Cincinnati USA – Insurance Market Outlook05/02/2015White Paper

Brian MoranLife Co. LFSC 98 Cincinnatibrian.moran@tcs.com

Mentor: Vinoth KumarProject Manager - Life Co. LFSC 98 Cincinnativinothkumar4.s@tcs.com

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Table of Content

Abstract...........................................................................................................................................................................

About the Author............................................................................................................................................................

About the Domain...........................................................................................................................................................

Our Perspective...............................................................................................................................................................

Current Insurance Industry Trends and Focus Areas.......................................................................................................

Threats?..........................................................................................................................................................................

Why Ohio?.......................................................................................................................................................................

Cincinnati Region Trends and Potentials.......................................................................................................................

Other Key Regional Facts and Trends............................................................................................................................

Conclusion.....................................................................................................................................................................

End Notes......................................................................................................................................................................

Acknowledgements.......................................................................................................................................................

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AbstractThis white paper attempts to look at the viability of expanding TCS insurance based

operations to clients beyond their existing clients in the referred geography. In order to

accomplish this, we will need to evaluate current trends in the global insurance market with specific

attention to regional circumstances of Cincinnati and the surrounding area. We will also examine

what it takes to expand and will see if expansion makes economic and strategic sense by

providing some, but not all of the data, to answer the following questions:

Is there a current and growing need not adequately being met for insurance products and/or services?

Can that need, both current and future, for the product or service be supplied by the company?

Can the product or service be provided with an attractive profit?

Our regional analysis of the Cincinnati region explores many of the opportunities and challenges

confronting the global insurance market in 2015. This report offers a perspective on the

Cincinnati market in comparison to other large regional metropolitan areas, the current life-

annuities and property and casualty market in the US, as well as future trends of the region and

industry.

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About the Author

Brian Moran

Mr. Moran has spent over ten years in the insurance industry in all facets of the industry. He has a Bachelors of Business Administration with a focus in Finance and International Business from the University of Cincinnati. He has extensive knowledge of Medicare and multi lines property and casualty insurance. He holds licenses in Property & Casualty, Life & Health as well as Variable Annuities as well as an NASD Series 6 Financial License. He has contributed to numerous process improvements with a focus on application and process methodologies.

About the Domain

Insurance

Tata Consultancy Service Ltd. (TCS) has been providing operations support for a Large Financial Service client in Texas for over 16 years. The services include Property & Casualty, Banking, Financial Services and Insurance processes entailing various operations such as Loan originations, Vendor Management, Processing, Underwriting, Auditing, Quality Control, Customer Service and Procurement Servicing. TCS is involved in all the stages of these projects using the onsite, offshore or Global Network Delivery Model (GNDM) methodology to support the client for all the above mentioned projects.

Working on this domain would require us to perform Life Insurance Application Scrutiny, Update and assign applications to USAA as per the type of the product & Value, Medical Analysis based on the documents received and issue contracts upon underwriter’s approval.

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Our Perspective

The questions that exist in the evaluation of the Insurance market and regional expansion are not unique and continue to focus around traditional issues such as technology and client drivers. The emergence of Big Data and Cognitive Insurance markets as well as advances in the industry to holistic growth to handle the economic and legal needs of clients is a strong indicator of the future. Adding to this landscape is the requirement of companies to transform existing legacy systems and stream line their operations in still an evolving global financial market.

The question of what does it take to expand while monumental contains a significant degree of uncertainty and risk. Given the vast amounts of available information and the sheer size of many of the macro trends in insurance, business action plans for immediate implementation are difficult to put in place. This focused examination causes the traditional Strength-Weakness-Opportunity-Threat and Pestle analysis methodologies to become cumbersome and mired with in a no clear cut solution situation for easy and immediate translation to business strategy.

This is not to discount the value of these methodologies only to reiterate that SWOT and Pestle analysis while highly valuable contain large amounts of copious data. Data that is only as valuable as the initiatives that come from implementation of their recommendations. Despite the potential draw backs these methodologies are the simplest road maps to synergize business and expand operations in a clear logical plan. They remain the most successful tools to capitalizing on the opportunities of the current economy while maximizing the leverage of current organizational capabilities. In this scientific and unemotional manner we can study a region, business unit, even an entire domain and come to a series of actionable steps. In this light we will evaluate the Cincinnati area which will allow us to internalize the future of the insurance market. It will also identify the core areas where the BPO - Business Process Solutions organizations and IT organizations domain overlap has generated opportunity for strategic growth and first mover advantages.

