Manulife

Introduction

The failures of big businesses and financial markets have consistently stopped the growth of economies and businesses at its track. This paper does not seek to assert that scenario thinking could have avoided such misfortunes, but it is certain the widespread use of scenario analysis would have increased the awareness of businesses towards highly dislocating environmental factors and provided the impetus for the planning and implementation of mitigation and contingency measures.

This paper explores the mid-term driving forces that can threaten the profitability of Manulife Financial Corporation (Manulife) or provide opportunities to be tapped upon for Manulife to thrive. These driving forces are then clustered and scoped according to their impact and uncertainty. This paper is driven with the intention of analyzing the preferred competitive strategy Manulife can take to respond to environmental changes that can bring about high and uncertain impact. Therefore, while a list of driving forces may be identified, only those which meet the aforementioned criteria would be considered in the determination of strategy so as to reduce the counter-productive complexity that will arise from a large number of assumptions and uncertainties. (Johnson, Scholes & Whittington, 2008)

Background of Manulife

Manulife is a Canadian based financial services company that provides financial protection and wealth management products and service to customers through Canada, the USA and Asia. More specifically, the company provides individual and group customers with health insurance, pension products, annuities and mutual funds. The company also supplies reinsurance services and investment management services for its general funds assets, segregated fund assets, and to institutional customers. (University of Oregon Investment Group, 2011)

Manulife organises its principal operations by the geographical boundaries of Asia, Canada and the United States, with each division being a profit centre, and operates a regioncentric orientation as it develops products, services, and distribution and marketing strategies based on the profile of its business and the needs of its market. Each division is a profit centre. The net income contribution in 2011 from the US insurance was 36%, Asia 34% and Canada 30%. (Manulife Financial, 2012)

Through the acquisition of John Hancock Insurance in the US, it became the largest insurance company in North America and the fourth largest in the world. It has over 22,000 employees and operates in 22 countries. The Company operates in Canada and Asia through the brand name Manulife Financial and in the United States primarily through the brand name John Hancock. Manulife distributes its products through a multi-channel network, including more than 50000 tied agents, bank partners, independent agents and financial advisors

Driving Forces

A productive scenario analysis requires the factors to be examined to only originate from the environment of the organization, as these factors are complex and ambiguous, rather than those that exist within, and can therefore be easily controlled by the organization. These factors are known as driving forces (van der Heijden et al., 2002) and are as described below.

Regulation in emerging economies: the first factor is the extent of regulations in emerging economies. Emerging economies have naturally higher entry barriers as compared to developed countries due to infrastructural weaknesses, poor distribution channels, tax consideration and cultural differences. While resourceful international industry companies can overcome these barriers, the government may implement protectionist policies in the nature of stricter regulations for overseas insurance firms. (Deloitte, 2012). On the other side of the coin, emerging economies may also attempt to encourage the penetration of their market by insurance companies based in developed markets by easing regulatory and tax requirements. Emerging economies have always proved to be more resilient to global economic slump; as of now, the growth in emerging economies account for virtually all of global growth (International Monetary Fund, 2012). The rapid expansion of the middle-class in these economies can be a tremendous source of revenue to international insurance companies who manage to overcome these cross-border entry barriers.

Social media and demographic: the second driving force relates to the impact of social media and demographic shifts on the insurance industry. The advent of social media in the past decade has shifted the trust from third party financial advisors to online communities. The gradual disintermediation of financial advisors, with advise stemming primarily from the Internet and these communities, will transform the nature of distribution agents from manufacturers to service providers. Furthermore, a recent survey revealed that more than 32% of all respondents — and 50% of those aged 18 to 25 - prefer to work directly with insurance carriers. (PricewaterhouseCoopers LLP, 2012). This shift in power and trust from financial advisors to communities and to the self can potentially allow Manulife to overtake a significant proportion of the profit margins of entities in its multi-channel distribution network.

Trend of consolidation: The next driving force is the extent of consolidation in the insurance industry as there is a positive correlation between the degree of consolidation in the insurance industry and systemic risk in the banking sector. While a merged between two compatible entities benefit the merged entities with scale and scope economies, it can result in systemic risk as mergers in the insurance industry significantly increases systemic risk to the insurance industry due to destabilization of adding size, leverage and diversification across insurance lines (Gregor, Janina, 2012)

Furthermore, mergers improve the cost structure of the merged entity, allowing them to gain market power and resulting in other entities facing heightened pricing pressure.

