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WHITE SULPHUR SPRINGS, W.Va.-Understanding various forces influencing change in the commercial insurance industry is key to the industry remaining profitable and continuing to serve its customers well, an insurance executive says.

These forces, which include consolidation, financial services reform, technological change and rising buyer expectations and sophistication, make the industry appear to be in a state of chaos, said Ramani Ayer, chairman, president and chief executive officer of Hartford Financial Services Group Inc. of Hartford, Conn.

But if one draws parallels to the chaos theory of physics, a system in disarray eventually will coalesce into a new form, as will happen in the insurance industry, he said. For insurance companies and their intermediaries, making sense of these changes and being flexible enough to adapt to the new system to come will ensure they continue to thrive in the future, he said during a presentation at the Insurance Leadership Forum.

The forum was held in conjunction with the joint annual meeting of the Council of Insurance Agents & Brokers and the Council of Insurance Company Executives last week at the Greenbrier resort in White Sulphur Springs, W.Va. Mr. Ayer is chairman of the CICE.

Forces shaping the insurance industry, he said, include:

Mergers and acquisitions.

New technology that expands access to information and ideas.

New distribution channels for insurance sales and services.

Competition from other financial services sectors.

New and higher customer expectations of cost, quality and service.

"The underlying trends driving change in our industry do create tremendous challenges. But they also offer tremendous opportunities for all of us," Mr. Ayer said.

One of the most important trends, he said, is technological advancement, particularly in terms of computing power and affordability.

"Today we buy more computers in America than cars or televisions," he noted. "Combined with more user-friendly software and options like the Internet, the PC penetration creates possibilities we couldn't imagine even five years ago."

Advances in technology allow the insurance industry to enhance its productivity, better understand customer needs and habits, cut the time customers spend shopping for insurance products and develop analytical systems to help make decisions and refine business processes, Mr. Ayer said.

Many industries, including banking, supermarkets and catalog retailers, already are tracking their customers' buying habits and custom-tailoring their products and services, he noted.

"The possibilities to agents and insurers are just as great, if not greater. We ourselves possess a virtual storehouse of information about our customers, more even than the banks and credit card companies," Mr. Ayer said.

"But we haven't always understood-nor have we tried-to mine and share that data. And we haven't spent the money it takes to do so," he said.

In fact, he said, research has showed that insurers only invest 2.4% of their revenues in information technology, compared with 4% for banks and brokerage firms.

Another key trend shaping the industry's future is the increasing complexity of the customer.

"Customers have new and higher expectations for cost, quality and service," Mr. Ayer said. "The bar is being raised not just by financial service competitors but also by members of other industries, companies like FedEx and L.L. Bean. If they can deliver a contract or a cardigan overnight, our customers must wonder why it takes so long to get an insurance policy endorsement or a claim settled," he said.

Some believe customers increasingly will make insurance-buying decisions at their computers, he noted. "They will become do-it-yourself shoppers, and our role will diminish to commodity providers. Face-to-face meetings and other value-added interactions will become obsolete," that view holds.

However, similar sentiments were raised in the 1960s about banking services, and a "checkless society" and the death of branch banking were predicted, he noted. Today, however, the majority of consumers still write checks and use a branch bank on average three times per month, he said.

Mr. Ayer said he thinks both views are right: Some customers will use new technology and take a more active role in their insurance-buying habits, while others will continue to depend on traditional systems and solutions.

"Customers have a way of confounding the experts because they insist on making their own choices. And customers today are more diverse and far more sophisticated than ever," he said.

In the commercial insurance arena, for example, some buyers embrace alternative markets and self-insurance, while others don't.

A third trend is increasing competition within the insurance industry.

Although the insurance business always has been competitive, what's different today is the number of competitors and the intensity of competition, Mr. Ayer said.

Financial services companies are trying to carve out new opportunities in this environment by entering new sectors of the industry, he said. For example, banks are selling insurance and buying agencies; insurance companies are buying stock brokerages and mutual funds; and brokerage and mutual fund companies are offering banking and insurance products, he said.

One response to this competition has been consolidation in all sectors of the financial services industry, including insurers and brokers, Mr. Ayer noted.

"Bigger companies can better afford the technology and the advertising and promotional efforts it takes to reach an increasingly fragmented market," he said.

"Whether the driving force behind these consolidations is cost reduction, revenue enhancement or both, my belief is they will certainly continue," he said.

The question now facing the insurance industry is what is it going to do about the challenges it faces, Mr. Ayer said.

"Whenever we see systems in apparent chaos, our leadership training urges us to interfere, to stabilize, to shore things up," he said, citing a management theory advanced by Margaret Wheatley in the 1992 book "Leadership and the New Science."

"Instead, Wheatley argues, we've got to trust the workings of chaos and, rather than hands-on control, should focus on purpose and direction of the organization and, in so doing, create the flexibility and responsiveness that every organization craves. That's the leadership challenge we face today," Mr. Ayer said.

Mr. Ayer outlined four things he said will characterize the successful insurance business of the future:

Winners will focus on the right market segments and create the right business systems.

There is a real danger in trying to be all things to all people, he said. As an illustration, he cited the mass-market retail industry, in which department stores have lost ground to specialty stores, mail-order retailers and deep discounters.

"Winners in our industry will understand their diverse customer groups. They will offer products and expertise specific to the segment," Mr. Ayer said.

They also will build their businesses processes and models around the market, rather than the other way around, he said.

Successful financial services companies will increasingly rely on alliances, outsourcing and partnering to create products or provide distribution, he said.

"That's good news for both agents and insurers, not only because it creates new opportunities, but also because the practice of partnering is second nature to us-it's the way we work already," he said.

Winners will provide expert professional advice and distinctive service.

"Given the diversity and complexity of the marketplace, meeting this need will require certainly using multiple distribution channels," he said. "But for most segments, meeting this need will involve agents and insurers working closely together."

This partnership is critical, he said, because most customers want face-to-face relationships with people they trust and the knowledge their future is secure.

"By themselves, most insurance companies can't provide the former and most agents can't provide the latter. Together, however, we can do it very well," he said.

Winners will use technology wisely.

The insurance industry relies on outdated information technology, he said. "So computers will continue to be a primary weapon in our battlefield."

Winners will build competitive organizations that can quickly capitalize on market opportunities.

"In a rapidly changing industry, insurers and agencies must be both flexible and aggressive. They must be led by demanding and passionate people," Mr. Ayer said.

Successful companies must have: the ability to attract and retain the best employees; flexible structures that encourage people to work across organizational lines in teams; risk-taking, entrepreneurial cultures; and superior skills in acquisitions, alliances and product development, he said.

"This is a tremendous challenge for us. Let's face it: Insurers and agencies haven't always been hotbeds of innovation. Traditionally, we design jobs that are tightly defined and grooved from many years of experience," Mr. Ayer said. "But the new competitors we're facing are aggressive and nimble. They move quickly from one idea, one market to another."

Ultimately, he said, the best way to manage change in the financial services industry of tomorrow will be to be a leader in the future's creation.