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November 15, 2020

6 Megatrends Shaping Life Insurance

Summary:

The life insurance and retirement market is set for profound change in the next decade.

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Senior executives in few, if any, industries think in longer or broader time horizons than those in life insurance. But, thanks to persistent low interest rates, shifting demographics, technology-driven disruption and regulatory shifts and the current global pandemic, life insurance leaders have adopted a more urgent and near-term perspective. While insurers face considerable risk if they fail to take bold enough action or delay necessary investments, there is also tremendous upside potential for firms that move quickly and creatively. 

As highlighted by the most recent installment of our NextWave Insurance series, the following megatrends are reshaping the life insurance and retirement market now and setting the stage for more profound change in the next decade: 

1. Financial health and wellness: Financial well-being — or having the ability to control day-to-day finances, the capacity to absorb a financial shock and the confidence to meet financial goals — has become increasingly important to more consumers around the world. With state pension and retirement plans looking less viable, such security will be harder to achieve. 

For insurers, value propositions will highlight how they can help people live the lives they want. Offerings will be more flexible, forward-looking and “goals-based,” with an emphasis on preparation rather than downside protection. The value propositions will also reflect that more people work for themselves or participate in the gig economy. 

However, insurers will be more transparent about prompting necessary consumer behaviors to achieve goals, rather than guaranteeing outcomes, as in the past. Retirement savings products will be more holistic and offer more options as consumers’ needs change. That’s how they’ll enable individuals to follow nonlinear career paths and take nontraditional retirements, based on alternating phases of asset accumulation and decumulation. 

2. Long-term value: Investors and analysts will expand their valuation approaches to include more holistic, long-term metrics, rather than only short-term financial measures. Intangible assets, such as intellectual property; talent; brand reputation; innovation; and environmental, social and governance impacts now carry greater weight. The shift toward inclusive, or stakeholder, capitalism will help build trust with younger generations and spark broader public-private collaboration to address societal issues, including the cost of future environmental damage or social injustice. 

3. Collaboration with governments and regulators: Difficult macroeconomic conditions, underfunded government retirement programs and intense regulatory scrutiny (especially around consumers’ best interests and data privacy) will force insurers to collaborate with public authorities on multiple fronts. Other priorities: increasing financial education, facilitating product innovation, influencing public policies, including tax incentives and issuing long-term bonds. More robust consumer protections and data privacy standards, as well as financial reporting frameworks, will be designed to promote financial stability. 

See also: Speeding Innovation in Life Insurance

4. Ecosystems and omnichannel engagement: Ecosystems will continue to grow and mature, becoming a primary method that companies use to engage consumers across channels. Technology advancements – particularly in the realm of application programming interfaces, microservices and data fabrics – hold the key by enabling rapid integration and smooth data sharing. 

Insurers will create their own networks of partners to offer complementary services. They will also engage in those orchestrated by others. Ecosystems will allow insurers to focus on their specific strengths (e.g., offering particular services to niche segments) or innovate more broadly (e.g., with subscription models). Ecosystems also suit insurers looking to modernize their distribution and shift to hybrid advisory models that balance robo-advice with human interaction. Partnerships being formed today will set the stage for future ecosystem success.  

5. Capital optimization and convergence: Beyond the near-existential threat of low interest rates, macroeconomic and competitive factors are driving the quest for higher levels of capital efficiency. Mergers and acquisitions and reinsurance are key variables in the equation. 

With more capital available from a wider range of sources and increasing clarity about the need for well-being, sector convergence will accelerate among life and health insurance, retirement planning and wealth and asset management. Capital efficiency will be a key design principle for future business models, largely because it will be necessary for survival. 

6. Commoditization and customization: The long-term trend in customer preference toward greater simplicity, transparency and comparability has helped commoditize life insurance and retirement products. Increasingly, consumers perceive value through user experiences, ancillary services and trust-based relationships. That’s why flexibility and customization are imperative. Delivering the right balance of simplicity and personalization requires stronger digital and analytics capabilities.

In light of these megatrends, we see a greater appetite for operational, organizational and technology transformation than ever before. The rapid shift to remote working and all-digital customer touch points revealed how quickly companies could adapt. That ability to change quickly and nimbly will serve life insurers well in what promises to be a dynamic decade.

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About the Author

Nicole Michaels is a principal with EY’s financial service organization and the operational excellence and performance improvement leader for insurance in the Americas.

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About the Author

Ed Majkowski is EY’s insurance sector leader for the Americas and is responsible for EY’s consulting businesses, markets and clients in this region.

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