O.R. Frey Award Presentation Cornhusker Chapter National - - PDF document

O.R. Frey Award Presentation Cornhusker Chapter National Association of Insurance and Financial Advisors (NAIFA) January 30, 2015 12 Noon Hillcrest Country Club “Complacency is our Enemy” by Tom Henning

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2 I. Introduction I want to thank the Cornhusker NAIFA Chapter for giving me this honor. I never knew Mr. O.R. Frey, but I did know his son John who was a long time president of the Lincoln Community Foundation. When I look at the past recipients, I’m humbled to be chosen to join this elite group. This award means a great deal to me and you all honor me more than I deserve. Before I begin I want to introduce three guests I have with me today – my wife Candy, my daughter Cassie Kohl and my assistant Tammy Halvorsen. Let me start my comments by telling you a story. On January 19, 2012, Kodak, the

• nce iconic U.S. company which had popularized photography, filed for chapter 11

bankruptcy. SLIDE 2

3 The name Kodak used to be synonymous with photography. Now, customers, both new and experienced, were choosing to bypass Kodak altogether. Simply put, Kodak had lost its customer base. Consumer preferences had changed with the ubiquity of smart phones and their digital cameras. So, what happened? How did this company find itself in bankruptcy? At its founding in the late 1800s Kodak was the Apple and Facebook of its day. At its height, Kodak employed more than 140,000 people and had a market value $28

• billion. But the new face of digital photography is Instagram. When Instagram was

sold to Facebook in 2013 for $1 billion, it employed only 13 people. Scale is no longer a guarantee of success. Ironically, Kodak did not fail because it missed the digital age. It actually invented the first digital camera in 1975. It also held a number of digital patents. However, instead

• f marketing the new technology, the company held back for fear of hurting its own

lucrative film business. Unfortunately, the company had the nearsighted view that it was in the film business instead of the memories business. When film went from “essential” to “old fashioned” the company never recovered.

4 As technology moves in warp speed and disrupt markets, all companies need to be ready to transform their business models. The days of the stable, long-lasting business model are a thing of the past. So what about our industry. I can’t go to a meeting in our industry where the other leaders I interact with don’t complain about Three big problems.

• 1. Commoditization of our products
• 2. Shrinking distribution
• 3. The growing underserved middle class

Guess what? I don’t believe these are the real problems. They are the symptoms of a relevance problem that is growing because we have simply done a terrible job of understanding the needs of our customers. Our industry has fallen behind other financial industries such as investment companies in capturing wallet share. The insurance industry needs to differentiate itself from others by focusing on our unique strength: removing risk from a client’s financial life. Here are some bleak statistics from the Life Insurance Marketing Research Association (LIMRA) on growth in our industry: SLIDE 3

5  Ownership of life insurance has hit a 50-year low.  Thirty percent of U.S. households do not have any life insurance; only 44 percent own an individual life policy.  Fifty percent of U.S. households (58 million) say they need more life insurance.  Among households with children under age 18, which arguably have the greatest need for life insurance, 11 million have no coverage.  When surveyed on financial issues, “money for a comfortable retirement” was the top pick of 67 percent of consumers. By contrast, the concerns that life insurance traditionally address (such as premature death, funeral expenses and leaving an inheritance) registered as a top priority for less than 40 percent of those surveyed.  Of those consumers who believe they need life insurance, 86 percent haven’t bought it because they think it is too expensive. If we do not do something to improve the consumers’ opinion of our industry, grow

• ur ability to distribute products effectively, serve the underserved, and combat

commoditization, we will wake up one day and find that somebody has reinvented the game without us. And it probably won’t be another insurance company or current insurance distribution entity. It will more likely be a company we’ve never thought of SLIDE 4 SLIDE 5

6 as competition. We won’t even see the knockout punch coming. We’ll end up like Kodak. Maria Ferrante-Schepis in her excellent book “Flirting with the Uninterested” said the insurance industry is ripe for disruptions. Maria is now with the consulting firm Maddock Douglas but prior to that was a marketing and sales executive both with Prudential and the Guardian. In, “Flirting with the Uninterested” Maria states she feels the industry is ripe for a “Napster” moment. Napster moments in innovation terms occur when someone from outside comes in and reinvents your game. Napster cleared the decks for Apple to own the music SLIDE 7 SLIDE 6

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• industry. Travelocity, Orbitz and Expedia reinvented travel. LegalZoom

revolutionized legal services. And Netflix knocked out Blockbusters. “Napster moments” are happening all around us and in a multitude of industries. Such moments are particularly disastrous when companies or industries on the whole, simply refuse to acknowledge that their business model or core product must

• change. For example, instead of embracing and capitalizing on e-reader technology,

the publishing industry wasted precious time trying to convince us that nothing replaced the smell and feel of a paper book! Really? Try convincing a five year old with an iPad in their hands. Data around books sales and reading is notoriously muddy but none can deny there has been a massive jump in e-book sales at the expense of paper book sales. Likewise, instead of developing the digital movie delivery opportunity, Blockbuster wasted time haggling with consumers over late fees while Netflix and others created the new distribution model right under their nose. Craigslist Logo Slide 8

