At last week’s Global Insurance Forum, Swiss Re Group CEO Christian Mumenthaler said the industry has been in a sort of hibernation for the past year and a half to two years, in terms of big deals and bold moves – but is about to wake up.
“I think we’re in for a very interesting two or three years, with lots of change in the industry,” he said at the virtual event, “Powering Recovery,” held by the International Insurance Society.
Roy Gori, CEO of Manulife, said insurance has “an opportunity to change the paradigm of how people think about our industry.” He described the opportunity as “once-in-a-lifetime.”
Mumenthaler, Gori and many of the other speakers at the three-day event –videos of which you can see here — said the industry had managed a stunning pivot to digital in the face of the pandemic, almost overnight. But they also pointed to numerous challenges and opportunities for the industry as the world gradually puts the pandemic behind us.
Gori, for instance, said the pandemic has underscored the role that insurance plays in creating personal financial stability, while also creating the opportunity for the “complete digitization of every aspect of our business … to eliminate the friction that makes insurance an unattractive proposition sometimes.” He said Manulife has “done more in the past 18 months than in the prior 18 years” in digitizing and has seen the benefits — e.g., straight-through processing now handling 81% of claims, up from 68%.
He sees a major role for insurance in the sorts of public-private partnerships that will be necessary to implement the infrastructure bill that, in some form, seems likely to pass in the U.S. Congress soon. Insurers can also help with what appears to be a new emphasis for global supply chains — while companies have spent many years optimizing them for efficiency, the pandemic has made clear that companies need to build much more resiliency into them.
He cited two other key challenges/opportunities: “Cyber crime is up 600% in the pandemic,” he said, “and 100 million people have been pushed back into poverty…. What can we do to close the income gaps that have been created?”
Mumenthaler said the Swiss Re Institute measures the protection gap — the gap between the economic losses in the world and the insured losses, across all lines of business — and saw a 6% increase during the pandemic, to $1.4 trillion. He said there “should be an obsession to close that protection gap.”
He said he sees an opportunity to apply behavioral science to not only better understand customers but to work better with governments to address massive problems like future pandemics, major terrorist events and large-scale cyber attacks.
“The big events are entirely foreseeable,” he said, citing a 2007 paper by 20 chief risk officers that not only said a pandemic was coming but that laid out almost all the repercussions we’ve experienced in the past year and a half. “Very few risks are totally off the screen,” he said. But insurers can do a better job of helping governments to not only see the risks but to “pre-finance” responses, when actions are far less costly, rather than wait until disaster hits.
Dan Glaser, CEO of Marsh McLennan, agreed with Mumenthaler that supply chains need to focus far more on resiliency. “The world was in a hyper-efficiency mode,” he said. “But the hyper-efficient companies shouldn’t be viewed as best in class. We have to see that risk-adjusted returns are more import than actual returns. Companies need to be asked: How prepared are you?”
The IIS’ Global Priorities Report, released in conjunction with the forum, underscored the challenges facing the industry. The report, based on surveys sent to nearly 10,000 executives worldwide, found that “changing customer expectations during these crises can result in insurer frustration, as consumers may not fully understand how their insurance policy works and what it covers. One executive noted the challenge of correcting ‘how insurance is viewed by the general public. It is not meant nor intended to cure all ills, yet it is often expected to.’ This was especially true during the pandemic.”
The report found that the biggest worry is about competition from outside the insurance sector: “Executives worry that digital engagement has taken over and that the industry faces disruption from new entrants with ‘better-organized data and a stronger consumer orientation.'”
I could go on and on. There is an awful lot of meat both to the videos from the three days of the forum and to the Global Priorities Report — which I encourage you to view and to read. But I’ll just cite two more of the speakers, whose comments I thought were especially insightful, then let Marsh McLennan’s Glaser bring us home.
As we’ve seen, ESG (environment, society and governance) has become a hot topic as companies are being pressed to be better corporate citizens, and that emphasis is likely to increase coming out of the world-shaking pandemic. Neeti Bhalla Johnson, president, Global Risk Solutions at Liberty Mutual Insurance, said insurance has a unique role to play in many aspects of ESG, notably climate change, because the industry has both “the asset and the liability side of the balance sheet.” In other words, the industry carries the risk, while also have enough capital to help address it. She said ESG could also help address the industry’s talent gap, because new types of people will want to join forces with insurers to tackle big ESG problems.
Meanwhile, Lorenzo Chan, president and CEO of Pioneer Inc., used the pandemic to make a bold step toward addressing the protection gap by, as he put it, going down the pyramid. He said that everyone typically goes for the best prospects, at the top of the pyramid, but he aimed at the “micromarket” in the Philippines. He says lots of people had negative associations about insurance — slow to pay, tricky in the fine print, etc. — so he looked for partners he could work with who were trusted by a broad market of the less wealthy. He wound up working with supermarkets, motorcycle distributors and, in particular, pawn shops.
“We unlearned everything we knew in traditional insurance,” Chan said. But, in the process, Pioneer went from 180,000 customers in the micromarket to 18 million, and Chan thinks there is still considerable room to grow.
Talk about narrowing the protection gap.
As Marsh McLennan’s Glaser looks at the challenges ahead, he says: “In my 40-year career, it’s always been thus: There have always been things on the horizon that look dangerous. We’re one of society’s ways of sensing those dangers.”
He adds: “Insurance is a noble business. It’s hard to think of a business that does more for society.”
P.S. If you’re at InsureTech Connect in Las Vegas this week, please stop by and say hello. I’ll mostly be hanging out at The Institutes’ booth, #1117 on the expo floor. I may be off doing some video interviews for a series we’re pulling together, but I shouldn’t be gone long. I hope to see you there.
This article was written by Ronnie Klein for the International Insurance Society, a sister organization of Insurance Thought Leadership, under the umbrella of The Institutes. To see more IIS articles by Ronnie and other IIS experts, visit internationalinsurance.org.
There is a saying in German: “Traue keiner Statistik, die du nicht selbst gefälst hast.” This translates as, “Do not believe any statistic that you have not forged yourself.”
Many credit this saying to Winston Churchill, but Nazi propagandists actually made up the quote and attributed it to Churchill as a way of impugning him as a liar. It appears that “fake news” is not a new phenomenon.
