The Life Insurance Industry Needs a Lifeline
Superficially, the life insurance industry appears healthy enough with plenty of capital and booming sales. A quick look under the hood, however, and it becomes clear that the industry’s profitability has been declining for some time.
Whereas the life insurance industry was once supported by a raft of highly attractive products, including endowments and investment bonds, the changing nature of tax rules, regulation and the market means that many of these profitable products are no longer in demand. This has had a major impact on return. Open strategic business lines are now insufficiently profitable to replace the runoff of the legacy book. In consequence, the life industry finds itself facing some very uncomfortable decisions.
Risks to Life
The life industry has a history of selling products managed on large and complex IT platforms via intermediaries. This leaves it vulnerable to disruption by other more agile and more profitable client-focused business. The danger for the industry is that, if it allows some of its activities to be carved off by others, this could leave it as a mere utility platform, processing lower-value admin and transaction elements of the business, while the attackers focus on the more profitable parts of the value chain closer to the clients.
Account information service (AIS) providers are one example of such a threat; these are new kids on the block that seek to act as intermediaries between financial institutions and their clients. Players using this model have already established successful businesses in the banking sector in Europe. Further growth will be encouraged there by the advent of Europe’s General Data Protection Regulation.
Nonetheless, there is reason for optimism—if the life industry is bold enough to take the bull by the horns. Life insurers’ relationships provide them with the opportunity to outplay the AIS providers—and the banks—and to reorient their business to more profitable fields of play.
From Selling Insurance to Deepening Customer Relationships
Following the introduction of “pension freedoms,” the 2015-2016 UK tax regulation that allows people to access their pension savings at any time after 55, customers now have far greater investment flexibility. Therein lies the opportunity for life insurers to shift the focus beyond traditional life insurance to a broader range of products and services. Pension freedoms have offered insurance customers greater autonomy and wider choices, but it has also made it more difficult to plan for retirement. People nearing retirement face a range of complex decisions about how to manage their money and plan for their future.
Life insurers will need to transform their business model completely if they are to become the financial home for the over-fifties.
Insurers can help by offering tailored support and guidance, helping their clients to decide how they want to live in retirement and then building the financial plan needed to support this. After retirement, the insurer can develop this relationship further by advising their clients on the decisions that need to be made as they manage their financial resources against this plan. Over time this will build trust and will place life insurers naturally at the heart of customers’ financial retirement decisions. However, developing these relationships to the point where they can support new sources of profits will require the complete reorientation of the industry’s traditional activity.
While providing for clients’ financial needs will continue to be a focus of the life industry’s business, its heart will be in helping people to prepare for and enjoy their retirement. This requires moving beyond pensions into a broad range of financial and later-life services. Done well, this will enable life insurers to become the “financial home” for the over-fifties.
Becoming the Financial Home for the Over-Fifties
Life insurers will need to transform their business model completely if they are to become the financial home for the over-fifties, moving from a product focus to becoming truly client-relationship oriented. Responding to the needs of the over-fifties will demand considerable investment of time and resources from life insurers. Insurers will need to venture into new retail and experiential areas that take them out of their natural comfort zone.
Advances in digital channels, data analytics and robo-advisory services have dramatically reduced life insurers’ costs in serving clients. Life insurers that use such technology to broaden and deepen their client relationships will not only be able to greatly expand their sources of profit but will have the opportunity to reverse their present decline in fortunes.
Life businesses should avoid placing big bets on technology and systems in the early stages of the development of their capabilities. Instead, they should seek to build their financial home incrementally. These initiatives will require putting in place well-structured processes for experimentation, piloting and scaling.
Taking a Lead in Financial Services
Making this transformation will enable the life industry to build new revenue streams to replace its reliance for profitability on the declining flow of profit from legacy products. It will also bring shareholder interests in line with the life industry’s crucial role as managers of the working population’s savings.
If successfully executed, the scale of the opportunity would be large enough to not only reverse the declining fortunes of the UK’s life insurers, but also potentially add 100 billion pounds (about $130 billion) of shareholder value by 2021.
This valuable prize will be shared by the small number of companies that succeed in making the transformation to becoming the financial home for the over-fifties. In contrast, those that fail will become, at best, utility platforms servicing other, more profitable businesses.
For some, in life the future is bright, for others, bleak. Seldom has the life industry been faced with possibilities of such stark contrast.