8 How many of you have used Craigslist? Think about what Craigslist has done to classified ads in newspapers and

• magazines. Craigslist was founded in 1995 to list local classifieds and forums online,

largely for free. More than 60 million people in the United States, along with millions more in 70 countries, use Craigslist each month – the website is in 13 languages. Craigslist users post 1 million classified ads each month. It’s estimated that Craigslist single-handedly wiped out $10 billion in annual classified ad revenues in print publications, replacing it with $100 million in online

• revenue. Its operating costs are a fraction of the cost incurred by newspapers and

magazines, which long relied on classified ads as a key part of their business model. Craigslist’s global online bulletin board is managed by a staff of just 30 people in its

• ffice in San Francisco.

As usual, Scott Adams in his Dilbert comic strip captured the essence of

• rganizations which refuse to acknowledge the rapid pace of change.

9 It is hard to see what industry won’t be impacted. A couple of years ago I had the

• pportunity to attend Stanford’s Directors College and hear Marc Andreesen of the

renowned venture capital firm Andreesen Horowitz, deliver a key note address. He discussed how technology was as he put it “eating one industry after the next”. Satya Nadella (sa-tya Nudella), the new CEO of Microsoft, recently said in a memo to all their associates Our industry does not respect tradition it only respects innovation. This is true not only for Microsoft but for almost every organization these days. The digitization of almost everything is also accelerating the creative destruction

• process. Digital technologies create near-perfect transparency, making it easy to

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10 compare prices, service levels, and product performance: consumers can switch among digital retailers, brands, and services with just a few clicks or finger swipes. It has changed the asymmetric knowledge advantage most sellers previously had over their customers. This dynamic accelerates the push toward commoditization of products and services. Third parties have jumped into this fray, disintermediating relationships between companies and their customers. The rise of price-comparison sites that aggregate information across vendors and allow consumers to compare prices and service

• fferings easily is a testament to this trend. Take “True Car”.

True Car will not only do a price and features comparison finding the dealer with the lowest price, but will actually negotiate a vehicle purchase if the consumer desires. So creative destruction is impacting almost every industry and every company. The Internet has threatened the livelihood of travel agents, video-store clerks and mail

• carriers. Now high-tech startups are aiming to put many other professions on the

Slide 11 True Car logo

11 endangered list. Digitization will encroach on a growing number of knowledge roles within companies as they automate many frontline and middle-management jobs. Even five years ago, who would have imagined these companies and how they would disrupt existing businesses. Slide 12

12 Uber for transportation, Roku/Apple TV and others are threatening traditional cable. Amazon is on its way to becoming the premier retailer in the world. Do you know Airbnb is now the fifth-largest hotel chain in the world? Information technology has enabled people to come together in new ways to better manage their resources. Now, not all these upstarts will be commercially successful – most in fact will not prove to be economically viable. In the meantime, however, they will significantly disrupt established players. Another Dilbert quote from Dilbert’s Boss.

13 I’ve got good news and bad news. The bad news is that huge companies like us can’t compete against nimble companies. The good news is that at the rate we are declining, we’ll be the smallest company around. Dilbert’s Boss Who the winners will be in this era of unprecedented change is largely unknowable. The only thing that is certain, is that we are in for dramatic changes, and that the old rules don’t apply any more. Creative destruction is accelerating with profound implications for almost every business and organization. Not long ago you could see the competition coming. What you had to worry about most was a new entrant within your industry that had a superior or maybe lower priced product. But now it is way more difficult because you can no longer see the competition

• coming. Technologies are no longer progressing in a predictable linear fashion, but

are advancing exponentially – and converging. Fields such as computing, the internet or things, artificial intelligence, 3D printing, robotics, nanomaterials and synthetic biology are simultaneously making advances, and combining. Slide 13

14 So what about our industry? Who or what will disrupt the life/health insurance industry? This is Mark Zuckerberg, the founder of Facebook who just turned 30 in 2013 and is the 35th richest person in the U.S. and has more than one billion users of his

• product. This means one out of every seven people in the world is on Facebook. So

why don’t we think that he or someone like him will revolutionize the insurance industry? The insurance industry is facing challenges which make it ripe for a “Napster” moment. New global research commissioned by Accenture, finds that as many as two-thirds

• f insurance customers would consider purchasing insurance products from
• rganizations other than insurers and their current distributors. Including 23 percent

who mentioned they would consider buying from online service providers such as Google or Amazon. SLIDE 14