An example of misleading statistics is when determining whether to take a medical test for a rare but serious disease like spina bifida. This rare disease causes the spine of a baby to form improperly and can lead to serious mobility impairments and possible organ malfunctions. Many doctors will recommend that the patient undergo a blood test to detect this disease. The test has improved over time and is now 95% accurate.
This sounds like an easy choice. The test is 95% accurate and can detect a horrible disease. But let’s explore.
The probability of contracting the disease, according to the U.S. Centers for Disease Control and Prevention (CDC), is 1 out of 2,758. Therefore, out of 1 million pregnancies, there should be approximately 363 babies, or 0.03%, born with spina bifida.
Assuming that all 1 million women opt for the test and that no false negatives occur, there will be 363 actual positives and about 49,982 false positives ((1,000,000 – 363) x .05) for a total of 50,345 positive tests. Receiving a positive result now means that the baby has a 363 in 50,345 chance of having spina bifida — or 0.7%.
Does this sound like a test with 95% accuracy?
Further, once a woman receives a positive test for fetal spina bifida, she must undergo follow-up tests that are a bit more invasive to more accurately determine the status of the baby. However, those additional tests take time to schedule and to generate results.
How much stress is the woman under during this time? What effect could this have on the unborn child? None of this is usually discussed with the mother.
How can a test that is 95% accurate change the probability of contracting the disease from 0.04% (363 out of 1 million) to 0.7% (363 out of 50,345)? Should an expectant mother take a test for a disease that will affect 363 babies out of 1 million? Armed with the correct statistics, an expectant mother will be much better prepared to make an informed decision.
COVID-19 statistics can also be misleading. The most common misstatement is that the disease only kills the elderly. According to the most recent data from the CDC at the time of this writing, 80.5% of COVID-19 deaths have occurred in people ages 65 and over in the U.S. On the surface, this seems like a daunting fact.
Of the nearly 540,000 U.S. deaths attributed to COVID-19 as of this writing, almost 435,000 are from people age 65 and over. Breaking it down further, 58% of all COVID-19 deaths occur in people age 75 and over. It is no wonder that most of the attention has been given to the most vulnerable people in these age groups. Why worry about those under age 65 when only 20% of COVID deaths can be attributed to this cohort?
Examining mortality by age for all causes shows that the statistics for COVID deaths do not vary greatly from all-cause mortality. Said another way, COVID deaths by age are highly correlated to deaths by all causes (see Figure 1).
Figure 1: COVID-19 Mortality vs. All-Cause Mortality by Age Group
Limiting the analysis to age groups over 25, which basically eliminates infant mortality and teen auto accidents, shows an even stronger correlation (see Figure 2).
Figure 2: COVID-19 Mortality vs. All-Cause Mortality by Age Group (25+)
While the media is quick to broadcast that approximately 80% of COVID-19 deaths occur in people over age 65, it fails to state that, in a given year, almost 75% of all-cause mortality occurs in the same age group.
Exploring the data for those ages 25 and up shows that people ages 75 and over account for 59% of all COVID-19 deaths and 56% of all-cause mortality – not far off. This virus is not only a worry for older people, it affects younger adults in a similar proportion to other causes of death.
What this means is that the target life insurance-buying population (people ages 30-60) should be very interested in purchasing life insurance to protect against this and future pandemics. COVID-19 increases mortality for adults of all ages at similar percentages. However, this very important fact is not widely broadcast in the news. And the life insurance industry has remained relatively silent on this topic, as evidenced by the continued flat sales of life insurance during the pandemic.
In the largest life insurance market in the world, the U.S., premium sales in 2020 actually dropped while number of policies showed a slight increase. Considering that there are no infectious disease exclusions in the vast majority of life insurance policies and that the world is in the midst of the worst pandemic in the past 100 years, one would think that sales of life insurance would be skyrocketing.
Every life insurance sales person will be familiar with the term “share of wallet.” Potential customers only have so much disposable income, and only a portion of that can be allocated to life insurance. While the pandemic should certainly highlight the need for life insurance, the ensuing financial crisis brought on by travel restrictions, hotel closures, restaurant closures and other lockdowns make certain that a person’s share of wallet is more focused on food, housing, medical supplies and other essentials. Life insurance has been moved further down the list.
A survey performed by the U.S. Census Bureau revealed that more than 60% of low-income families experienced “income shocks” during the pandemic. This includes food insecurity and delinquencies on rent or mortgage payments. The percentage is even higher for families with children (see Figure 3).
When choosing between paying rent or purchasing life insurance, there is no question at all. However, as bad as things are for these families, it will become much worse if the breadwinner dies due to COVID-19.
Figure 3: Share of Families Experiencing an Income Shock by Household Income and Presence of Children
The U.S. Congress recently passed the American Rescue Plan, which provides aid to all citizens and disproportionately helps low-income families. A family of four earning less than $150,000 per year received $6,400 in cash and possibly other benefits, including extended unemployment, tax credits and lower health insurance premiums.
If a family of four is earning $50,000 per year, this is more than a 12% increase in pay — and the money has already arrived. Similar packages have been offered in most developed countries in the world that are experiencing the same adverse mortality and economic downturn as the U.S.
These low- and middle-income people are suffering from a huge protection gap. One estimate places the middle-market protection gap in the U.S. at $12 trillion (see Figure 4). This is exactly the market that the life insurance industry has been talking about addressing, but failing to reach, for decades.
Wouldn’t this be a great opportunity to approach these people, as they receive a relatively sizable lump sum of cash? A small term policy that costs less than one-per-thousand for most of these ages would help to protect those families most in need.
But the window for action by the insurance industry is short, as these funds have already been distributed. This money will not sit around waiting to be spent on life insurance.
Selling pure protection to the middle markets during a pandemic is a great opportunity for the customer and the insurer. It provides much-needed protection during a time when excess deaths due to COVID-19 in the U.S. are estimated at about 16% (see Figure 5). It benefits insurers as a way to reach a market that has thus far eluded the insurance industry. And, it will help inform the middle markets of the importance of life insurance and may win over many customers for life.