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Current Insurance Industry Trends and Focus Areas

In recent years, the US insurance market has faced tremendous environmental changes as well as changes brought about by new and exciting trends in the technology and social media. While the insurance domain is a mature market segment the future indicators are that these areas will be a key driver in technology, investment, and change. Simply, the US market change is dramatically affected by the continued aging of the baby boomer market and the rise in technology driven by younger generations such as generations x (ages 32-47) and y (aged 20-31). Current 12-month industry growth estimates for these two demographics is a conservative $3.6 trillion dollars with an expected estimated potential growth rate of $7.1 trillion dollars. The shift in demographics along with technology revolutions unthought-of ten years ago has shifted insurance from a bit player in the financial services industry to an up and coming star. Much of the rise being attributed to the rise in big data analytics and a heightened focus on analytics and replacement of legacy systems. The growth in analytics is indeed advancing the insurance domain, and it remains one of the industry’s most interesting prospects.

Type equation here.The focus on Analytics and Big Data is illustrated by the fact that currently 34% of the industry has only invested approximately 10% of its resources in this area. While 68% of the industry have either taken no action or focused on incremental changes to existing legacy systems and antiquated data analysis trends. The simple reality is that much of this investment goes to standardization, cleansing and refinement of data and their subsequent processes in order to make faster and smarter decisions. The ultimate goal remains the combining of machines and social data in order to analyze and prioritize the various streams of data for offering improved products and services to new and existing customers.

The focus on Cognitive insurance and digital insurance enterprises has resulted in an increasing need for companies to accelerate the phase out and/ or improvement of their legacy systems for systems capable of handling large quantities of data in a consolidated forward thinking manner. In fact many providers of business process solutions overlook this strategic growth opportunity simply because clients are unable or unwilling to allow themselves to provide solutions to handle these areas. The improving economic environment in 2015 provides carriers with an opportunity to invest in large, transformational technology projects aimed at meeting the evolving demands and expectations of both customers and channel partners.¹

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Threats?

Companies not interested in adopting new technologies will be forced to develop much more aggressive strategic responses in order to add value based on other more creative fronts or risk customer attrition and discontent.

From a broad perspective the US Life and Health Market continues to undergo a period of uncertainty with respect to the implementation and market conditions surrounding the Affordable Care Act. In fact many large organizations have reduced their workforce to deal with the changes to simplified underwriting and core processes. Yet this is not the only change affecting the short term positions of companies.

Property and Casualty firms are nervously watching the regulatory uncertainty that has slowly become and by all indicators will continue to be the norm in 2015. No other issue is more prevalent in this regard than the uncertainty regarding the terrorism insurance for property owners (TRIP). Irrespective of the future of the TRIP Act insurers should be prepared for a potential regulatory backlash if the industry moves in force to limit or abandon terrorism coverage, or to effectively price consumers out of the market.

On a more local front the political spotlight is directed more towards market conduct by state insurance regulators conscious of the industry’s exemption from the reach of agencies such as the Federal Consumer Financial Protection Bureau. Certainly while this focus shift is slow and may take years to fully implement the indicators continue to be stricter and more involved state insurance regulators ready to judiciously target carriers and agents believed to be compromising the current and future health of the everyday consumer.

However, one of the most difficult problems of the industry is not confined to its boundaries. Simply how to deal with the most difficult social trends affecting the insurance domain, “How do we deal with the growing inability to attract and retain new young talent? Insurers like most businesses are just now beginning to adjust their performance management and compensation systems to focus more on developing their in-house talent. This internal growth goal is not only to improve retention of highly-skilled, experienced employees at a time when competition among companies for talent is fierce, but to more proactively encourage and facilitate flexibility and productivity among their entire work force. This holistic approach will require a shift by companies to no longer view career growth as a vertical progression within a business line or operating unit, but to one of a more flexible career lattice, where individuals are given the

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opportunity and rewards for extending their functional skills laterally across multiple lines and departments. This shift in organizational philosophy will also allow employees to be more productive and valuable for the organization as well as creating additional paths for career advancement.

The opportunity to transform business operating models will allow for companies and consulting firms to demonstrate their ability, creative thinking, and perhaps even risk-taking acumen of their management teams. Managers and organizations should be challenged to leave their comfort zones by making dramatic changes in the status quo, including ongoing innovation in product design, underwriting, marketing, and distribution. Meanwhile, talent recruitment and career development should be redefined to staff insurers and the market with the skill sets required to fuel the transformations required in the digital insurance world. Certainly, there is much more insight on the Macro picture facing the insurance market and the US Economy however those are subjects for later research and future papers.²

Why Ohio?

