Five Key Trends That Will Impact the Insurance Industry in 2011

1. Doing More with Less: Premium growth will be modest at best. Claims inflation will pick up as the economy improves and a lagging bond market will drag down investment income. In other words, insurance companies will have to operate more efficiently with less room for error.

2. Better Data brings Better Results: Predictive analytics and other data centric tools will play a bigger role in separating the winners from the losers. It’s no longer a game of market share. It’s now a game of who can best leverage their data to write profitable risks.

3. What’s my Micro Niche? Niche markets continue to provide superior returns but as competition increases, companies that can identify micro niches within larger markets will accelerate their growth.

4. Social Networking Comes of Age: The impact of Social Networking on brand, customer service, and client acquisition can no longer be ignored. The Internet has changed consumer behavior and companies that fail to incorporate social networks into their day-to-day operations will be at a competitive disadvantage.

5. It’s all about Distribution: The Independent Agent Channel continues its comeback in 2011 as technology, transparency, and access to information makes open architecture a powerful value proposition. Direct to consumer continues to grow for commodity products like auto, home, and term life but creates added pricing pressure. Targeted program business continues to expand.

Major Disruptions Coming to the Life Insurance Industry

Two recent developments indicate disruptive changes lie ahead for the life insurance industry.

Automated Underwriting is Finally Here: The use of predictive analytics to replace the need to take blood as part of the underwriting process has finally come of age. This is the holy grail companies have been chasing for years - get rid of the expensive and time consuming "blood test" as part of the life underwriting process.

I worked with several companies over the last several years to introduce this technology. While the CMO at Farmers Insurance I worked with my colleagues at Farmers Life to launch an electronic underwriting system that used prescription database information to "score" applicants. Several software companies, including one I headed (Clear Technology) pursued this opportunity and found strong industry interest. But now Deloitte Consulting has embraced this concept and is working with several large insurance companies to bring automated life underwriting to the market in a big way.

This will revolutionize term sales at first followed by permanent insurance sales when companies get more comfortable with the technology. Automated underwriting will also transform the life insurance sales process into one that resembles the purchase of auto insurance. Carriers that embrace this new capability will see tremendous growth. Technology companies that enable agents to integrate this underwriting technology into a seamless online experience will benefit too. Friday's WSJ has a detailed article on the predictive analytics used to enable this automated process.

Life Agent Compensation Structure To Change: I don't know how soon, but pressure is building for a change in the life agent compensation structure. With new disclosure laws going into effect in 2011 in the State of New York that require agent compensation to be disclosed as part of the life insurance sales process, insurance companies will re-think the traditional life agent compensation structure. Unlike P&C agents, Life agents get upfront commissions on the sale of a life insurance product that average roughly 60% to 80% of first year premium. As with other financial products, as these upfront commissions are disclosed, consumer dislike will force the industry to spread commissions out over several years, if not the life of the policy. This will have a tremendous impact on the life agent's annual compensation forcing many to leave the industry.