Against a backdrop of stagnant industry growth and technological innovation, the US life insurance industry has begun to experience a shift in the balance of power, away from distributors and manufacturers and towards the end consumer.
Technological advances embraced by other financial service industries have created a consumer base that is armed with more information and that expects a certain level of service. As an industry that has also been challenged by external factors such as low interest rates and an uncertain regulatory environment, US life insurers will need to find ways to answer the needs of these end consumers to foster industry growth.
What does this change in bargaining power mean for the life insurance industry and the product landscape as we know it? At EY, we continuously monitor the product and solution landscape to help manufacturers and distributors keep abreast of the ever changing market.
We have identified the top five things to watch for in the life insurance product space, all influenced greatly by this shift in bargaining power.
(1) Simplification in product design and processes
In order to build scale in the retail market and address the demands of consumers, the industry needs to simplify processes and architecture. Complementing these streamlined processes are simplified products, which address consumer needs without all the confusing bells and whistles.
Despite the industry readily acknowledging this need for simplification, some of the most recent products are the most complex yet. The current product space has too many product features and the differentiators are not clear, confusing the end consumer and distribution.
Companies that focus on designing simplified products that are supported by streamlined distribution and maintenance processes will be able to better embrace the technological advances consumers are accustomed to, therefore allowing them to play in this new space while addressing consumer’s needs and creating a value proposition for both the customer and the company.
(2) Increased prevalence of combination products with accelerated benefit riders
Accelerated benefit riders, including long-term care and critical illness, are not necessarily a new concept, but they have recently been on the rise and will continue to represent a growth area for the life insurance industry. While the premise of adding accelerated benefit riders to life products goes against the move towards simplicity, these combination products address a specific consumer need, especially regarding long-term care costs.
As lifespans lengthen and the costs associated with a critical illness or use of an assisted living facility continue to rise, combination life insurance products offer a more affordable option to consumers looking for insurance coverage for these events, while removing the “use it or lose it” value proposition associated with the standalone version of these products.
These products have a more acceptable risk profile for the manufacturer, while adding value for the consumer when priced right. There are a lot of reasons these combination products with accelerated benefits should be considered by consumers. And through the right education and awareness, this is an area where the industry could see sustained growth in the future.
(3) Underwriting advancements and streamlining
In an era where other financial services have enhanced the buying process for consumers, the insurance industry has continued with a more burdensome and invasive underwriting process. Current underwriting procedures and processes are a known pain point for consumers and represent an area ripe for change.
Companies need to rely on the data and analytics available to them to develop a more streamlined underwriting process that is less invasive for the consumer. They need to leverage electronic health records, prescription databases, credit information and other big data sources along with their familiarity with predictive underwriting techniques to offer more affordable simplified issue products, while still controlling their underwriting risk.
Underwriting enhancements is a crucial step for all life insurers that want to remain competitive. Those that choose not to adapt and make changes will be left behind.
(4) Changes to the advice model
In recent years, consumer expectations have changed and today’s consumers desire the best information available to make educated purchase decisions. They seek much of this information through the digital space, specifically the Internet and social media.
The breadth of information now available on the Internet has created a consumer base that is now able to research and self-educate from many places they trust. The knowledge obtained through this self-research becomes the driver behind the decision to shop for and purchase products.
This is prevalent for retail products and financial services alike and will have a great influence on the advice model currently employed by the life insurance industry. Consumers now desire the ability to find the best information available with an assurance that it is high-quality and reliable information — the shift is that this assurance no longer needs to come from a traditional agent.
With this shift towards a self-educated consumer, agents are being used to confirm what the consumer already wants. The role of agents will change as they serve as a confirmer of the information already obtained by the consumer and a facilitator of the purchase.
(5) Internet distribution
During the last two decades, the Internet economy has transformed industries and become a powerful driver of economic growth. There is no reason to believe it will not have the same effect on the life insurance industry. Simpler products and processes, enhanced underwriting capabilities and changes in the advice model will all help support a shift toward the distribution of life products over the Internet.
This distribution channel has been slow to gain traction, but generational differences create a need for life insurance companies to place strategic bets in this area so as not to lose access to a key consumer base. Life insurance companies that build a brand amongst the younger generations now will situate themselves for future growth as the needs of these consumers increase with age. Those companies that sit on the sidelines will watch their competitors or outside entrants take their market share.
Historically, the life insurance industry has been slow to change, but as dynamics continue to shift and consumers demand more from their financial service providers, insurance companies will need to embrace these changes or be left behind.
The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young LLP or the global EY organization.