Shifting focus, the question becomes “Where can companies grow in this insurance market?” The answer is certainly not a state associated with being a leader in insurance domiciled within its borders. Yet Ohio is ranked 6th in the nation for companies of all sizes and market share domiciled and headquartered in its borders. When it comes to insurance the state of Ohio is the ninth largest state in terms of insurance premium volume and the industry is one of Ohio’s largest employers. The Ohio insurance industry ranks seventh in the nation with more than 95,000 employees and an annual contribution of $17.4 billion to the state’s GDP. From a consumer stand point Ohio’s average auto and homeowner’s insurance premiums continually rank among the lowest in the nation. According to the most recent data published by the National Association of Insurance Commissioners (NAIC), Ohioans paid on average $620 per year (versus the $797 national average) in auto insurance premiums. This statistic ranks Ohio as the ninth lowest average auto insurance premium in the nation. Ohio’s average homeowner’s insurance premium of $652 (compared to the national average of $968) also ranked Ohio sixth nationally in Homeowners insurance affordability.

According to a workforce study using Bureau of Labor Statistics data, the Ohio insurance industry will need 26,000 skilled workers by 2020. The states is estimated to have a shortage of 18,500 vacant jobs by 2020, with retiring baby boomers responsible for 80 percent of the positions. The bottom line translation of the data is simply if workers are not attracted and trained, the industry will fail

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to grow to its potential, negatively impacting the overall Ohio economy. To combat this trend Ohio recently launched an initiative called Insuring Ohio Futures. Insuring Ohio futures seeks to educate students, career-changers and military veterans about the career opportunities that exist in Ohio’s insurance industry. The study further identifies the need for talent in each of more than 100 individual occupations, including actuary, claims, IT, marketing, sales and more.

This strategic need focuses on attracting new graduates, military veterans, and job changers to the insurance industry and many of its supporting functions. With perhaps the biggest opportunity being created in higher education through the creation of Risk management and Insurance degree programs within Ohio’s universities. A fact illustrated simply by comparing before and after results in the industry. Prior to the launch of the Insuring Ohio Futures program, not a single Ohio college or university offered a risk management and insurance (RMI) degree program. Today though these tailored programs curriculum have been crafted to meet industry needs by offering critical resources such as lecturers with industry experience, and helping to raise awareness of the industries new opportunities. Currently, Kent State University, Franklin University and the University of Cincinnati, Ohio Northern University and Ohio Dominican University offer bachelor’s degree programs related to insurance with new programs expected to launch at Bowling Green State University in 2015.

Yet with 26,000 jobs to fill, companies will need to attract workers from many other sources. While students and career-change professionals are prime sources of talent, the rise in the number of military veterans whose skills are transferable to the insurance industry also is an opportunity to grow the total work force. Military personnel offer employers’ mission-oriented and value-based training, which allows veterans to transition well into the private sector. The opportunity stems from the traditional fact that unemployment rates among young veterans is almost always higher than the national average.³

Cincinnati Region Trends and Potentials

A key factor in the ability of any business to be successful is to be located in a city or region that is vibrant and growing. To that end the following looks at some specifics of the Cincinnati region. Demographically, the counties of Hamilton, Warren, Clermont and Brown counties in Ohio; Boone, Bracken, Campbell, Kenton, Gallatin, Grant and Pendleton counties in Kentucky; and Dearborn, Franklin and Ohio counties in Indiana combine to create the Cincinnati-Middletown, OH-KY-IN Metropolitan Statistical Area (MSA). There are over 2.2 million people that live in the Cincinnati MSA, making the flourishing Cincinnati

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metropolitan area the 24th largest metro in the United States according to the 2010 US Census count. In addition Cincinnati ranks 1st in Ohio in MSA population. One of the regions many economic honors recently bestowed on the Greater Cincinnati region has been its votes as one of America’s Most Liveable Communities. The region also rated in USAA’s top place for Military Veterans retirees and their families. The area’s recovery continues as strong growth in the education and healthcare sectors is supplemented by strong and growing employment in the manufacturing and trade, transportation, and utilities sectors. A highly educated workforce, diverse economy, and the presence of multiple Fortune 500 company headquarters positions the metro area for long-term growth.

Economically, the City of Cincinnati is well positioned for growth. Economic indicators predict a 9.6% increase by 2015, creating approximately 103,600 new jobs. The indicators forecast growth to occur predominantly in service-providing industries including trade, transportation, utilities, information, financial activities, professional and business services, education, health, leisure and hospitality, and government. While costs increase elsewhere, Cincinnati remains financially suitable with a cost of living residing well below the national average.

The diversified and talented workforce powering Cincinnati's economic engine stems from the production of its many colleges, universities and vocational schools whose targeted programs supplement the region's array of industries with skilled personnel.

More than 1 million students are enrolled at more than 336 colleges and universities within a 200-mile radius of Cincinnati. Out of those, 33,000 scientists and engineers are located within 50 miles of the city.

The Cincinnati MSA higher education composes primarily of the University of Cincinnati, Xavier University, Northern Kentucky University, Thomas More, and Miami University. The area also contains satellite campuses for the Ohio State University as well as for profit schools like ITT technical and Brown Macke University.

