatory activity is intensifying at both a national and global level. Many of the new rules (e.g., Dodd-Frank and Basel III) are well known; others may so far command fewer headlines but also are expected to exert major disruptions. Seasongood points to the Accounting Rules for Insurance Contracts, which changed in 2013 and promises to significantly alter how insurers recognize and present their company's profits.

"The impact will be felt beyond accounting as the underlying systems that support operations and finance will also have to be modified to support the new rules," Seasongood notes. "Many top executives in insurance are concerned about over-regulation—not only in insurance but throughout the financial services industry. This new regulatory environment has forced insurance companies to increase personnel in the areas of compliance and risk management."

GROWTH
When asked to identify the top challenges insurers face, Shaw identifies growth first. Common growth strategies include the pursuit of new products, markets, geographies, and acquisitions.
An August KPMG survey of 95 U.S.-based senior insurance executives, finds that 54 percent of executives expect to be involved in a merger or acquisition as a buyer during the next 12 months—a substantial increase compared to 34 percent in a similar 2013 survey.

Of the 54 percent, 19 percent indicate that they are "very likely" to be involved in a merger or acquisition as a buyer, which is nearly double the 10 percent of 2013 survey respondents who answered the same way. What's more, the portion of survey respondents who say they have no M&A plans on the bale dropped from 41 percent in 2013 to 21 percent this year.

"Cleary," Shaw adds, "insurance companies are looking to expand their business." He points to Latin America (Brazil, Argentina and Mexico, specifically), Southeast Asia and parts of Africa as being particularly enticing to insurers as areas of expansion.

TECHNOLOGY
Insurance executives appear excited to invest in new technologies to bolster their ability to reach new markets and new market segments (including social-media savvy millennials.) "To stay current in today's world, insurance companies need to adapt to the new technology," Seasongood emphasizes. "They need to develop new products to protect consumers against new risks… and, at the same time, they also need to provide new information and product choices via the Internet. The way that insurance is marketed and sold has gone through a massive transformation in recent years, as more products are bought via the Internet and increasingly via mobile devices."

This type of modern adaptation requires significant attention on old-fashioned legacy systems. Deloitte calls this work core systems transformation, and it focuses on underwriting, claims, policy administration applications and these types of legacy systems. "A lot of companies are undertaking pretty big initiatives to upgrade their infrastructure," says Shaw, "so that they can then take advantage emerging technologies."

TALENT
Talent shortages as well as the need for niche talent are also on the minds of insurance executives. Seasongood reports that life insurance companies confront a looming talent shortage. "The industry looks to be struggling in identifying and mentoring its next generation of insurance agents," he says. "What was a very attractive career 20 to 30 years ago appears not to be an attractive option for young professionals and recent college graduates now. The industry needs to address this by providing better mentoring programs within its organizations and finding a way to attract young professionals…"

As the nature of the risk function inside insurance companies evolves to become more strategic and collaborative (with less of an exclusive focus on actuarial and compliance tactics), the demand for new talent within the CRO's office and the upper levels of the risk function are increasing. Other highly targeted talent needs are also cropping up. "Chief customer experience officers are being hired at senior levels—and reporting to CEOs in some cases," reports Shaw. "Many [insurance] companies are also hiring data scientists right now."

The New, New Things
Addressing risks in a way that limits their threats and maximizes their upside requires innovation. "Innovation is a very, very hot topic," says Shaw, who adds that this interest extends beyond the development of new products to the development of a repeatable innovation capability—and even a culture—throughout the enterprise. The insurance companies that are best equipped to manage the implications of global megatrends tend to have a portfolio of innovation initiatives underway.

And Deloitte—with its Monitor acquisition—is well-equipped to provide guidance on this count. Shaw says Doblin's instruction on innovation has resonated well with clients at a time when these companies are forming internal innovation committees and task forces to identify, develop and harvest new ideas.
And many of the newest insurance industry ideas tie in to areas of consulting need. These include:

New Models
Insurance companies have traditionally considered themselves masters of risk management. Rightfully so, their risk calculations enable their products to thrive and their clients' industries to achieve peace of mind. Since U.S. and global regulatory activity kicked into a new realm (at some point following Sarbanes-Oxley, Basel and Dodd-Frank), risk management has become a must-have internal core competency.