The life insurance industry has long lived by the motto, “Let sleeping dogs lie.” During a 1-in-100-year pandemic, would it be worthwhile to attempt to make a change and tout the industry’s many benefits – especially to middle-income families? For example, would this be a good time for life insurers to contact all of their existing policyholders to remind them that policies are valid for death due to COVID-19? In-house lawyers can put in all of the caveats such as, “assuming all premium payments are current, assuming the policy is not accident-only, etc.”
J.D. Power performed a life insurance survey in late 2020 and concluded that “…a combination of infrequent client communications and a pervasive perception of high cost and transaction complexity have suppressed consumer interest and customer satisfaction with life insurance providers.”
Following the results of the survey, Robert Lajdziak, a senior consultant for J.D. Power, said that policyowners’ satisfaction with their life insurance products declines the moment the sale is completed. Lajdziak showed his surprise that this trend would continue during a pandemic and implores the industry to “rachet up” its client contact, not just its communication with agents.
To some, telling customers that they are covered for death due to disease is not necessary — but is this really the case? Just one Google search with the tagline, “Does life insurance pay for COVID-19 death?” will show how many articles have been written on this subject.
Why do customers need to get this information from a third party? While there may be risks to offering it to in-force policyholders, the benefits of this positive communication could dramatically outweigh these risks.
The life insurance industry protects policyholders from the financial hardships of premature death or disability of a breadwinner. This is especially important during a pandemic. However, sales of life insurance have been flat in most mature insurance markets for decades.
If a pandemic that is responsible for about an eighth of all deaths of people ages 25-64 cannot generate interest among the general population to purchase insurance, at a time when lump-sum stimulus payments are being made to lower-income earners, it is difficult to imagine what will cause an increase in sales. But consumers will not run to purchase this insurance. The industry must think of a coordinated, thoughtful and compelling message.
Epsilon Marketing estimated that there are about 50 million middle-market households in the U.S. A survey performed for this report revealed that reaching the middle market was a top priority for 25 of the 35 life insurance companies that responded. This survey was performed in 2014, so these companies and others had approximately seven years to work out a plan to reach this market.
Now is the time to “pull out all stops” and market aggressively. Doing that will generate sales and create an entire class of new life insurance purchasers who will be able to tell positive stories in the future. Starting this process may be as simple as communicating with existing policyholders about the benefits of their policies. Word of mouth among friends may be the best sales channel to reach the underserved middle markets and to help close the protection gap.
Selling more life insurance during a pandemic can bring peace of mind to customers and help protect their families. Yet, with all of the talk about new technologies to market, underwrite and speed policies to customers, there has been virtually no perceptible increase in life insurance sales.
This can be easily evidenced by QualRisk’s assessment that, in 2020, all-cause mortality increased in the U.S. by 16%, but there was only a 3% increase for individual life insurance. Some in the industry may look at this as a favorable outcome. What it really shows is the vast protection gap that exists in the U.S. and in all mature insurance markets in the world. It is time to do something differently and reach underserved markets. Now is a perfect time to begin.
This article was written by Joan Lamm Tennant for the International Insurance Society, a sister organization of Insurance Thought Leadership, under the umbrella of The Institutes. To see more IIS articles by Joan and other IIS experts, visit internationalinsurance.org.
As the world grappled with the overwhelming challenges attributed to COVID-19, racial and social injustice and dysfunctional geopolitics throughout 2020, many observers anticipated that reliance on the ESG framework for establishing commitments to all stakeholders would fade. To the contrary, 2020 ushered in a year whereby the ESG framework provided a strategic and cultural road map for global corporations to adapt, navigate and emerge from 2020 with their businesses not only functioning but thriving. No longer are leaders debating the merits of ESG as a framework for creating long-term value for all stakeholders. Rather, a sustainability plan of action designed around ESG is widely accepted as an imperative for moving forward. We now turn to 2021 and the years ahead to determine if these plans become a catalyst for widespread change in why and how we conduct our business.
Year of Commitment
In 2020, ESG went mainstream among corporate leaders, and many within our industry made public commitments to all stakeholders to be a force for good in the environment and society at large. Companies began by establishing a “new” purpose acknowledging all stakeholders and articulating the impact they want to have in the world. With regard to the environment, one example is Aviva’s bold commitment to tackle the climate crisis. Amanda Blanc, Aviva Group Chief Executive Officer, said, “We have a huge responsibility to change the way we invest, insure and serve our customers.” The commitment goes beyond Aviva’s footprint and investment strategy by extending into their core insurance/underwriting operations. By the end of 2021, Aviva will stop underwriting insurance for companies making more than 5% of their revenue from coal or unconventional fossil fuels, unless they have signed up to the Science-Based Targets initiative (SBTi), a collaboration between CDP, World Resources Institute (WRI), the World Wide Fund for Nature (WWF) and the United Nations Global Compact (UNGC), whose goal is to establish science-based environmental target setting as a standard corporate practice.
Both Swiss Re Group and Zurich Insurance Group also established their respective climate commitments by relying on a multi-prong strategy covering their physical footprint, asset management and re/insurance. Moving beyond their corporate footprint, Swiss Re made a public commitment to reach net-zero emissions by 2020 across the whole business, including asset management and re/insurance. Mario Greco, Zurich Insurance Group’s chief executive officer, sets a high standard by stating, “We want to be known as one of the most responsible and impactful businesses in the world.” Regarding the core insurance business, Zurich goes beyond a pledge to understand and monitor the carbon intensity of their underwriting portfolios and developing key metrics to support alignment to a 1.5°C future by also committing to helping their customers successfully navigate the transition.
As it pertains to societal issues, insurers’ commitments are equally bold, addressing the needs of employees, customers and vulnerable people at large. One insurer supported emerging digital trends with a new generation of products and services that deliver the best solutions and experiences while maintaining ethical use of customer data (e.g., personal data will never be sold or shared without the insurer being transparent with customers). Digital was recognized as a means for not only serving existing customers better but reaching the disenfranchised, as well.
Commitments to employees went beyond a safe physical presence to include an environment conducive to the employee’s success and mental well-being. Employees were promised meaningful work with a clear purpose in a safe, attractive, flexible and inclusive work environment where everyone can contribute. Access to training and skill development needed to succeed in a digital business environment and a culture of inclusivity, collaboration and creativity became core.
