Tag Archives: Jamie Yoder

Insurance at a Tipping Point (Part 1)

Since the start of the decade, we’ve encouraged insurers and industry stakeholders to think about “Insurance 2020” as they formulate their strategies and try to turn change into opportunity. Insurance 2020’s central message is that whatever organizations are doing in the short term, they need to be looking at how to keep pace with the sweeping social, technological, environmental, economic and political (STEEP) developments ahead.

Now we’re at the mid-point between 2010 and 2020, and we thought it would be useful to review the developments we’ve seen to date and look ahead to the major trends coming up over the next five years and beyond.

Where are we now?

Insurance is an industry at the tipping point as it grapples with the impact of new technology, new distribution models, changing customer behavior and more exacting local, regional and global regulations. For some businesses, these developments are a potential source of disruption. Those taking part in our latest global CEO survey see more disruption ahead than CEOs in any other commercial sector (see Figure 1), underlining the need for strategic re-evaluation and possible re-orientation. Yet for others, change offers competitive advantage. A telling indication of the mixed mood within the industry is that although nearly 60% of insurance CEOs see more opportunities than three years ago, almost the same proportion (61%) see more threats.

The long-term opportunities for insurers in a world where people are living longer and have more wealth to protect are evident. But the opportunities are also bringing fresh competition, both from within the insurance industry and from a raft of new entrants coming in from outside. The entrants include companies from other financial services sectors, technology giants, healthcare companies, venture capital firms and nimble start-ups.

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How are insurers feeling the impact of these developments?

Customer revolution

The insurance marketplace is becoming increasingly fragmented, with an aging population at one end of the spectrum and a less loyal and often hard to engage millennial generation at the other. The family structures and ethnic make-up within many markets are also becoming more varied and complex, which has implications for product design, marketing and sales. This splintering customer base and the need to develop relevant and engaging products and solutions present both a challenge and an opportunity for insurers. On the life, annuities and pensions side, insurers could design targeted plans for single parents or shift from living benefits to well-being or quality of life support for younger people. On the property and casualty (P&C) side, insurers could create partnerships with manufacturers and service companies. Insurers could also offer coverage for different lifestyles, offering flexible, pay-as-you-use insurance or providing top-up coverage for people in peer-to-peer insurance plans.

As the nature of the marketplace changes, so do customer expectations. Customers want insurers to offer them the same kind of easy access, show the same understanding of needs and provide the sorts of targeted products that they’ve become accustomed to from online retailers and other highly customer-centric sectors. Digital developments offer part of the answer by enabling insurers to deliver anytime, anywhere convenience, streamline operations and reach untapped segments. Insurers are also using digital developments to enhance customer profiling, develop sales leads, tailor financial solutions to individual needs and, for P&C businesses in particular, improve claims assessment and settlement. Further priorities include the development of a seamless multi-channel experience, which allows customers to engage when and how they want without having to relay the same information with each interaction. Because the margins between customer retention and loss are finer than ever, the challenge for insurers is how to develop the genuinely customer-centric culture, organizational capabilities and decision-making processes needed to keep pace with ever-more-exacting customer expectations.

Digitization

Most insurers have invested in digital distribution, with some now moving beyond direct digital sales to models that embed products and services in people’s lives (e.g., pay-as-you drive insurance).

A parallel development is the proliferation of new sources of information and analytical techniques, which are beginning to reshape customer targeting, risk underwriting and financial advice. Ever greater access to data doesn’t just increase the speed of servicing and lower costs but also opens the way for ever greater precision, customization and adaptation. As sensors and other digital intelligence become a more pervasive element of the “Internet of Things,” savvy insurers can – and in some instances have – become trusted partners in areas ranging from health and well-being to home and commercial equipment care. Digital technology could extend the reach of life, annuities and pension coverage into largely untapped areas such as younger and lower-income segments.