Insurers now need a sophisticated, strategic and collaborative risk function to A) grow the business and B) to address the global risks more insurers now take, Dewor explains. Risk management is no longer "a compliance function only that checks the different compliance boxes and then says, 'OK, we're finished and all the controls are in place,' " she says.

As a result, more insurers are looking for help developing new risk-based operating models that complement the risk-based capital models they're developing in response to new regulatory requirements. Dewor says these new operating models, like the Accenture model she helps clients weave into their day-to-day activities, help insurers integrate risk management into core operations, capital management and business processes. "This, in turn, can help insurers maximize enterprise value by allowing their management to invest in projects or business units that are profitable after taking into account the cost of needed capital," Dewor adds.

New Products
A recent Munich Re survey of risk managers finds that 77 percent of companies plan to purchase cyber insurance coverage for the first time, maintain existing coverage or increase existing coverage. That interest helps explain why Seasongood points to cyber insurance as a promising new product.

And there are plenty of other new products in development, in beta release and already on the market. An analysis conducted by SNL Financial and Deloitte indicates 50 percent of U.S. drivers will have access to usage-based insurance—auto insurance whose cost flexes depending on specific driving behaviors that are tracked through telematics—by the end of this year. And 10 major U.S. auto insurers, representing nearly 60 percent of the market, will be offering telematics products in 2014, according to The National Association of Mutual Insurance Companies (NAMIC).

Deloitte developed D-rive—a mobile–based telematics solution that captures, scores and reports on policyholder driving behaviors while engaging drivers through a mobile app and online driver portal—for NAMIC member companies, who also provided input on the solution's development. D-rive's insurer portal gives insurers access to a "data bureau" of pooled driver results related to driver and loss cost information. The information, Shaw notes, helps insurers price their products more accurately and effectively.

Shaw and Hay also point to growing interest in new life insurance products that are much easier to understand and qualify for compared to traditional life insurance policies.

New Segments and Channels
These new life insurance offerings are created with new or underserved markets in mind, including lower-income consumers, Hispanic consumers and young adults. "There are a lot of under-insured groups out there," says Hay." And many of these segments prefer to buy insurance offerings differently than through traditional means (i.e., agents). "There is a lot of focus on the younger generation and the fact that life insurance purchasing is at a 50-year low right now," Hay adds. "That's understandable because the insurance companies have been slow to change how they market and sell to that population. But I'm convinced that they'll get there."

Although Hay allows that Gen Y and Millennials may not snap up life policies at the same rate Boomers did at a similar age, these younger consumers are already exerting a major impact. "Consumers are telling insurers, 'This is what we need,'" Hay continues. "And the companies that move faster are the ones that will pounce on those opportunities."

In addition, the most agile insurers include those that are hiring customer-experience executives. They likely will do so through new marketing and sales channels. Recent Strategy& research shows that traditional insurance channels are changing as the importance of agents fades. Insurers "will continue to see more business transactions via the Internet as customers look for ways to research and select insurance products through the web and mobile apps," agrees Seasongood.

New Technology
"To stay current," Seasongood adds, "insurance companies need to adapt to the new technology." The KPMG insurance industry survey identifies technology as a top-three investment area. The most commonly cited types of technology investments that insurance companies want to make, according to the survey, include technology related to:

• Customer growth and customer service
• Data and predictive analytics
• Risk modelling and analytics

"Data and analytics are just going gangbusters across life and P&C," Shaw confirms. Analytics are being applied to improve underwriting, pricing, claims-handling, customer segmentation and marketing campaigns among other areas. "It's really the whole gamut," Shaw adds. "A lot of it is about harvesting information within the company and from external sources to basically predict who the better customers are." Many of these customers want new product features and new products through new channels. And most of the insurance companies serving these demanding customers are seeking outside help in meeting their revolutionary expectations.