As for vulnerable people at large, insurers committed to community outreach, using digital to reach and support the underserved and to deliver resiliency programs in developing countries and poor communities.
In terms of governance, companies began with a pledge toward achieving diverse board representation and in many cases set forth specific targets. Aside from board composition, directors engaged in governing all ESG matters by providing oversight of progress toward delivering on stakeholder commitments as well as oversight of material ESG-related risks (e.g., supply chain disruptions, energy sources and labor practices). Boards also seek to be informed about the company’s approach to dealing with investor requests for ESG-related engagement and external disclosure and requests from emerging ESG-ratings services (e.g., the proxy advisory firm ISS’ new “Environmental & Social Quality Score”).
In summary, 2020 was the year of recognition that a sustainability plan designed in accordance with the ESG framework is not only a force for good but is critical to creating long-term value. The absence of a sustainability plan will likely have reputational impacts and result in significant public, investor and stakeholder relations risk. While companies will consider the value proposition of ESG initiatives relative to other business priorities and opportunities, it is important to recognize that the value derived from ESG initiatives will continue to develop, especially as more institutional investors consider sustainability as an investment priority and more companies take an active but targeted approach.
An Era of Action
The year ahead will be a year of corporate action with accountability at the forefront. Global hopes are high that corporate leaders will play a significant role in building a better future alongside governments, civil society, non-governmental agencies and other such actors. But corporates face a paradox. Corporate leaders are increasingly accepting responsibility for their social, environmental and economic impacts, yet they are not in direct control given the systemic nature or the fact that the impact falls upstream and downstream in their value chain. Consequently, corporate engagement with other external stakeholders is imperative. Business leaders now recognize the importance of not just associations but deeper collaboration to drive progress on common objectives. Surely, the COVID-19 pandemic has demonstrated the power of collaboration between government, the private sector and civil society as well as the unfortunate consequences of its absence. The environmental and societal problems that we face are problems of the global commons. Acting alone, even if intentions are good, will prevent a globally optimal outcome.
Imperative of collaboration to drive needed system change — Collaborative research conducted on behalf of the Sustainability Transparency Network (STN) highlighted trends and best practices for corporate practitioners. Companies are being more selective and strategic when it comes to collaborations and moving away from general participation to being an active piece of the puzzle in areas where they have expertise. At the same time, collaborative peer initiatives focused on sustainability are, by their nature, acts of systems change. They seek to shift the status quo by moving best practice within an industry, or even across the entire private sector. There is wisdom in the crowds. Including voices from outside and within the private sector can enhance systems change. A collaborative mindset requires humility, open-mindedness and a willingness to abandon traditional decision models. The collaborative leader is willing to not only accept but expect setbacks, learn from the setbacks and re-engage, as opposed to being punitive or overly reactive. Organizations will need to seek, develop and reward individual competencies needed to support collaborative efforts and trusted relationships, such as those individuals who forge beyond their organization / industry to form “boundary-spanning” partnerships. How corporations foster collaboration among leaders to draw on the wisdom of the crowd, and who is included in the crowd, will untimely determine success.
Evolving metrics and tracking systems for informing and validating progress — To date, corporations substantiated their commitment by setting high-level targets or referencing programs currently in operation. Going forward, companies will develop explicit metrics as well as systems for tracking and reporting progress relative to the metrics. Additionally, companies will provide clarity as to how these metrics map to value creation within their own company as well as throughout their value chain and within the economy at large. The association is supported by research, although individual companies will now develop unique roadmaps for building network effects across their various programs, resulting in globally optimal solutions.
Better governance of information through harmonization — Clarity, consistency and comparability of ESG data remain key challenges. With any new initiative, multiple normative standard setters evolve and in time consolidate or align to achieve a uniform corporate reporting norm. Regulatory authorities and rating agencies are following suit. In recent months, the New York Department of Financial Services, AM Best, Lloyd’s and EIOPA have all made pronouncements. In the meantime, leaders will learn from and select across the varying standards, many of which are not auditable or validated by outside authorities. Boards will need to be aware that regulation and harmonization is evolving, therefore directors are encouraged to be inquisitive about indicators of success against a self-selected framework.
The Years Ahead
The most recent year is the first in a decade that could recalibrate the role of business in delivering on purpose. It has been a daunting year, and more challenges lie ahead. Challenges such as the need to develop an ESG mandate beyond investments to include the core business of insurance/underwriting, the lack of consistency over ESG data quality and disclosures and the need to truly adapt to a collaborative mindset. Furthermore, as an industry we are facing challenges as we broaden the meaning of “E” in the ESG paradigm beyond climate to recognize biodiversity, water pollution and the circular economy. Likewise, we are grappling with the breadth and ever-increasing momentum around social resilience. We are on a multi-year journey, with next year being a year of action toward building truly resilient organizations and systems. Stakeholder capitalism is here to stay, and “triple-bottom-line” goals of people, planet and profit are, in fact, mutually reinforcing. It seems clear that 2021 will indeed be The Year of a New Beginning.
This article was written by Chunka Mui for the International Insurance Society, a sister organization of Insurance Thought Leadership, under the umbrella of The Institutes. To see more IIS articles by Chunka and other IIS experts, visit internationalinsurance.org.
“There are decades where nothing happens, and there are weeks where decades happen,” Vladimir Lenin observed. The arduous weeks spent grappling with the COVID-19 pandemic certainly fall into the weeks-where-decades-happen category.
Take telehealth; its adoption has seemingly been on the horizon for decades and suddenly, within weeks after COVID-19 became a pandemic, telehealth achieved near universal embrace. McKinsey estimated that healthcare providers saw 50 to 175 times more patients via telehealth in the months after the pandemic than ever before. Additionally, 57% of providers viewed telehealth more favorably than before the pandemic, and 64% of providers reported that they felt more comfortable using telehealth. Now, even as the pandemic recedes, another McKinsey survey found that 40% of consumers believe they will continue to use telehealth at similar or greater levels even after the pandemic ends. These punctuated changes in preference, perception and practice will force the rewiring of the entire healthcare delivery system.