Information advantage

Availability of both traditional and big data is exploding, with the resulting insights providing a valuable aid to customer-centricity and associated revenue growth. Yet many insurers are still finding it difficult to turn data into actionable insights. The keys to resolving this are as much about culture and organization as the application of technology. Making the most of the information and insight is also likely to require a move away from lengthy business planning to a faster and more flexible, data-led, iterative approach. Insurers would need to launch, test, obtain feedback and respond in a model similar to that used by many of today’s telecom and technology companies.

A combination of big data analytics, sensor technology and the communicating networks that make up the Internet of Things would allow insurers to anticipate risks and customer demands with far greater precision than ever before. The benefits would include not only keener pricing and sharper customer targeting but a decisive shift in insurers’ value model from reactive claims payer to preventative risk advisers.

The emerging game changer is the advance in analytics, from descriptive (what happened) and diagnostic (why it happened) analysis to predictive (what is likely to happen) and prescriptive (determining and ensuring the right outcome). This shift not only would enable insurers to anticipate what will happen and when, but also to respond actively. This offers great possibilities in areas ranging from more resilient supply chains and the elimination of design faults to stronger conversion rates for life insurers and more effective protection against fire and flood within property coverage.

Two-speed growth

These developments are coming to the fore against the backdrop of enduringly slow economic growth, continued low interest rates and soft P&C premiums within many developed markets. Interest rates will eventually begin to rise, which will cause some level of short-term disruption across the insurance sector, but over time higher interest rates will lead to higher levels of investment income.

On the P&C side, reserve releases have helped to bolster returns in a softening market. But redundant reserves are being depleted, making it harder to sustain reported returns.

The faster growing markets of South America, Asia, Africa and the Middle East (SAAAME) offer considerable long-term potential, though insurance penetration in 2013 was still only 2.7% of GDP in emerging markets and the share of global premiums only 17%. Penetration in their advanced counterparts was 8.3%. Rapid urbanization is set to be a key driver of growth within SAAAME markets, increasing the value of assets in need of protection. Urbanization also makes it harder for those from rural areas to call on the support of their extended families and hence increases take-up of life, annuities and pensions coverage. The corollary is the growing concentration of risk within these mega-metropolises.

Disruption and innovation

Many forward-looking insurers are developing new business models in areas ranging from tie-ups between reinsurance and investment management companies to a new generation of health, wealth and retirement solutions. The pace of change can only accelerate in the coming years as innovations become mainstream in areas ranging from wearables, the Internet of Things and automated driver assistance systems (ADAS) to partnerships with technology providers and crowd-sourced models of risk evaluation and transfer.

At the same time, a combination of digitization and new business models is disrupting the insurance marketplace by opening up new routes to market and new ways of engaging with customers. An increasing amount of standardized insurance will move over to mobile and Internet channels. But agents will still have a crucial role in helping businesses and retail customers to make sense of an ever-more-complex set of risks and to understand the trade-offs in managing them. On the life, annuities and pension side, this might include balancing the financial trade-offs between how much they want to live off now and their desired standard of living when they retire. On the P&C side, it would include designing effective aggregate protection for an increasingly broad and valuable array of assets and possessions.

Companies can bring innovations to market much faster and more easily than in the past. These companies include new entrants that are using advanced profiling techniques to target customers and cost-efficient digital distribution to undercut incumbent competitors. It’s too soon to say how successful these new entrants and start-ups will be, but they will undoubtedly provide further impetus to the changes in customer expectations and how insurers compete.

In the next two articles in this series, we look at how all these coalescing developments are likely to play out as we head toward 2020 and beyond and outline the strategic and operational implications for insurers. While we’ve set a nominal date of 2020, fast-moving businesses are already assessing and addressing these developments now as they look to keep pace with customer expectations and sharpen their competitive advantage.

What comes through strongly is the need for reinvention rather just adjustment if insurers want to sustain revenue and competitive relevance. As a result, many insurers will look very different by 2020 and certainly by 2025. As new entrants and new business models begin to change the industry landscape, it’s also important to not only scan for developments within insurance but also maintain a clear view of the challenges and opportunities coming from outside the industry.