Risk modeling technologies: The fourth driving force is concerned with the development of sophisticated risk modeling technologies would enable insurance companies to assess the risk they face to a greater precision, thus improving the effectiveness of strategies used to transfer or reduce risks. Precise risk monitoring is especially important in an era of drastic climate change, bringing about natural disasters that are unprecedented in hazard and unpredictability. The capability of natural disasters to cause wanton destruction to huge communities have brought about the necessity for risk to be accurately assessed so that insurance companies can manage the risk of a large volume of insurance payouts and diversify accordingly.

Tax: Tax laws concerning wealth management can heavily influence where people place their money. A sudden hike in taxes from investing in life insurance products may stunt growth.

Economic activity: the fifth driving force is the economic condition of the markets Manulife is operating in. Insurance companies perform in tandem to the volatility of market conditions, as their best performances are achieved during market booms and vice versa. These market conditions affect insurance companies through primarily their investment portfolios, whose financial market valuation directly correlates to economic activity. (Sebastian Schich,2009). Although insurance companies actively diversify their portfolios, the financial crisis of 2008 and debt contagion have proven that they are not immune to economic fluctuations. Furthermore, economic uncertainty spurs central banks worldwide to reduce interest rate in order to promote economic growth. While low interest rates have many widespread ramifications for insurers, insurers are most vulnerable to it causing a decline in general account portfolio book yields. Companies have limited means by which to hedge against the decrease in interest rate as these hedges can only be applied to a small proportion of the portfolio, art short-term in nature and do not cover expected new business flows. In addition, new hedges are too costly or unpalatable as options are in the money and companies can no longer lock in attractive rates. (French, Hann, Luck, Mosbo, 2011)

Longevity risk: lastly, insurance providers are unlike most other private institutions subjected to longevity risks through its existing annuity contracts, which can potentially lead to increase in regulatory reserves in such contracts. However, Manulife faces reduced longevity risk due to its diversified business lines as life insurance policies lead to longer premium payments and delayed pay-outs by and to the insured with a longer lifespan. (International Monetary Fund, 2012)

Uncertainty/Impact Matrix

The driving factors are now assessed using the uncertainty/impact matrix as shown in Figure 1. The framework is structured around the two factors with the greatest impact and uncertainty about what the impact may be. These two factors, defined by the two extreme outcomes, will later by scoped by interacting with each other so as to generate four possible combinations. (Wright, Cairns, 2011)

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Figure 1: Relative impact/uncertainty of driving factors

The level of uncertainty and impact is based on the relative ranking of each driving factor in terms of those two criteria.

The justifications for the relative ranking in uncertainty, from lowest to highest, of each driving factor are as follow: 1. It is certain that the impact of the realisation of longevity risk is the increased payout from annuity schemes, hedged by the increased collection of premiums from life insurance. 2. The certainty of the impact of risk modeling technologies is shown by the how gradual such technologies have developed over the years 3. The impact of social media and demographic change is the abolishment of the multi-channel distribution network, which would be substituted by administrators from the insurance company. However, as the social media industry has yet to reach maturity stage, there is the possibility of an unforeseen change in the way social media may impact Manulife. 4. Consolidation will pose two kinds of risk: systemic risk as the overall number of insurance firms shrink and the risk of Manulife being subjected to greater price pressure from a successfully consolidated competitor. 5. Any changes in tax laws that can affect the insurance industry mostly originate from the increased taxation of health insurance and wealth management. 6. The causes and nature of economic slumps that have the potential to result in economic depression in a nation or global scale had always been fundamentally different as governments sought to eliminate the seeds of recessions. The bust and boom of economies rank second in terms of the level of uncertainty as it can offer a myriad of results: the take-over or liquidation of a competitor, the bankruptcy of Manulife, putting insurance providers into disrepute and so on. 7. Emerging economies can either enact regulatory barriers to deter international insurance companies from competing with the less powerful local insurance firms or promote free trade and competition in local markets by developing national infrastructure, improving political stability and establish clear and inclusive regulations relating to insurers. The uncertainty of the impact of this driving forces stem from the fact that there are a multitude of equally possible outcomes both scenarios may result.

The justifications for the relative ranking in impact, from lowest to highest, of each driving factor are as follow:

1. The overall increase in profitability due to dis-intermediation is undermined by the need for Manulife to incur additional administrative overheads and labour cost, previously incurred by Manulife’s distributors. The additional threat of diseconomies of scale further reduces the impact of social media and demographic change in the mid-term. 2. Longevity risk has limited impact to a Manulife, which is well diversified enough to fully hedge against increase payouts for annuity contracts. 3. Risk modeling will help Manulife in improving the accuracy of its risk assessment procedures, enabling it to charge premiums commensurate to the risk. 4. Changes in tax treatment on retirement and wealth management income introduced by the authority will attract the populace to purchase more financial products from Manulife. However, as the debt crisis will persist at least in the medium term in many developed countries, it is anticipated that there is little scope in the reduction of tax. 5. Consolidation, while can result in increased systemic risk and scale economies, the extent of is limited due to the progressive slow-down of consolidations in the insurance industry. 6. Changes in economic activities have the ability to impact on the demand for financial products provided by Manulife. 7. Regulations in emerging countries has the greatest impact as the insurance markets of developed economies have matured, leaving little room for growth as compared to relatively untapped markets of emerging economies.