Similarly, insurance has steadily, but unevenly, digitized for decades. Suddenly (and admirably), within weeks after COVID-19, the digital nature of most insurers’ work, collaboration, transactions and customer service greatly accelerated. A recent PwC survey found that customers are not suffering laggards lightly. Of customers who expressed difficulties in dealing with their carriers, 41% said they are likely to switch providers due to inadequate digital capabilities.
A key aspect of successful innovation in the context of such rapid change is to first deeply understand the technological drivers behind that change. I briefly introduced these drivers as the Laws of Zero in my first article of this series, titled “How Insurers Can Change the World.” In this article, I explore these laws to highlight the changing future context in which insurers must operate. (I go into even more detail in a book I’ve written with ITL Editor-in-Chief Paul Carroll and a longtime colleague of ours, Tim Andrews, a vice president at Booz Allen Hamilton, that will be released Sept. 21.)
The basic ideas behind the Laws of Zero are that seven key drivers of change—computing, communications, information, genomics, energy, water and transportation—are improving exponentially in capability while headed toward a nearly zero relative cost. This yields two critical implications. First, as shown in the figure below, there exists a rapidly expanding gap between state-of-the-art technology potential and incremental change. Secondly, the rapidly decreasing costs of those state-of-the-art capabilities will drive marketplace adoption; the notion of zero(ish) cost grabs the attention of loads of people and means we use as much of these capabilities as we need to address any problem.
Successful innovation requires anticipating future scenarios, both upside and downside, enabled by the Laws of Zero, and then smartly pulling backwards to the present to chart possible paths for working toward the opportunities while managing downside risks. The best way to predict the future is to invent it, as personal computer pioneer Alan Kay says.
Now, let’s explore the drivers and lay the foundation for understanding the upside and downside scenarios that should drive your innovation agenda.
The smartphone in your pocket has over 120 million times more processing power than the computer systems that guided Apollo 11 to the moon and back—at a percentage of their cost that effectively rounds to zero. While computing power obviously isn’t free (as anyone buying a smartphone knows), that power looks almost free from any historical distance.
Now, consider how computing capabilities will change over the next several decades. If Moore’s Law remains an accurate guide, computing power will double 20 times in the next 30 years while cost would be cut in half 20 times. In other words, we can look forward to analytical power more than one million times faster than the present with a per-unit cost of today’s divided by one million. What’s more, trillions of devices will be connected in a network, making the so-called Internet of Things millions of times more important than it already is.
Building on ever-smaller connected devices, over the next several years AI-driven voice input assistants such as Alexa, Google Home and Siri will not only take commands but will act as sensors that can detect illness, provide home security, etc. Robots will extend our presence: Just slap on some virtual reality goggles and (with permission) “inhabit” a robot in your kid’s, parent’s or friend’s room. Computing could be implanted in our bodies. A chip right below the jaw and near the ear could capture our voices while vibrating in ways that our ears would easily pick up as sound. There is even talk of chip implants that would plug directly into our brains and give us instant access to essentially all the world’s information. People may turn into a form of centaur, except that, instead of being half-human and half-horse, we would be part people, part electronics.
People, homes, cars and all other things being insured and served will never be the same, and the insurers that serve these assets must adapt.
Communications will reach into every corner of the globe, as tens-of-billions of devices and trillions of sensors are incorporated into a tapestry of communication. In other words, we aren’t just talking about humans connecting with each other. We’re also talking about humans talking to devices as well as devices talking to each other. This communication could happen anywhere because, with a little solar power and a tiny antenna, every device could be connected.
Communication will become richer too, as having bandwidth to burn means that video can be part of every connection. Think of how easily the world moved from voice calls to Zoom calls during the pandemic. Now imagine having thousands of times as much bandwidth available. If you draw the graph of cost vs. performance from today’s perspective, that cost will be so low that universal-ultra-high bandwidth connectivity will be the normal expectation rather than an exception.
Imagine what that will mean for every aspect of the insurance value chain, including underwriting, distribution, claims and service.
The ability to embed computing and communications into every aspect of life will exponentially expand the amount of information available. Paired with rapidly improving data analytics, machine learning and other artificial intelligence capabilities, information will enable more powerful knowledge-driven enterprises.
Think about a situation we’re all familiar with, the daily commute. Every car and street will soon be so thoroughly wired that traffic will be managed in ways that aren’t conceivable today. For example, just because you can’t see what might be coming at you from the sides at an intersection, doesn’t mean another car can’t see for you and relay that information to your car; a camera mounted on a car, for instance, could spot a vehicle zooming through a red light and automatically alert all cars in the vicinity to halt and wait for the danger to clear the intersection. The presence of ice or any other danger will be immediately communicated to all cars in the area. Traffic will be managed as a single, highly efficient digital system, rather than through a few rules that require hundreds of millions of drivers to sort things out on their own.
Ubiquitous sensors will supply information from everywhere else, too – – including our bodies. Already, sensors built into contact lenses can measure blood sugar levels. A cuff about the size of a smartwatch can report on blood pressure in real time. Tiny cameras can now be sealed into a capsule the size of a cod liver oil tablet that someone can swallow; these cameras screen for cancer as they pass through the person’s bowel, meaning the person can avoid the dreaded colonoscopy. In addition, chips the size of a grain of salt are being developed that could be swallowed and provide real-time data on our vital signs from inside our bloodstreams – – sort of an Internet of Me to go along with the Internet of Things.
Yes, this sort of transparency could be a scary prospect, and the concept of Big Brother is a real possibility. Breaches in cyber security will be an ever-present threat. How do insurers shape their futures in a world where every bit of information is available? How do these insurers offer trustworthy products and service while navigating potential problems?
If DNA is “the language in which God created life,” as President Bill Clinton once put it, then genomics’ acceleration has brought us to the point where we can read and write in the language of life. It cost billions of research dollars to sequence the first human genome in 2003. Today, sequencing a genome costs roughly $600. That’s a cost improvement of more than one million times. That’s almost seven orders of magnitude in just 18 years, and the gains are hardly finished. There are already attachments that let you sequence a genome from an app on your own smartphone. Likewise, rapid improvements are being made in the field of gene editing, building on revolutionary techniques such as CRISPR/Cas9 (called CRISPR for short) and mRNA.
