O.R. Frey Award Presentation Cornhusker Chapter National Association of Insurance and Financial Advisors (NAIFA) January 30, 2015 12 Noon Hillcrest Country Club SLIDE 1 “Complacency is our Enemy” by Tom Henning
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 once iconic U.S. company which had popularized photography, filed for chapter 11 SLIDE 2 bankruptcy. 2
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 of 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. 3
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 SLIDE 3 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: 4
Ownership of life insurance has hit a 50-year low. SLIDE 4 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 SLIDE 5 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 our 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 5
as competition. We won’t even see the knockout punch coming. We’ll end up like Kodak. SLIDE 6 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. SLIDE 7 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 6
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 7
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 glo bal online bulletin board is managed by a staff of just 30 people in its office in San Francisco. As usual, Scott Adams in his Dilbert comic strip captured the essence of organizations which refuse to acknowledge the rapid pace of change. 8
Slide9 It is hard to see what industry won’t be impacted. A couple of years ago I had the opportunity 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 techno logy 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. Slide10 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 9
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 offerings easily is a testament to this trend. Take “ True Car ”. Slide 11 True Car logo 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 10
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 11
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