Industry trends, strategies to stay competitive
As technology innovation, higher customer expectations and disruptive newcomers redefine the marketplace, insurers remain focused on growing top-line sales, bottom-line profitability, addressing challenges, and
competing in a dynamic industry. Our 2018 Insurance Industry Outlook pinpoints key opportunities and threats that should demand attention from insurers over the next 12-to-18 months.
Setting the agenda
Insurance company leaders have a lot on their plates. Political and regulatory upheavals around the world are changing some of the ground rules about how carriers may operate. An accelerating evolution in the way business is conducted is being driven by innovation and higher customer expectations, while disruptive newcomers are looking to take market share from incumbent insurers. In particular, carriers have been racing to keep up with insurance technology development, as we recently documented in Fintech by the numbers, which analyzes startup financing activity and trends.
2018 Insurance Industry Outlook
However, in preparing our annual insurance outlook, we recognize that most insurers remain focused on two overarching goals: growing top-line sales while bolstering bottom-line profitability. Standing in the way of insurers achieving these objectives are a wide range of challenges. Not all of them are within the industry’s control, such as rising interest rates and catastrophe losses. But how effectively insurers anticipate, prepare, and adapt to their shifting circumstances, both strategically and operationally, is well within their control, and can help differentiate them in the market.
Where do insurers stand as they enter 2018?
Insurer hopes for accelerated growth and improved bottom-line profitability were tempered throughout 2017 by the emergence of major speed bumps, both natural and man-made, although there seems to be cautious optimism for improving conditions in the year ahead. US property-casualty (P&C) insurers saw underwriting losses more than double, to $5.1 billion, for the first half of 2017 compared with the year before—an even more dramatic downturn when you consider the industry was in the black on underwriting by $3.1 billion during the same period two years ago.1 Soaring loss costs, led by higher catastrophe and auto claims, drove net income down 29 percent in the first half,2 and this was before huge third-quarter disaster claims from Hurricanes Harvey, Irma, and Maria. These storms reverberated globally, particularly within the reinsurance sector, as did claims from other massive natural disasters outside the United States, most notably September’s earthquake in Mexico.
On the other hand, a soft market beyond auto and property-catastrophe lines continues to prevail, with global insurance renewal rates falling for the seventeenth consecutive period in the second quarter of 2017.3 This appears mainly due to an overabundance of capital, particularly in the US market, with industry surplus as of June 30 at an all-time high of $704 billion.4 Even record storm losses would be unlikely to put more than a temporary dent in those reserves, most likely making recent hurricanes earnings events rather than serious capital concerns for most primary insurers—although reinsurers and those issuing insurance-linked securities may be harder-hit over the long term as mounting catastrophe claims are settled.
On the life insurance and annuity (L&A) side of the business, most carriers seemed to enter 2017 expecting small, but steady US interest-rate increases to put their portfolios on a more solid foundation. However, those expectations likely quickly abated, given the economic headwinds keeping the Federal Reserve from taking more aggressive action, thus leaving rates at historically low levels and undermining industry profitability. Stubbornly low fixed-investment yields are prompting L&A writers to cut the crediting rates offered to
policyholders.5
The MIB Life Index, which tends to give a strong indication of individually underwritten life insurance activity, fell 3.2 percent the first half of 2017, while activity in the critical 45-59 target age segment was down 5.5 percent.6 Meanwhile, revenue from annuity sales was down 18 percent in the first quarter of 2017, according to the Insured Retirement Institute.7 Life insurance and annuities could be a harder sell in the United States in 2018, given the potential impact of new fiduciary standards set by the US Department of Labor on the sale of retirement-related products. While the final form of the fiduciary rule is still being debated following the change in US presidential administrations, many insurers have already made substantial changes in their business model to accommodate the regulation, and most are unlikely to turn back the clock at this point, instead adapting to their new operating environment (see “L&A insurers in a ‘hurry up and wait’ position over DOL fiduciary rule”).
A similar challenge faces carriers in the United Kingdom, where “pension freedom” was established two years ago, allowing pensioners to draw down their retirement accounts at will. Before the rule change, most retirees had purchased annuities offering regular payments for life. Annuity sales have plummeted 91 percent since
“pension freedom.”