In medicine, as genomics pioneer Craig Venter has observed, almost every new drug and vaccine is already based on genomics, and, even at our early stage of knowledge, genomics provides hope for addressing several diseases caused by variation in a single gene. These diseases, known as monogenic disorders, include sickle cell anemia, cystic fibrosis, Huntington’s disease and Duchenne muscular dystrophy – debilitating diseases that afflict some 400,000 people in the U.S. CRISPR is helping researchers better understand these diseases, and a number of therapies are in clinical trials for treating and even curing them.
The combination of massive power and plunging costs guarantees that we will soon be able to sequence any genome, anytime, anywhere, with profound implications not just for medicine but far beyond. Genomics is a foundational tool in almost every field of science related to biology, including agriculture, environmental studies, health and zoology. Genomics will exponentially amplify science and engineering’s impact over the next half century to a degree that will likely surpass the impact of the computing platform it is built upon.
We still have much to learn to become truly fluent in the language of life. But it is not hard to envision harnessing the power of genomics to create healthier foods; to eliminate microbes that cause disease; to eradicate the most dangerous pests; to identify and possibly correct the genetic markers that cause disease; and to do all of the former in an ethical and equitable manner with a deep understanding of the implications of our choices.
The opportunities and challenges for life and health insurance will be profound.
When Bell Labs developed the first solar photovoltaic panel in 1954, the cost was $1,000 per watt produced. That meant it cost $75,000 to power a single reading lamp, which is a little pricey. By 2017, solar was down to $0.25 a watt. A solar project that will supply 7% of the electricity to Los Angeles promises power at less than $0.02 per kilowatt hour (kwh), while the national average for electricity charges to consumers in the U.S. is nearly seven times that. The International Energy Agency’s annual report for 2020 says solar power is already “the cheapest electricity in history.” A drop in price by a factor of 3,000 over six decades isn’t Moore’s law, but it’s certainly headed toward that magic number: zero.
Wind power is also on an aggressive move toward zero as prices are down nearly 50% in the past year. Contracts were recently signed for wind power in Brazil at a cost of 1.75 cents per kilowatt hour, about one-fourth the average of 6.8 cents per kwh worldwide for coal, considered to be the cheapest of the conventional energy sources.
The key holdup for renewable energy has been batteries. There must be some way to store the solar and wind energy for when you need it, which means the need for lots of battery capacity. Fortunately, batteries are progressing on three key fronts: battery life, power and cost. CATL, the world’s top battery producer, recently announced a car battery that can operate for 1.2 million miles, eight times longer than most car batteries on the market today. Additionally, battery prices have plunged 87% in the past 10 years.
So, we have at least three cost curves that look like they’re headed toward zero: solar, wind, and batteries. That’s plenty, but others are worth mentioning as well, including nuclear fission, nuclear fusion, geothermal and radical energy efficiency. Together, these curves create a Law of Zero for clean energy that will create unfathomable benefits.
Energy drives every living thing, and unlimited clean energy will drive unlimited opportunities.
A quarter of humanity faces looming water crises, and demand is growing along with population, urbanization and wealth and the taxing of traditional fresh water supplies while also polluting them. But there’s hope – limitless energy could allow for the almost magical availability of water.
By 2050, anyone near a body of saltwater could benefit from water technology breakthroughs. Desalination has always been possible, but prohibitively expensive because of energy costs, whether done by filtering out the salt through osmosis or by evaporating the water and leaving the salt behind. Cheap energy makes desalination more plausible, as many cities around the world are getting desperate for water.
Water won’t be pulled out of thin air in great quantities anytime soon, but that technology is also under development. One group won a $1.5 million X Prize by developing a generator that can be used in any climate to extract at least 2,000 liters of water a day from the air at a cost of less than $0.02 per liter, using entirely renewable energy. One can imagine a day when decentralized production of water will lead to benefits akin to those that come from having abundant electricity while off the grid.
Where there is abundant water, along with the energy that comes from the Law of Zero, there can be food. The basics of life will be available everywhere, even at the far corners of the Earth.
Although the enthusiasm for autonomous vehicles (AVs) took a hit for a couple of years – they are a really hard problem – momentum is building again, and the multitude of startups and brilliant scientists tackling the issues portends a future that will include an unlimited number of AVs.
The implications are mind-boggling. AVs are aimed at dramatically improving two key drawbacks of human-driven cars. First, humans are bad drivers. More than 90% of vehicular accidents are due to human error, which result in tens of thousands of deaths, millions of injuries and hundreds of billions in cost each year—just in the U.S. Worldwide, the figures are even more staggering. Bad driving also leads to traffic congestion, costing hundreds of billions of dollars due to added hours in traffic, wasted gasoline and lost productivity. Secondly, human-driven cars are very underused. Most of these cars are personally owned and sit parked more than 95% of the time. Some estimate that AVs, once successfully deployed as fleets of shared Uber-like, on-demand vehicles, could reduce accidents, lower congestion and reduce the number of cars by 90%.
Now, a lot of metal will need to be shaped and maintained even in an autonomous future, so transportation won’t be free. But that transportation will be so much less expensive than it is today that we can be profligate in throwing transportation resources at anything we want to. Think in terms of a world where fuel is free and, thus, infinite, where many considerations of time and distance no longer matter. Think about how health, wealth, education, economic mobility and more could all improve because access to transportation currently constrains so many people.
Yes, lots of people and businesses will have to adapt. Among the notable are the 4.5 million professional drivers in the U.S. AVs will also change emergency rooms, which currently treat some 2.5 million people each year after auto accidents and, based on current estimates, might treat only 10% as many individuals once AVs become ubiquitous. Car dealers, gas stations, oil companies, auto repair shops and most others in the multitrillion-dollar transportation value chain might well be disrupted.
There’s also the existential question for auto insurers: Why do you need personal auto insurance when there are almost no accidents, and you aren’t driving anyway? Will personal car insurance essentially go away?
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Not all the Laws of Zero will kick in right away. The ubiquity of water, in particular, will take time to play out, partly because getting to zero cost for energy will also take time. Other laws, such as for information and genomics, are driving disruption faster than most imagine.
