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
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 lifep.