U.S. life insurance carriers have faced significant challenges in recent years, particularly low interest rates and the burden of legacy systems. These issues are compounded for carriers with less scale and more modest budgets, perhaps having less than $50 million of annual new sales or under $2 billion of assets.
Larger carriers have achieved certain economies of scale in operations, information technology and new business processing, which brings pressure on operating expense ratios for smaller carriers.
In addition, capital requirements are higher for certain lines, such as term and no-lapse guarantee (NLG) – a carrier with a very large in-force block relative to new sales has much larger profits from that book to better absorb the capital strain from new sales. Higher-selling carriers also have more leverage with reinsurers and bankers in developing structures for reserve engineering. Yet because of stringent profitability and capital usage constraints, carriers are exiting these lines (which should improve profit measures for remaining carriers), even though they are the products most in demand from distributors, as measured by policy count. One need only look at the sales of the insurtech startups to see the demand for term and similar products.
Investment management has become more sophisticated with private equity (PE) approaches to asset management generating increasing yields. The question, of course, is what increased risk are carriers taking on with certain asset classes that offer an illiquidity premium but may present specific challenges in a market downturn. This may be an opportunity for carriers’ in-house investment managers to re-assess specific strategies, while noting that regulatory considerations are also surfacing with respect to these approaches. But clearly the annuity carriers are doing well in gathering assets to generate higher investment income.
Distribution channels are demanding more from carriers. Witness the continued aggregation of independent marketing organizations (IMOs), such as the market power of the merger several years ago between LifeMark and BRAMCO, and the rapid-fire purchases of agencies, including very large ones, by entities back by private equity. Such consolidation in life distribution will, in my view, increase pressures on carriers for competitive pricing and compensation, but it is hard for a carrier to be a price leader if it is not a cost leader, or supported by one.
So, what is a smaller carrier to do to survive and thrive in this environment?
It is difficult for smaller carriers to be a price leader, so they need to focus on other differentiating factors, and look to where they can have a competitive advantage.
See also: A New Boom for Life Insurance?
One option is to look at niche markets – opportunities in specific sectors where relationships and specific expertise matter more than price. This contrasts, for example, with fixed and fixed-indexed annuities that are very competitive, unless you have a unique product or service approach. Getting really good at a specific niche can be a big plus!
A second option is newer takes on traditional products – perhaps upending long-held views on product structures or underwriting approaches. There may be opportunities to have such an approach supported by reinsurance from a capital management perspective. Tied in with this, a carrier might examine product development - being able to listen carefully to distributors and customers, vs. larger companies doing canned surveys that provide little insight. Too often such market research is done by staff lacking the expertise/experience to "connect the dots" and see truly feasible opportunities. This may also involve a much more personal approach with distribution at all levels of the carrier.
A smaller carrier may want to focus on being nimble - too many large carriers still must wade through layers of organizational complexity to get anything done, even if they've invested in newer technology platforms promising speed to market for product development. This may involve rethinking your product development approach, particularly internal approval processes and IT considerations. In some cases, smaller carriers with rigorous cost control and fewer layers may be able to justify very competitive pricing. In conjunction with this, you may want to consider proprietary products developed in close conjunction with significant distribution organizations.
Another option is a different approach to customer service, which historically has been focused on transactional efforts on in-force policies, with little focus on emphasizing cross-selling and up-selling opportunities. Some companies have done this well, having implemented the structures and incentives and partnerships with their distribution entities to make this a successful revenue center, but for many large carriers this aspect has been essentially ignored by the policy owner service team. I observed this personally while recently trying to help a friend wade through the process of porting some group life coverage. In essence, carriers may want to look at a lifetime value (LTV) approach to customers and distributors.
Smaller carriers should also look to unique approaches to analytics and technology. Developing unique expertise in specific aspects of underwriting might be worth considering. Along the same lines, it may make sense to outsource those aspects of the value chain where a smaller carrier may not have the necessary expertise in-house, possibly in asset management and some aspects of operations. You may look to shared approaches for certain functions – at least one smaller carrier with which I’m familiar has become in essence a "virtual insurer," laser-focused on particular markets, products and distributors.
I hope these ideas provide some food for thought in your strategic deliberations and am happy to discuss these in much more detail.