Here’s the core question all insurers should explore: How will these Laws of Zero shape the future? As customers, supply chain partners, competitors and others in the world at large accelerate their own digitization, driven by the Laws of Zero, how will insurers innovatively adapt their own business and operating models to stay responsive and competitive? Insurers should assume that decades will continue to happen in the weeks and months ahead.
These are times that demand both giant leaps and baby steps. In coming articles and webinars, we will continue to explore how insurers can systematically do both. In the meantime, we welcome your comments and questions.Read more at internationalinsurance.org.
This article was written by Ronnie Klein for the International Insurance Society, a sister organization of Insurance Thought Leadership, under the umbrella of The Institutes. To see more IIS articles by Ronnie and other IIS experts, visit internationalinsurance.org.
What is happening in the world of life insurance?
The Hartford discontinued sales of individual life insurance policies in 2012.* MetLife spun off its life insurance business into Brighthouse Financial in 2017. VOYA Financial exited the individual life insurance business in 2018. AXA sold its share in Equitable, its U.S.-based life insurance business, in 2019. AIG announced that it will split off its life and retirement business in 2020. Prudential plc, of the United Kingdom, announced the demerger of Jackson National Life, its U.S.-based life and retirement business. The American firm Prudential Financial announced that it will sell its retirement business and is considering further “de-risking” of its annuities and other products. And these are just a few of the announced divestitures from the life insurance business by major insurers.
Is the sale of individual life insurance coming to an end? Insurers are certainly still selling it, but in this lingering environment of ultra-low interest rates, pressure is mounting from shareholders to sell off all or certain blocks of life insurance. That is why one prominent insurer’s CEO said, “I think that life insurance is a mutual company product.”
Not only are low interest rates making it difficult to earn a decent return on these products, but some insurers also have products on the books with minimum guarantees that they just cannot keep up with any longer. To add insult to injury, insurers must also hold regulatory capital against these policies and manage costly legacy administration systems. Announced changes to insurance regulations are tending toward increasing regulatory capital for long-dated guarantees, rather than decreasing it. Updating systems for old insurance policies does not seem like a good use of shareholder money.
Shareholders Demand Better Returns
Shareholders are becoming increasingly vocal about the returns on capital for life insurance. This is especially true for companies that must adhere to Solvency II regulations, which require insurers to hold excessive capital in support of long-term guarantees. A combination of low yields on assets and overbearing capital requirements makes life insurance increasingly difficult for stock insurers to maintain. One prominent board member of a life insurance company aggregator said the insurers that do not sell certain blocks of life insurance business “run the risk of activist investor action.” While life insurance is generally thought of as a long-term business with many policies in force for decades, activist investors generally represent investors with much shorter time horizons. This mismatch of expectations can wreak havoc for life insurers and their policyholders.
The life insurance industry has focused on Baby Boomers for decades, and for good reason. Baby Boomers still hold over 50% of total household wealth (see Figure 1). This large group of people born between 1946 and 1964 purchased pure protection products to pay off mortgages and college costs for their children in case of premature death. Then they purchased life insurance savings products as they advanced in age and became more affluent. Then they purchased annuities to protect against outliving their retirement assets.
However, this era is coming to an end, as the youngest Baby Boomers are now in their late 50s and most are well into their 60s and 70s. Life insurers now realize that they have to invest in new technologies to attract other demographic groups, such as millennials. Freeing up large amounts of capital backing life insurance products to invest in technology seems like a better use of this money — and it is what shareholders are demanding.
The life insurance business is still extremely important and will continue to be so. It protects breadwinners from the financial consequences of premature death, disability or outliving their assets. According to the Financial Stability Board, insurer assets in 2019 amounted to $35.4 trillion. In 2016, the International Monetary Fund estimated that 85% of insurance assets can be attributed to life. That means that the life insurance industry is responsible for approximately 7.5% of the $404.1 trillion of financial assets worldwide. Not too bad for an industry that seems to be selling off its businesses.
Not only does the industry invest these assets into corporate bonds, infrastructure and government bonds, but benefit payments in the U.S. alone amounted to over $530 billion. The life insurance industry continues to be a noble undertaking.
Divestiture Strategies Vary
Insurers can use several different methods to offload blocks of life insurance business. They can stop writing new policies and manage the old policies as a run-off business. They can reinsure the old policies but continue to service and administer the policies. They can spin the business off into a separate company. They can reinsure the business and transfer the servicing and administration. Or they can sell the business to another organization, most likely to an aggregator. Each technique has its benefits and drawbacks, and hybrids may also be used. This paper will focus on the aggregation model, which has become more prominent during the past few years.
Through economies of scale, aggregators service and administer policies and may be able to invest a bit more efficiently than the seller was. Recently, the aggregator business has become quite competitive, with many new entrants, especially in the U.S. market. Aggregators can also domicile in jurisdictions with the most favorable capital requirements for their specific business models, thus reducing regulatory capital and increasing returns to shareholders.
The economics for this type of business seem to be working for both buyers and sellers, but what about the policyholder? This is exactly what insurance regulators around the world are exploring. With the increase in activity, regulators are “looking into the financial, operational and investment risks associated” with these transactions, according to recent conversations with four regulators. They are also concerned with policyholder protection. However, the chair of the board of a major aggregator recently said that regulation is “driving this business, not impeding it.” The president of another aggregator said that, as long as there is “sufficient capital to back the policies, regulators are happy.”
But there is more to in-force life insurance than simply paying benefits. Policies need to be updated as family circumstances change. If an aggregator is running off a block of business, the policyholders may not be receiving important services they need to keep their policies up to date. Aggregators will say that they actually do a better job servicing the policies because run-off is their core business. Their systems are newer and designed specifically for this business model, and the aggregators do not have new sales to offset lapses. Therefore, they need to maintain or improve persistency to meet shareholders’ expected returns.
Because most aggregators do not offer new policies, many policyholders may not be offered updates in coverage to meet changing needs in their lifecycles. The selling company will say that its agents and brokers will continue to treat these policyholders as customers, but regulators are becoming wary. One prominent European regulator said he would not approve the sale of a block of life insurance business when a third party services the policies. This regulator believes that the biometric and policyholder-behavior risks need to be with the same company as the administration. This, however, is not the norm in the U.S. or even other parts of Europe.