15 Here is another potential disruptor for our industry - Honestpolicy. This company is right in our backyard. It is physically located in the Turbine Flats building right off UNL’s downtown campus. It was started by Colby Thomson who is a graduate of the Raikes School at UNL. On their website here is what they say they are all about. Insurance is complicated. We make it simple. We’ll help you choose the right coverage, teach you what you need to know and help you make the right choices. Will it work? Who knows – but I could name at least six other web-based insurance start-ups who are attempting to disrupt the life/health insurance industry. We all need to remember the - Stone Age didn’t end because we ran out of stone, but because a better alternative came along. Slide 16 Slide 15 Slide 17

16 I’ve now spent nearly 25 years in the executive ranks in an insurance company. I know the kind of change that’s needed for this industry is not easy. Insurance company cultures are risk adverse, despite being in the risk business. The joke I’ve heard other speakers use at industry conferences – is the old insurance company executives prayer is – “this change will too pass”. Silos and corporate bureaucracy reward the status quo and punish failure. But as an industry I feel we have no choice, we have to innovate if we are going to survive. “Doing nothing is no longer safe—in fact it is the riskiest thing you can do. If you’re not changing business models fundamentally, whether in the home office or in the field, you are not facing reality.” Now, I didn’t intend for this talk to be doom and gloom – there are good things happening. “How Young Insurance Agents are Changing The Industry” Last year I read an article in the Insurance Journal magazine which focuses on distribution in the property casualty industry. The title of the article was, “How Young Insurance Agents are Changing the Industry”. I’d like to read you a few excerpts: SLIDE 18 SLIDE 19

17 John D. Cass, is the owner of the J.D.C. Insurance Group based in Centralia, IL. He also serves chair of the Independent Agent Brokers of America Young Agents

• Committee. In Cass’s view, young agents are eager to make big changes in how the

industry operates and are generating excitement and pushing for change. We are getting out there and generating a spin that is really getting people excited, says Cass who started his own independent agency in 2009 – an agency without a store

• front. Cass said, “I’m a virtual agency, I work out of my house, I do almost

advertising, I’ve done four ads in 28 months”. Cass does a lot of Facebook

• marketing. He also does a lot of online social media marketing. That’s how he drives

his business. The research supports this when it comes to the digital world, today’s young independent agents are hooked in on multiple levels. Of the 513 young agents responding to a 2012 Insurance Journal young agent’s survey, 75.2 percent reported having a Facebook page, 73.7 used LinkedIn, 28.5 percent used Twitter, and 10 percent report writing a blog. As everyone in this room knows success in the insurance business is mostly about building relationships. Some things don’t change. But how young people build those relationships is what differs from their older counterparts. Young agents like Cass are taking traditional means of agent customer communication like frequently asked questions and turning those into new media opportunities such as 100 insurance

18 questions answered through video. Cass said, “The FAQ’s on our site are actually 100 blog posts, which are essentially 100 YouTube videos.” What Should We Do – What Shouldn’t We Do? First, if you are a leader of a business or organization complacency is your enemy. Andy Grove, of Intel Fame, famously titled his autobiography “Only the Paranoid Survive” in this age of disruption – sound advice for all business and organization leaders. Business leaders now have to operate with the tension of a dual mandate. Do everything that you can to grow and effectively manage your existing business models while experimenting with more innovative ways to serve customers. Organizations unwilling to re-examine what they do and how they do it with an eye to the evolving needs of their customers are doomed to go the way of the dinosaur.Innovation now has to be at the heart of any healthy business. In reexamining what you are doing you can’t do it with old lenses . . . you need new eyes to see it differently – to do that, leaders need to constantly relearn and reframe the way they look at their consumers by finding ways to give themselves “new eyes.” I love this quote – Slide 20 Slide 21

19 “The real voyage of discovery consists not in seeking new landscapes, but in having new eyes.” Marcel Proust As technology moves in warp speed and disrupts markets, all companies need to be ready to transform their business models. The days of the stable, long-lasting business model are a thing of the past. Business-model innovation is a mandatory new competency in the digital era, and it’s scary. I like this quote it is an essential mindset for future success – “If everything seems under control, you’re just not going fast enough.” Mario Andretti In 2015, Assurity will celebrate a heritage of 125 years. We are very proud of this long record of serving policyholders and our distributors. But in this day and age, longevity is no guarantee of future success. We are taking new steps to position Assurity for another 125 years of prosperity. Slide 23 Slide 22

20 An important part of this process is fostering a culture of innovation. This past year we have been working with the Maddock Douglas innovation firm to help us innovate

• n how individual disability income and critical illness insurance should be regarded

in the future. I’m very encouraged with some of the ideas we have developed and how they might help our distribution more effectively market these two important products. Technology, globalization and changing consumer behavior mean many previous assumptions are no longer relevant. Almost every industry I know is facing upheaval, from retailing to financial services, to travel, to pharmaceuticals, to entertainment. Models that worked for 50 years or more are no longer viable. The most important thing is to build an enterprise mindset which is open to change and innovation. Let me end by asking you this: What are you doing in your business to adapt to these significant changes in consumer preferences and values? Change is inevitable; progress is optional. As noted by Charles Darwin many years ago, “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”