EY’s James Maher, Insurance Sector Leader for EY Financial Services, writes about the challenges facing life insurers and how they are responding for Irish Broker Magazine.
The life insurance sector is undergoing significant pressures as a result of low interest rates and currently depressed economic contexts impacting on new business flows and client risk appetites. With that said, the need for the sector as a savings platform and a risk protection platform has never been more important. In this latest article, Life insurers meeting the challenge head on, we look at those challenges and see how insurance companies and the insurance ecosystem are responding.
Muted economic growth across the continent since the financial and eurozone crisis of 2007-09 has led to the stagnation of wages, an extended period of low-interest rates, and a subsequent lack of growth in the returns that funds are seeing. It is likely that a low and negative interest rate environment is here to stay, making it one of the biggest problems facing the industry. On top of this, Europe’s mature asset management sector poses a serious threat to life insurers’ ability to grow, which is particularly acute for Insurance Company owned Asset Managers.
Low growth across the sector has also been exacerbated by increased financial pressure being placed on the region’s working generation – a situation that has only been made worse by the Covid-19 pandemic. With another economic crisis looming large, individuals are being compelled to choose between their long-term goals of saving for a comfortable retirement and meeting short-term financial obligations, such as mortgage repayments or rent.
However, the current crisis is also an opportunity for life insurers to adjust their business models to build lasting, meaningful relationships with Financial Brokers and customers and increase their own profit margins. In practice, this will mean a shift to:
Consumers are increasingly looking for Financial Brokers and service providers to help them manage their day-to-day financial needs while helping them plan for the future.
Even without the rapid shift to working from home, the trend has been toward individuals being much more flexible in the choice and direction of their careers. Moreover, the rise of the gig economy is expected to accelerate as we move through 2020 and beyond.
However, to reach a generation of gig workers who are often lower-paid, the industry will need to transform its business model to reach a lower price point and find new ways to engage such customers in their long-term financial needs. “Employee benefits for the self-employed” might be one gateway offer to attract gig workers. Equally, greater digitisation could enable organisations to offer robo-advisory services as a cheaper, yet effective, way of servicing this growing customer segment.
Financial well-being and resilience are now recognised as crucial to people’s mental health and happiness. However, with government pension and retirement plans looking less viable, such financial well-being will be harder to achieve. Consumers are increasingly looking for Financial Brokers and service providers to help them manage their day-to-day financial needs while helping them plan for the future.
This increased choice – and the accompanying customer confusion for less financially-savvy consumers – presents a real opportunity for life insurers, pension providers and Financial Brokers. But by educating them in making the right decisions through related services such as financial planning tools, insurers can not only improve the financial well-being and resilience of customers but also build loyalty and trust. Financial Brokers have a major role to play here.
The threat of disruption from FinTech companies and Insurtechs continue to form part of the conversation around the future of the life insurance industry. Yet, to date, these companies have struggled to make significant headway.
Put simply, customers do not yet trust these relatively untested, young start-ups to take care of their long-term retirement funds. This gives Financial Brokers and traditional players a real opportunity to take advantage of their established reputations. The advice of a Financial Broker is key here.
To build on this, and compete effectively with FinTechs, traditional insurers must act faster to embrace new technologies – to not only service their customers better but to also attract the next generation of talent. Widespread use of automation and self-service can help to achieve a level of cost efficiency that allows both asset growth for customers and profit margin for the provider. Several established European insurers are already making efforts to improve these capabilities – often in partnership with FinTechs and other start-ups.
Covid-19 could also provide the push needed to help insurers make this leap and provide the digital tools that customers are demanding. The lockdown restrictions that came in across Europe have increased demand for online solutions that offer peace of mind and ease of use such as electronic signatures and document exchange. With these initiatives, organisations can provide the kind of personalised guidance and support that builds lasting customer trust and loyalty.
The insurers that will thrive in this new normal will offer their Brokers and customers not only the products they need to aid them in realising their financial and life goals, but also the support, advice, expertise and personalised user journeys that they have come to expect from all industries.
As we’ve mentioned, the pressure from low and negative interest rates is of particular concern in Europe, where regulations surrounding solvency make it more difficult for insurers to offer traditional products backed by a life fund. With rates below 1%, costs are a key differentiator for long-term investment providers.
The focus is a gradual shifting towards unit-linked products, thereby reducing insurers’ exposure to financial market risks while at the same time transferring those risks to customers. This is a growing cause for concern by regulators and has been called out by EIOPA as a risk to watch. However, it remains to be seen whether this strategy will work in the long run. Insurers must still lean toward their unique selling proposition: risk protection. Protection from both biometric and financial risk should not be abandoned in favour of performance-oriented products. However, it is a difficult balance to strike. To give themselves the best chance of success, insurers will have to work hard to transform their organisations. Investing heavily in technology will help reduce costs and increase the range of ancillary services that will favour the customer’s overall well-being.
Accumulated savings will serve different retirement needs for different customers. To accommodate each customer, insurers will have to provide an ecosystem of evolving products and services (also by partnering with Brokers). Here, health services are a natural integration. Several insurers now offer combinations of health and retirement products.
The insurers that will thrive in this new normal will offer their Brokers and customers not only the products they need to aid them in realising their financial and life goals, but also the support, advice, expertise, and personalised user journeys that they have come to expect from all industries. Here, an effective use of technology will be key to both providing the levels of service required and improving insurers’ efficiency. This, in turn, is crucial to increasing individuals’ confidence in being able to save for a comfortable retirement – and society’s ability to meet the needs of an aging population.
This article “Life Insurers meeting the challenge head on” first appeared in the December 2020 issue of Irish Broker. Don’t hesitate to reach out if you have a question.