Other Key Regional Facts and Trends

Cincinnati resides in the Federal Reserve Bank of Cleveland’s Fourth district. The District’s most populous metropolitan areas are: Columbus, Cleveland, Pittsburgh, Cincinnati, Toledo, Akron, Dayton, Erie, & Lexington-Fayette County.

Fourth District Population by City (thousands)

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City 2000 2010 2000-2010 Percent ChangeCincinnati 331.2 296.9 -10.3

This district devotes 13 percent of its employment to manufacturing which is still greater than the roughly 11 percent for the United States. PNC Financial Services Group, Fifth Third Bancorp, Keycorp, and Huntington Bancshares combined assets total more than $500 billion, company headquarters are located within the region. A larger share of the state’s banking assets are located outside the major metropolitan areas in Kentucky and West Virginia, due to the relatively rural nature of the region. Ohio’s top three banking markets contain about 65 percent of the state’s banking assets.

The metro area seems well poised to continue its recovery, thanks to heavy shares of employment in marketing, healthcare, aerospace manufacturing, and auto parts. The area’s educated workforce is an advantage for continued growth: average educational attainment is higher here than in the state or nation.

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Despite challenges including adjusting to cuts in government payrolls and declines in manufacturing and construction employment.04

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Conclusion

Health care has surpassed manufacturing as the largest employing industry within our District. Districtwide, healthcare employees make up about 16 percent of the workforce, compared to 15 percent nationally.

Armed with the information contained within let’s go back to answer the three initial questions:

Is there a current and growing need not adequately being met for insurance products and/or services?

Yes. As noted in a number of industry studies, demographic, environmental and legislative changes are stressing existing systems and technologies. Only approximately one third of providers have invested in improving and/or updating their analysis and data systems.

Can that need, both current and future, for the product or service be supplied by the company?

Yes. TCS’s vast experience in both its human resources and technology place it in a top position to offer products and services to many of the two thirds of the providers not currently capable of investing the resources needed to keep up with the ever changing market. The ability to integrate the Business Process Solutions and IT organization provides the opportunity for strategic growth and first mover advantage.

Can the product or service be provided with an attractive profit?

Yes. If the US market growth is even close to their estimates on conservative side $3.6T and if only 10% (as currently estimated) is invested in the type of product and/or services that TCS can supply there appears to be a significant profit to be made.

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End Notes3Deloitte USA 2015 Life Insurance and Annuity Industry Outlook by Gary Shaw & Jim Eckenrode.

4Deloitte USA 2015 Property and Casualty Insurance Industry Outlook by Gary Shaw and Jim Eckenrode. http://www2.deloitte.com/us/insurance ;http://www.docs-archive.com/Deloitte-Insurance-Report.pdf

5Federal Reserve Bank of Cleveland Beige Book Summary of Commentary on Current Economic Conditions by Federal Reserve district June 3 2015 edition. https://www.clevelandfed.org/Our%20Research/Our%20Region/Beige%20Book.aspx?hootPostID=9964a562b2f17b8f3de31e98cb19e7d0

6Federal Reserve Bank of Cleveland fourth District Metro Mix Third Quarter 2014 Cincinnati MSA. https://www.clevelandfed.org/Newsroom%20and%20Events/Publications/Metro%20Mix/Cincinnati%202014q3.aspx

7Cincinnati USA Regional Chamber Of Commerce State of Downtown Cincinnati Issued April 2015 via www.DowntownCincinnati.com;http://www.cincinnatichamber.com/ ;http://www.downtowncincinnati.com/doing-business-downtown/state-of-downtown

8Redi Cincinnati.com/Case Studies/ Tata Consultancy Services Redi Cincinnati fast facts 2014 http://redicincinnati.com/uploadedFiles/REDI_Cincinnati/Documents/REDI_FastFacts.pdf

9CINCINNATI BUSINESS. RESULTS THAT SHINE. http://redicincinnati.com/

10Tata Cincinnati, OH Salaryhttp://www.salarylist.com/city/Tata/Cincinnati-OH-Salary.htm

11From Mumbai to the Midwest, the Economist, Published November 5, 2011.http://www.economist.com/node/21536620

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Acknowledgements

I wish to take a minute to extend my deepest Thanks to all those who made this paper possible. to Vinoth Santhanam and Steve Moran I wish to say “Thank you” for your insights guidance and mentoring. Your leadership lessons have served as the basis for the managerial insights this paper is based around. To the entire team in LFSC 98 and TCS Cincinnati for their insights and feed back! To Anna Smith for her peer review and her technical editing skills. Finally a big Thank You to Saurabh Seth & Ramanand for trusting Cincinnati and Myself with the opportunity to explore this topic.

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Thank You

Contact

For more information, contact gsl.cdsfiodg@tcs.com (Email Id of ISU)

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