Another issue raised by regulators is the large — and growing — life insurance protection gap. Swiss Re estimates that the global mortality gap has reached $408 billion in 2020, a 6% increase from 2019. It seems unfathomable that the protection gap increased during a pandemic, when people were focused on their own mortality and that of family members. Others will argue that the pandemic impeded agents’ ability to sell policies by making it difficult to schedule paramedical exams and keeping people out of the office.
However, many insurers increased non-medical underwriting limits, making it easier to purchase life insurance without any additional exams. The Life Insurance Marketing and Research Association (LIMRA) announced that, while new life insurance policy sales in the U.S. increased 2% in 2020, annualized premiums dropped 3%. People were definitely considering purchasing life insurance during the pandemic, as the Medical Information Bureau (MIB) showed an increase in applications during 2020 (see Figure 2), but many did not complete the purchase. Some refer to this as the intention gap, another disturbing trend that needs to be addressed. Flat life insurance sales during the worst pandemic in 100 years is disappointing, nonetheless.
Technology Can Help
There has been a lot of talk in the industry about technology. Life insurers are investing millions of dollars and dedicating much time to start-up companies that claim to issue policies in minutes and to have developed more efficient underwriting and better fraud management. Willis Towers Watson (WTW), in its “Quarterly InsurTech Briefing Q1 2021,” announced that investment in insurtech for Q1 2021 reached a record $2.55 billion, spread over 146 deals (see Figure 3). About 31% of this funding is associated with the life insurance industry. WTW says that it will soon have to drop the term “insurtech” as these new technologies are becoming the norm. Even with the multitude of start-ups and insurtech investments, worldwide life insurance sales have been flat at best. Will these new ideas eventually gain traction that turn into tangible insurance sales?
One area of increased interest is in the field of artificial intelligence (AI). However, this technology is not as advanced as people might believe. Try asking an automated assistant to dial the phone of a friend with a foreign name. Sometimes, no matter how many times you say the name, the assistant just cannot understand it — until you receive a response such as “Ordering pizza.” (Although nice, hot pizza may take your mind off of whomever you were trying to call.)
In the insurance industry, AI has mainly been used for non-life insurance — particularly in fraud detection. With vast amounts of data now available, machines can comb through seemingly endless numbers of claims to search for patterns in suspicious claims submissions. Machines can find certain repetitive behaviors not easily discovered by humans. Not only can claims managers use AI to assist in identifying potential fraud, AI can also help find ways to prevent fraud.
AI is also being used more and more in the field of auto insurance, especially with telematics and autonomous vehicles. A newer use of AI is to match up a caller with the correct servicer. Using data such as previous issues, age, location and policy type, machines can learn how to increase sales and decrease lapses. Call-center activity is vitally important to the success of auto insurers, yet this activity is typically delegated to operations or IT. Perhaps it is time to realize that call centers should be under the control of the sales team.
For life insurance, the only real use of AI has been in the field of medical underwriting. Risk assessment is probably the most important aspect of life insurance, and companies spend a lot of money choosing their risks carefully. This typically involves costly paramedical exams, blood tests, nonmedical questionnaires and perhaps stress tests. These tests are not only expensive, they are time-consuming and can severely delay the delivery of a policy. Agents complain that lengthy delays in policy issuance are a major cause of non-taken ratios — which could increase the intention gap. Using AI to select risks more quickly and without time-consuming and expensive exams could lower prices and speed delivery of policies. This can help close the intention gap and increase sales.
Another use of AI for life insurance could be for in-force management. Given the robust market for blocks of in-force life insurance business and the continuing need for protection, it may be time for a change to the current business model. Imagine using AI to examine in-force policyholders and determine which were in need of policy changes — increase in face amount, sale of new products (annuities, long-term care, disability, etc.), decrease in face amount (could prevent an imminent lapse and help build customer loyalty). Using AI as a tool to assist agents in identifying customer needs could be very powerful.
Aggregators could use AI to sift through in-force life insurance policies to determine which are best-suited for policy changes. If the aggregator does not issue new policies, it can contract with third-party insurers to write the new policies and receive a commission. This would be good for all parties. The aggregator makes extra returns for its shareholders by marketing a highly valuable asset — its policyholders. Insurers have a great source of new business — people who have already purchased life insurance and who have been identified by AI as likely to purchase additional insurance. AI companies can sell their software to aggregators and insurers. And, most importantly, policyholders are given the opportunity to purchase important products to help secure the financial well-being of their families.
Life insurance is a very involved business. Insurers must develop complex products that can last more than 50 years. Then they must market and sell these products using an array of channels. Applications must be underwritten carefully to mitigate the risk of anti-selection. Once a policy is sold, it must be administered, which includes allowing for a host of policy changes. Reserves and capital held against these policies must be invested prudently, according to strict regulatory guidelines. Claims and other benefits must be paid with a watchful eye for fraud.
Traditionally, these completely different competencies have typically fallen under one roof. But there seems to be change in the wind. With a combination of a low-interest-rate environment, the Great Recession, a once-in-100-years pandemic and stricter regulation, it is becoming more and more difficult to manage all aspects of life insurance while meeting shareholder expectations. The life insurance industry is decentralizing before our eyes. It is too early to say whether this new approach will succeed, but, if interest rates remain at record lows, the odds of this happening increase.
Regulators will continue to scrutinize this evolving business model with the goal of protecting policyholders. The worst thing for a policyholder, insurer and regulator is for a life insurer to be unable to make a claim payment, especially if the policyholder has been paying premiums for 30 or 40 years. One default could destroy the entire model.
The sale of individual life insurance may well be best-suited to mutual companies, but the new model that is emerging might be well-suited to insurers, aggregators, shareholders, regulators and, most importantly, policyholders. Bringing the many activities that life insurers currently perform under one roof to separate companies that excel in one or two of these competencies may be the wave of the future. New technologies such as AI can assist in meeting policyholder needs. Regulators will have to show some flexibility and patience. It will be very interesting to see how the life insurance industry evolves.
Who said the life insurance industry is dull?
*This article originally said the Hartford had discontinued sales of life insurance. In fact, while it no longer sells individual policies, it still provides group policies.