For the full report from which this article is excerpted, click here.

Reinventing Life Insurance

Many life insurance executives with whom we have spoken say that their business needs to fundamentally change to be relevant in today’s market. Life insurance does face formidable challenges.

First, let’s take a hard look at some statistics. In 1950, there were approximately 23 million life policies in the U.S., covering a population of 156 million. In 2010, there were approximately 29 million policies covering a population of 311 million. The percentage of families owning life insurance assets has decreased from more than a third in 1992 to less than a quarter in 2007. By contrast, while less than  a third of the population owned mutual funds in 1990, more than two-fifths (or 51 million households and 88 million investors) did by 2009.

A number of socio-demographic, behavioral economic, competitive and technological changes explain the trends — and the need for reinventing life insurance:

  • Changing demography: Around 12% of men and an equal number of women were between the ages of 25 and 40 in 1950. However, only 10% of males and 9.9% of females were in that age cohort in 2010, and the percentage is set to drop to 9.6% and 9.1%, respectively, by 2050. This hurts life insurance in two main ways. First, the segment of the overall population that is in the typical age bracket for purchasing life insurance decreases. Second, as people see their parents and grandparents live longer, they tend to de-value the death benefits associated with life insurance.
  • Increasingly complex products: The life insurance industry initially offered simple products with easily understood death benefits. Over the past 30 years, the advent of universal and variable universal life, the proliferation of various riders to existing products and new types of annuities that highlight living benefits significantly increased product diversity but often have been difficult for customers to understand. Moreover, in the wake of the financial crisis, some complex products had both surprising and unwelcome effects on insurers themselves.
  • Individual decision-making takes the place of institutional decision-making: From the 1930s to the 1980s, the government and employers were providing many people life insurance, disability coverage and pensions. However, since then, individuals increasingly have had to make protection/investment decisions on their own. Unfortunately for insurers, many people have eschewed life insurance and spent their money elsewhere. If they have elected to invest, they often have chosen mutual funds, which often featured high returns from the mid-1980s to early 2000s.
  • Growth of intermediated distribution: The above factors and the need to explain complex new products led to the growth of intermediated distribution. Many insurers now distribute their products through independent brokers, captive agents, broker-dealers, bank channels and aggregators and also directly. It is expensive and difficult to effectively recruit, train and retain such a diffuse workforce, which has led to problems catering to existing customers.
  • Increasingly unfavorable distribution economics: Insurance agents are paid front-loaded commissions, some of which can be as high as the entire first-year premiums, with a small recurring percentage of the premium thereafter. Moreover, each layer adds a percentage commission to the premiums. All of this increases costs for both insurers and consumers. In contrast, mutual fund management fees are only 0.25% for passive funds and 1% to 2% for actively managed funds. In addition, while it is difficult to compare insurance agency fees, it is relatively easy to do so with mutual fund management fees.
  • New and changing customer preferences and expectations: Unlike their more patient forebears, Gens X and Y – who have increasing economic clout – demand simple products, transparent pricing and relationships, quick delivery and the convenience of dealing with insurers when and where they want. Insurers have been slower than other financial service providers in recognizing and reacting to this need.

A vicious cycle has begun (see graphic below). Insurers claim that, in large part because of product complexity, life insurance is “sold and not bought,” which justifies expensive, intermediated distribution. For many customers, product complexity, the need to deal with an agent, the lack of perceived need for death benefits and cost-of-living benefits make life products unappealing. In contrast, the mutual fund industry has grown tremendously by exploiting a more virtuous cycle: It offers many fairly simple products that often are available for direct purchase at a nominal fee.