Growth prospects on the horizon
Looking ahead and abroad, emerging markets— particularly China—appearto be a better bet for rapid growth, at least on a percentage basis, especially for P&C insurers. A report by Swiss Re’s sigma research unit found that emerging market P&C premiums rose 9.6 percent in 2016, compared with overall global growth of 3.7 percent—with China, now the world’s third-largest insurance market, seeing non-life premiums soar 20 percent. In addition to expected hikes in property-catastrophe premiums, particularly for reinsurance, look for a large share of US P&C premium gains to be generated by higher auto insurance rates (which were already rising in 2017 due to worsening loss frequency and severity). Even with price increases, however, profitability could remain elusive, given the multitude of emerging risk factors confronting auto carriers, such as the rise in distracted driving and the proliferation of more expensive sensor-laden vehicles. Recent disaster losses are exacerbating this trend, as Hurricane Harvey is believed to have damaged more vehicles than any storm in history—perhaps as many as one million.10
On the L&A side, insurers can still recover their footing in 2018 if interest rates are raised on a more regular basis. There are already some positive signs. The gap is widening between what consumers can earn on fixed annuity contracts and bank certificates of deposit, with annuity holders having the added benefit of tax-deferred status on gains.11 And while the life policy count fell by 4 percent in the second quarter of 2017 and 3 percent in the first half, new annualized premiums were actually up 4 percent in the first half.12
The individual market is just one channel where L&A insurers can seek growth. Group life sales—which have the advantage of guaranteed issue and little, if any, direct contact with the insured—have surpassed individual policy purchases for the first time.13
There remains plenty of room for expansion across the board. While nearly five million more US households had life insurance as of 2016 than in 2010, those gains were fueled by population growth rather than higher market penetration, which remains at its record low of just 30 percent.14
However, to accelerate growth, L&A insurers should consider simplifying their products and streamlining their application process to make policies easier to understand, underwrite, and purchase.
In short, insurers can take advantage of growth opportunities, operational improvement, and expense reduction in 2018 if they can
overcome a host of internal and external obstacles standing in their way. The following are among the options they should consider to potentially improve their top and bottom lines, as well as stay ahead
of the competition in the year ahead.
Growth options: Insurers can capitalize on connectivity, digitalization Life and annuity carriers look to break the mold on underwriting, distribution
Why should this be high on insurer agendas?
An age-old enigma is how to overcome buyer reluctance to purchase life and annuity products. The stage is seemingly set, with nearly half of the US population uninsured or underinsured,15 and a similar percentage of US families having no retirement account savings,16 yet sales of L&A products remain relatively sluggish.
Historically low interest rates may have undermined the take-up of rate-sensitive L&A products, and stymied company profitability for the last several years. While the likelihood of additional interest rate increases in 2018 should help, macroeconomic factors alone are unlikely to substantially boost penetration rates absent more
fundamental business-model changes.
As digital capabilities infiltrate nearly every industry, there appears to be a big opportunity for L&A companies to transform their business model. In fact, unless the industry commits to integrating transformative technologies more rapidly into their operations, L&A companies could risk not only continued stagnation, but potential leakage to InsurTech innovators as well.
What is changing?
Several insurers are experimenting with connectivity and advanced analytics to narrow the life application-to-closing process from weeks to minutes, lowering onboarding costs, and minimizing the consumer dropout rate. Accelerated underwriting metrics, based on digitally available medical data, drug prescription information, and potentially even facial analytics technology can be used to estimate an applicant’s life expectancy and eliminate traditional medical tests.
Digitalization of underwriting can also enable online distribution capabilities, allowing insurers to cast their nets wider and embrace younger demographics that often prefer a more virtual experience.
Underwriting digitalization also could remove a barrier to purchase with those of all ages discouraged by the long and complicated life insurance application process. Indeed, Deloitte’s work on life insurance underwriting suggests that the likelihood of prospects buying a policy once they apply increases from about 70 percent to nearly 90 percent as the underwriting and application process gets closer to real time.17 Beyond underwriting, distribution also seems ripe for digitalization.
In one example, Abaris, an InsurTech startup, launched a direct-to-consumer online platform for deferred income annuities. On the life insurance side, Ladder, another InsurTech startup, is now offering direct-to-consumer policies within minutes, particularly targeting younger consumers who may often avoid purchasing such coverage, given the time it traditionally takes to do so. Moreover, Ladder does not charge annual policy fees or employ commissioned agents, potentially gaining a competitive advantage relative to incumbents.18 Then there is the Swedish InsurTech startup, Bima, which is offering accident and life micro-insurance to low-income consumers in developing regions of Africa, Asia, and Latin America via prepaid credit on their mobile devices.19 The game-changing potential of such automated lead-generation and direct-sales platforms could challenge L&A providers to modernize their business models to maintain, let alone expand, their client base.
In addition, by connecting with clients via sensor devices, insurers can build more regular and meaningful client engagement. For example, insurers can harness data from devices that monitor vital signs, activity, nutrient consumption, and sleep patterns for more precise underwriting and pricing while offering value-added fitness and lifestyle feedback. John Hancock’s Vitality program is one such initiative, offering policyholders premium savings and rewards for completing health and fitness related activities, tracked by smartphone apps and fitness devices.20
What should insurers do?
L&A insurers should embed digital technology across their organizations—as part of an offensive strategy to expand their market
share and defensive measure to fend off potential competition from nontraditional InsurTech companies. By harnessing and harvesting big data sources—perhaps with the help of third-party managed services specialists—insurers can streamline their often cumbersome and expensive operating models while both improving customer experience and lowering costs. Insurers may also want to consider teaming up with, investing in, and/or purchasing InsurTechs not just to expand digital capabilities, but to inject a more innovative element into their culture, and to accelerate the disruption of more time-consuming and expensive standard business processes.