Scoping the Scenarios

To give body to the emerging scenarios, the extreme outcomes for the two factors with the highest risk and uncertainty are interacted with each other so as to generate four possible combinations. Presenting a competitive strategy based on these four scenarios would provide Manulife with the opportunity to merely adapt its strategy to deal with these otherwise possibly unforeseen scenarios.

| |High regulatory barriers of all emerging |All emerging economies welcome |
| |economies against insurance firms |competition in their insurance industry |
|Crash of the global insurance industry |Doom? |To the developing countries we go |
|Global economic boom |Focus on developed markets |Prosperity for all |

Preferred Competitive Strategy

The preferred competitive strategy will be one that leverages on the strengths of Manulife to capitalize on the opportunities of global economic boom and the opening up of emerging companies while minimizing the impact of high regulatory barriers and the crash of the global insurance industry.

Therefore, Manulife should relook at the whole range of products and remove the terms that may have impact to the long term liabilities to the Company. Such of the terms that may be considered include removing the no-lapse guarantee or to increase the pricing for the no-lapse guarantee for the universal life product. As for the single premium deferred annuity, perhaps the payment should not be guaranteed or to have a maximum payment of annuity till aged 90. The Company should dramatically reduce or eliminate the sales of such products immediately. In addition, the company should substantially re-price the long term care and guaranteed life insurance products.

The company should reposition the product mix to better meet the demands of the competitive environment, economic climate, and regulatory requirements whilst at the same reduce the potential hidden liability of the business.

The main distribution force used by Manulife is through the bancassurance and agency. The company should expand the investment in bancassurance relationship, to create and expand the number of bank selling the products of the company. In the area of agency, acquisition of experienced agent may speed up the growth process rather than to rely on organic recruitment growth.

The company may also invest in “next generation” distribution channel using technology through the creation of superb wealth management platform and infrastructure projects. This will expand its distribution system.

The company should expand the sale of in the area of wealth management through acquisition of fund house and to encourage the different distribution channel to promote the sale of the products. The main benefit of wealth management product is the much lower potential liabilities to the Company. Investing in more mutual fund distribution and manufacturing of new wealth management products to tap on the recent upward trends of wealth management is key to the success. With the longer life span of most individual, the company should design wealth management products to tap on the pension and provident fund available in most countries. Tapping on old age with huge saving, the wealth management products can cater to the retirement needs of the new generation.

Risk management committee should be setup to measure the impact to the earning and value to the shareholders against specific risk identified.

The company should made substantial shifts in the business mix and to increase the hedging of the underlying earnings sensitivity to equity markets. At the same time, the company should increase the hedging of any decrease in interest rate towards the earning. The company should continue to shift the business mix to more fee and spread-oriented products and away from products that contain higher-than-desired equity and interest rate risk.

To maintain the adequacy of the minimum capital requirement, the company should shift the capital to higher return applications.

With the Asian economic growth, Manulife should leverage on the power of the rising middle class across Asia. Asia is set to have 50% of the world’s middle class population in the next decade and is expected to lead the world and be be responsible for more than 40% of the global consumption.

For Canada, the company should continue to offer competitive franchise through mutual funds and lending products through a multi-channel distribution network. With Canada being the home ground for Manulife and extensive multi channel distribution network, the company should leverage on the large in-force and generate growth from cross selling opportunities. For example, a client that takes a mortgage loan should be offer to the insurance colleague to cross sell on the mortgage insurance.

Tapping on the John Hancock brand, distribution channels and differentiated customer service in the United States, the company can continue to capitalize on the continued demand for retirement, mutual fund and insurance products and in particular the small and mid case 401(k) mutual fund.

In the area of wealth management, Manulife should acquire more business in wealth management eg the recent acquisition TEDA. Manulife Asset Management and John Hancock Asset Management must also succeed as boutique investment businesses with global capabilities. The earning mix from wealth management should surpass the life insurance in the long term.

Life insurance products have to be restructured with more emphasis on profitability while at the same time lower risk individual life insurance.