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Reasons for optimism

Despite the bleak picture we have painted so far, we believe that reinventing life insurance and redesigning its business model are possible. This will require fundamental rethinking of value propositions, product design, distribution and delivery mechanisms and economics. Some of the most prescient insurers are already doing this and focusing on the following to become more attractive to consumers:

  • From living benefits to well-being benefits: There is no incentive built into life policy calculations for better living habits because there traditionally has been very little data for determining the correlation between these behaviors and life expectancy. However, the advent of wearable devices, real-time monitoring of exercise and activity levels and advances in medical sciences have resulted in a large body of behavioral data and some preliminary results. There are now websites that can help people determine their medical age based on their physical, psychological and physiological behaviors and conditions. We refer to all these factors collectively as “well-being behaviors.” Using the notion of a medical age or similar test as part of the life underwriting process, insurers can create an explicit link between “well-being behaviors” and expected mortality. This link can fundamentally alter the relevance and utility of life insurance by helping policyholders live longer and more healthily and by helping insurers understand and price risk better.
  • From death benefits to quality of life: Well-being benefits promise to create a more meaningful connection between insurers and policyholders. Rather than just offering benefits when a policyholder dies, insurers can play a more active role in changing policyholder behaviors to delay or help prevent the onset of certain health conditions, promote a better quality of life and even extend insureds’ life spans. This would give insurers the opportunity to engage with policyholders on a daily (or even more frequent) basis to collect behavioral data on their behalf and educate them on more healthy behaviors and lifestyle changes. To encourage sharing of such personal information, insurers could provide policyholders financial (e.g., lower premiums) and non-financial (e.g., health) benefits.
  • From limited to broad appeal: Life insurance purchases are increasingly limited to the risk-averse, young couples and families with children. Well-being benefits are likely to appeal to additional, typically affluent segments that tend to focus on staying fit and healthy, including both younger and active older customers. For a sector that has had significant challenges attracting young, single, healthy individuals, this represents a great opportunity to expand the life market, as well as attract older customers who may think it is too late to purchase life products.
  • From long-term to short-term renewable contracts: Typical life insurance contracts are for the long term. However, this is a deterrent to most customers today. Moreover, behavioral economics shows us that individuals are not particularly good at making long-term saving decisions, especially when there may be a high cost (i.e., surrender charges) to recover from a mistake. Therefore, individuals tend to delay purchasing or rationalize not having life insurance at all. With well-being benefits, contract durations can be much shorter — even only one year.
  • Toward a disintermediated direct model: Prevailing industry sentiment is that “life insurance is sold, not bought,” and by advisers who can educate and advise customers on complex products. However, well-being benefits offer a value proposition that customers can easily understand (e.g., consuming X calories per day and exercising Y hours a day can lead to a decrease in medical age by Z months), as well as much shorter contract durations. Because of their transparency, these products can be sold to the consumer without intermediaries. More health-conscious segments (e.g., the young, professional and wealthy) also are likely to be more technologically savvy and hence prefer direct online/call center distribution. Over time, this model could bring down distribution costs because there will be fewer commissions for intermediaries and fixed costs that can be amortized over a large group of early adopters.

We realize that life insurers tend to be very conservative and skeptical about wholesale re-engineering. They often demand proof that new value propositions can be successful over the long term. However, there are markets in which life insurers have successfully deployed the well-being value proposition and have consistently demonstrated superior performance over the past decade. Moreover, there are clear similarities to what has happened in the U.S. auto insurance market over the last 20 years. Auto insurance has progressively moved from a face-to-face, agency-driven sale to a real-time, telematics-supported, transparent and direct or multi-channel distribution model. As a result, price transparency has increased, products are more standardized, customer switching has increased and real-time information is increasingly informing product pricing and servicing.

Implications

Significantly changing products and redesigning a long-established business model is no easy task. The company will have to redefine its value proposition, target individuals through different messages and channels, simplify product design, re-engineer distribution and product economics, change the underwriting process to take into account real-time sensor information and make the intake and policy administration process more straight-through and real-time.

