An extraordinary combination of macroeconomic forces are creating top- and bottom-line pressures for the life insurance industry – pressures that are unlikely to be resolved anytime soon. Among the most visible and most persistent of these powerful headwinds is the historically low interest rate environment. Life insurers that once could depend upon a steady stream of interest revenue now find themselves scrambling for alternatives at a time when they have made significant commitments to their customers in the form of annuities and other contractual obligations.
Equity investments offer insurers little consolation. Although the Dow Jones Industrial Average has essentially doubled since its lows on March 9, 2009, it has yet to reach the levels it set in October, 2007. The equity market remains volatile with intraday price swings of more than 200 points not uncommon. Many investors speak of a "lost decade" extending from March 2000 to the present, during which time major averages have experienced steep falls followed by gradual climbs – but no sustained increases.
In addition to an uncertain investment environment, life insurers have faced prolonged weak economic conditions and an unusually slow recovery from the downturn of 2008 and 2009. Continuing high unemployment slows household formation and decreases the flow of potential new buyers of life insurance policies, while stagnant wage growth deters customers from purchasing annuities and other retirement products.
The cost pressures on life insurers remain significant. Life insurers are burdened by the costs of legacy system upgrades and replacement, as well as investments in new distribution channels. Competing in the crowded retirement market also requires large marketing expenditures. At the same time, life insurers are coping with a sales model that calls for high levels of recruitment and training, in part to compensate for high levels of attrition among new recruits. The system is less than optimal but few have developed an acceptable alternative.
Life insurers must also deal with increased regulation and the likelihood of higher capital requirements. Dodd-Frank in the U.S. and Solvency II in Europe both pose the potential for higher reserve levels as well as investments in IT, compliance and enterprise risk management.
Consumer behaviors and expectations continue to change rapidly, and life insurers are not having an easy time maintaining the pace of change in a digital world. Conditioned by top on-line retailers, consumers expect a broad range of tailored options presented in an interesting format, with reviews and support from "people like them."
Although some life insurers are moving into multichannel distribution, life insurers lag behind many other industries in terms of using analytics, social media, gaming and other innovative technologies to build and maintain relationships with customers.
Finally, life insurers are coming to grips with a changing product structure. "Traditional" life insurance products including term and whole life insurance have lost shelf space to annuities and other retirement vehicles.
To succeed in this difficult environment, life insurers will need to be very focused on managing their revenue and cost positions, while finding new avenues for profitable growth. They need to concentrate on six key strategic areas:
- Reducing and avoiding costs – Strategic cost reduction remains essential, but avoiding future costs is even more important. Life insurers must streamline operating models and transform their operating models to address profit compression.
- Enhancing product flexibility – Life insurers need to be able to get a broader range of specialized products to market more quickly, both to meet customer needs and to get a jump on the competition.
- In-depth understanding of the customer and producer – Through creative use of data analytics, life insurers can gain knowledge and insight into what customers and producers want and need.
- Delivering a differentiated customer experience – With customer expectations changing life insurers should be able to reach customers in a format that makes sense to them, at a place and time of their own choosing.
- Maximizing distribution effectiveness – Digital marketing, social media and collaborative technology can help life insurers deliver the right offer to the right customers.
- Capturing share in the retirement income market – This is the biggest challenge and the biggest opportunity for life insurers. The U.S. retirement market will grow to more than $20 trillion in the next few years and will be the growth engine for life insurers going forward.
In subsequent postings, we will explore these strategic imperatives in more depth, starting with a look at how insurers can use innovative technologies to reduce costs and obtain maximum efficiencies.
About the Author: Brian DeMaster is a senior executive in Accenture’s insurance practice.