References

Deloitte. (2012). 2012 Global Insurance Outlook. Available: http://www.deloitte.com/assets/Dcom-Sweden/Local%20Assets/Documents/GlobalInsuranceOutlook2012_011312US_FSI_.pdf. Last accessed 13th Dec 2012.

French, Hann, Luck, Mosbo. (2011). The impact of prolonged low interest rates on the insurance industry. Available: http://www.ey.com/Publication/vwLUAssets/Low_interest_rates_effects_on_the_insurance-industry/$FILE/The%20impact%20of%20prolonged%20low%20interest%20rates%20on%20the%20insurance%20industry.pdf. Last accessed 13th Dec 2012.

International Monetary Fund. (2012). Resilience in Emerging Market and Developing Economies: Will it Last?. Available: http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/c4.pdf. Last accessed 13th Dec 2012.

International Monetary Fund. (2012). The Financial Impact of Longevity Risk. Available: http://www.imf.org/external/pubs/ft/gfsr/2012/01/pdf/c4.pdf. Last accessed 13th Dec 2012.

Johnson, Scholes & Whittington (2008). Exploring Corporate Strategy. 8th ed. England: Prentice Hall. 59.

Manulife Financial. (2012). Manulife Asia: Delivering Now... More to Come. Available: http://www.manulife.com/public/files/202/1/MFC_AsiaIDSlides_0912.pdf. Last accessed 13th Dec 2012.

PricewaterhouseCoopers LLP. (2011). What the future holds: Insurance 2020. Available: https://www.pwc.se/sv_SE/se/forsakring/assets/what-the-future-holds-insurance-2020.pdf. Last accessed 13th Dec 2012.

Sebastian Schich. (2009). Insurance Companies and the Financial Crisis. Available: http://www.oecd.org/insurance/insurance/44260382.pdf. Last accessed 13th Dec 2012.

University of Oregon Investment Group. (2011). Manulife Financial Corporation (Update). Available: http://uoinvestmentgroup.org/wp-content/uploads/2011/04/MFC-Update.pdf. Last accessed 13th Dec 2012.

Van der Heijden, K., Bradfield, R., Burt, G., Cairns, G. and Wright, G. (2002) The Sixth Sense: Accelerating Organizational Learning with Scenarios. Chichester: John Wiley

Weiss, Gregor N. F. and Mühlnickel, Janina, Consolidation and Systemic Risk in the International Insurance Industry (October 4, 2012), pp 28-29, (Online). Available at SSRN: http://ssrn.com/abstract=2135041 or http://dx.doi.org/10.2139/ssrn.2135041 (Accessed: 13th Dec 2012).

Wright, Cairns (2011). Scenario Thinking: Practical Approaches to the Future. England: Palgrave Macmillan. p37-42.

References: Deloitte. (2012). 2012 Global Insurance Outlook. Available: http://www.deloitte.com/assets/Dcom-Sweden/Local%20Assets/Documents/GlobalInsuranceOutlook2012_011312US_FSI_.pdf International Monetary Fund. (2012). Resilience in Emerging Market and Developing Economies: Will it Last?. Available: http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/c4.pdf International Monetary Fund. (2012). The Financial Impact of Longevity Risk. Available: http://www.imf.org/external/pubs/ft/gfsr/2012/01/pdf/c4.pdf Johnson, Scholes & Whittington (2008). Exploring Corporate Strategy. 8th ed. England: Prentice Hall. 59. Manulife Financial. (2012). Manulife Asia: Delivering Now... More to Come. Available: http://www.manulife.com/public/files/202/1/MFC_AsiaIDSlides_0912.pdf PricewaterhouseCoopers LLP. (2011). What the future holds: Insurance 2020. Available: https://www.pwc.se/sv_SE/se/forsakring/assets/what-the-future-holds-insurance-2020.pdf Sebastian Schich. (2009). Insurance Companies and the Financial Crisis. Available: http://www.oecd.org/insurance/insurance/44260382.pdf. Last accessed 13th Dec 2012. University of Oregon Investment Group. (2011). Manulife Financial Corporation (Update). Available: http://uoinvestmentgroup.org/wp-content/uploads/2011/04/MFC-Update.pdf. Last accessed 13th Dec 2012. Van der Heijden, K., Bradfield, R., Burt, G., Cairns, G. and Wright, G. (2002) The Sixth Sense: Accelerating Organizational Learning with Scenarios. Chichester: John Wiley Weiss, Gregor N Wright, Cairns (2011). Scenario Thinking: Practical Approaches to the Future. England: Palgrave Macmillan. p37-42.