So, where should life insurers start? We propose a four step “LITE” (Learn-Insight-Test-Enhance) approach:

  • Learn your target segments’ needs. Life insurers should partner with health insurers, wellness companies and manufacturers of wearable sensors to collect data and understand the exercise and dietary behaviors of different customer segments. Some leading health and life insurers have started doing this with group plans, where employers have an incentive to encourage healthy lifestyles among their employees and therefore reduce claims and premiums.
  • Build the models that can provide insight. Building simulation models of exercise and dietary behavior and their impact on medical age is critical. Collecting data from sensors to calibrate these models and ascertain the efficacy of these models will help insurers determine appropriate underwriting factors.
  • Test initial hypotheses with behavioral pilots. Building and calibrating simulation models will provide insights into the behavioral interventions that need field testing. Running pilots with target individuals or specific employer groups in a group plan will help test concepts and refine the value proposition.
  • Enhance and roll out the new value proposition. Based on the results of pilot programs, insurers can refine and enhance the value proposition for specific segments. Then, redesign of the marketing, distribution, product design, new business, operations and servicing can occur with these changes in mind.

Insurance CEOs See Wave of Disruption

The insurance marketplace is transforming, creating openings for some and challenges for others. According to the PwC Global CEO Survey of insurance industry CEOs, 59% of insurance CEOs believe there are more opportunities than there were three years ago, but 61% see more threats.

The fact that people are living longer and have more wealth to protect presents insurers with an opportunity. The threats to insurers include mounting commoditization, the squeeze on margins and increase in self-insurance. These threats reflect both intensifying price competition and difficulties in conveying the true value of the coverage that insurers sell. Regulation is creating upheaval and more costs on the one side and diverting attention from other strategic challenges on the other.

Disruption on multiple fronts

Insurance CEOs believe that new regulation, increasing competition, technological developments and changes in distribution will have more of a disruptive impact over the next five years than CEOs in almost all other industries.

Realizing the digital potential

Insurance CEOs recognize how digital technology can help them sharpen data analytics (90%), strengthen operational efficiency (88%) and enhance customer experience (81%).

Yet are they making the most of digital’s potential? Most insurers are still primarily focused on e-commerce — doing what they already do just via a different channel. Leaders are using digital to engage more closely with customers, fine-tune underwriting and develop customized risk and financial solutions. They’re also pushing back frontiers in areas like real-time risk monitoring, more active risk prevention and lowering the cost of life and pensions options for younger and less wealthy consumers.

Questions to ponder:

  • Can you meet the challenge of a changing business environment, including from technology and other financial services (FS) companies?
  • Is change a threat or an opportunity?

Seeking out complementary capabilities

Nearly half of insurance CEOs plan to enter into a joint venture or strategic alliance over the next 12 months. Two-thirds see these tie-ups as an opportunity to gain access to new customers (much more than in other FS sectors).

Business networks, customers and suppliers are seen as the most important focus for strategic collaborations. Examples could include affinity groups or manufacturers. A further possibility is that one of the telecoms or Internet giants will want a tie-up with an insurer to help it move into the market.

More than 30% of insurance CEOs see alliances as an opportunity to strengthen innovation and gain access to new and emerging technologies. Yet two-thirds currently do not have plans to partner with start-ups, even though such alliances could provide valuable access to the new ideas and technologies they need.

Attracting fresh ideas and skills

A rapidly changing market requires a more diverse workforce with new talents. 80% of insurance CEOs now look for a much broader range of skills than before. At the same time, they recognize the challenges; 71% — even more than last year — seeing the limited availability of key skills as a threat to growth.

Diversity is now recognized as a key way to enhance business performance, innovation and customer satisfaction. Nearly three-quarters of insurance CEOs have a strategy to promote talent diversity and inclusiveness or plan to adopt one. But nearly 40% have no plans to seek out talent in different geographies, industries or demographic segments.

Questions to ponder:

  • How could collaboration help you reach new markets and sharpen innovation?
  • Is your definition of diversity broad enough to identify and hire tomorrow’s workforce?