Managing a Long Term Strategic Horizon

Operational management of businesses in the financial services sector has never been easy. The design and mechanics of products, their governance and the necessary communication of sometimes complex elements alone, require both a technical skill set and management aplomb.

Perhaps some of the most difficult businesses in manufacturing and operational terms are those involved with delivering financial solutions that run for the long term.

Traditionally this is the life assurance sector but in generic terms now encompasses other organisations involved in the delivery of solutions for accumulation, decumulation and protection.

There is however something more difficult than the operational management of these businesses and that is their strategic management.

Setting a strategy for long term businesses has certainly never been easy. Even in the early days of life assurance real foresighted strategic vision was required to translate component theory into practicable approaches to meeting long term and enduring needs, often for different groups and sub-groups in society.

The managers responsible for setting the strategic direction for long term business have to factor in a number of interrelated factors, not least:

  • Social trends
  • Longevity (for some product areas)
  • Economic dynamics
  • Competition changes (new entrants etc.)
  • Market changes (development/restriction on new markets geographically or propositionally that may arise)
  • Political/legislative change
  • Regulatory structures and context(s) change.

2014 has seen the last two of these come sharply into view for a wider audience.

Namely the announcements related to relaxing the compulsion to purchase an annuity that came in the March budget, hotly followed by the FCA announcement (aside from its perhaps ‘clumsy’ delivery) into a review of existing business.

The first of these was a significant political/legislative development and one that took those outside of a very tight political cabal by something of surprise.

The second, perhaps slightly less (aside for its delivery) surprising, is of the regulatory hue.

Both are huge strategic jolts for those providers involved in the decumulation space (annuity providers in particular) and those with large existing books for new business from the ‘70s to ‘90s (closed fund consolidators and large former direct sellers in particular).

With hindsight they are not wholly out of the blue or from left field, but are significantly of that hue and direction – and they crash headlong into existing medium and long term strategic plans and in fact strategic rationale.

Effectively both were always part of the wider risks faced by providers and requiring consideration in their strategic planning.

There is an excellent study, produced every couple of years by the Centre for the Study of Financial Innovation (CSFI) in association with PwC, which is germane here. This survey report is appropriately entitled “Insurance Banana Skins” with 2013 being the latest.

The report is very readable and gives insight into the risks that are concerning the most senior executives responsible for the strategic management of insurers across the globe.

Cutting to the chase this study puts Regulation (again) as the top risk faced by insurers. And whilst admittedly further down the pecking order, Political Interference as well comes into the top 10.

Insurance Banana Skins 2013

(2011 ranking in brackets)

  1. Regulation (1)
  2. Investment performance (4)
  3. Macro-economic environment (3)
  4. Business practices (18)
  5. Natural catastrophes (5)
  6. Guaranteed products (-)
  7. Quality of risk management (15)
  8. Quality of management (14)
  9. Long tail liabilities (7)
  10. Political interference (11)
  11. Distribution channels (9)
  12. Actuarial assumptions (12)
  13. Innovation (-)
  14. Reputation (16)
  15. Change management (-)
  16. Capital availability (2)
  17. Corporate governance (8)
  18. Climate change (20)
  19. Human Resources (6)
  20. Product development (24)
  21. Social media (-)
  22. Crime (22)
  23. Complex instruments (19)
  24. Reinsurance (21)
  25. Back office (17)
  26. Pollution (25)
  27. Terrorism (23)

Source: “Insurance Banana Skins 2013: The CSFI survey of the risks facing insurers” PwC & CSFI

 

And looking a little more granularly in terms of respondent types the Regulatory and Political risk factors are highlighted further in the following lists:

Life Insurance

  1. Regulation
  2. Macro-economic envt.
  3. Guaranteed products
  4. Investment performance
  5. Business Practices
  6. Distribution Channels
  7. Reputation
  8. Quality of management
  9. Political interference
  10. Quality of risk mgt.

 

Source: “Insurance Banana Skins 2013: The CSFI survey of the risks facing insurers” PwC & CSFI

Europe

  1. Regulation
  2. Macro-economic envt.
  3. Investment performance
  4. Guaranteed products
  5. Business practices
  6. Political interference
  7. Long tail liabilities
  8. Quality of risk mgt.
  9. Natural catastrophes
  10. Distribution Channels

Source: “Insurance Banana Skins 2013: The CSFI survey of the risks facing insurers” PwC & CSFI

 

Strategically then, the risk of having a long term business model, or long terms plans within a business model, derailed through regulatory or political (legislative) change or action is of particular significance and must never be underestimated or forgotten.

The share price tumbles of the annuity providers on the day of the March budget, and the £6bn wiped off the price of closed fund and large back book institutions following the FCA announcement for existing business come as timely reminders, illustrating the very real risk long term businesses face to their strategies and ultimately their healthy survival.