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Life Health > Life Insurance

Life insurers must adapt quickly to meet equity analysts’ expectations

By Daniele Presutti, Patrick M. Lyons

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Life insurers are operating in a challenging and fast-changing environment, with their businesses under enormous pressure from a range of external forces. To gain insight into the factors driving the ratings of insurance companies, as well as the strategies that insurance CEOs should adopt to improve valuations of their companies, we at Accenture commissioned a survey of leading insurance equity analysts around the world.

Examining the results  

Perhaps the most surprising finding of the survey is the bullish expectations which analysts have of the life industry’s top performers.  In 2012 as in previous years, analysts are demanding strong growth in annual revenue, as well as a nine-percent increase in pre-tax return on equity over 2011. Since insurers are still struggling with the global economic crisis, along with weak demand and new regulatory requirements, merely maintaining their positions might have seemed like a reasonable expectation, but equity analysts continue to expect revenue and ROE growth. 

A survey question about the impact of the tough market conditions provides insight into analysts’ thinking: No fewer than 55 percent expect the impact to be positive for the industry’s front runners. Analysts anticipate that the weaker players, unable to adapt to the more challenging environment, will lose share, be acquired or eliminated. The leaders, however, will be forced to strengthen their capabilities and will have greater capacity for growth. 

The research indicates that organic growth is likely to be more important than inorganic growth, with analysts expecting insurers to concentrate their efforts somewhat more on emerging markets (with 44 percent saying these are critical) than mature markets (25 percent). However, they predict that mergers and acquisitions in emerging markets (20 percent) will contribute to growth—significantly more so than in mature markets (4 percent).

While organic growth will be challenging over the next three years, analysts believe that to achieve it insurers will need to better understand and predict customer behavior and needs.  More than a third (36 percent) say this is critical.  Other key factors include the ability to develop and implement a multi-channel distribution strategy (28 percent), and introduce new, relevant products (24 percent). Important opportunities for insurers include expanding the business in new markets, improving risk control and enhancing asset management capabilities.

Achieving the goals that equity analysts have set for life insurers, including a return on equity in excess of 15 percent, will not be easy. The industry is facing more severe headwinds than most insurance executives have ever experienced.

Demand is low and volatile, at least in mature markets, due to customers’ financial straits, their lack of confidence in equity-based investments, and their general mistrust of financial institutions. Low interest rates have decimated investment returns.

Stock market volatility has made high-return guarantee products a risky proposition; and, while repricing would help, the market resists this notion.  Additionally, regulations are forcing insurers to hold larger capital reserves and incur greater sales and other costs.

We see five main areas of opportunity for life insurers seeking to meet or surpass equity analysts’ expectations for profitable growth:

(1) Emerging markets.  Consumer demand is stronger in emerging markets, due to more buoyant economies as well as the rapid growth of affluent, under-insured middle classes. To capitalize on this opportunity, global carriers need to equip themselves for success in unfamiliar environments while grappling with complex regulatory regimes and confronting local competitors which, in recent years, have become much more sophisticated.

(2) The retirement market.  This is a traditional life insurance segment, but one that has been underexploited by the majority of carriers.  A recent global survey by Accenture of more than 8,000 consumers in 15 countries found that most people realize they need to save more now to provide for their retirement—but life insurers are not their preferred provider of retirement products.  If insurers can improve their engagement with consumers they should be well placed to take advantage of this huge opportunity.

(3) Controlling risk. Equity analysts agree that effective risk management is as important a contributor to profitability as cost reduction. Without the stability that risk control brings, investment in growth and cost reduction will be difficult to achieve. By aligning risk management with their business strategy, and integrating risk management with their key business processes, insurers will not only ensure compliance but will enhance operational performance, reduce costs and deliver distinctively superior customer service.

(4) Building customer-centricity.  Despite the burden of legacy platforms, insurers should keep working toward an integrated, multi-channel distribution strategy, incorporating innovations like mobility and social media.  This is essential to meeting prospects’ engagement preferences and delivering the service experience customers now demand. 

(5) Reducing costs.  Isolated efforts to cut costs are likely to do more harm than good.  Life insurers need a thorough review of the cost structure, with special attention to old, inefficient and inflexible operating models.  New sourcing strategies and organizational alignment present major opportunities for real savings. 

The necessity of change

Pursuing new directions will mean significant change for many life insurers.  Some carriers will have the capability, the balance sheet and the appetite to operate as full-function providers across multiple lines of business and in multiple geographies.  Others will realize they need to make changes in their operating model and distribution channels to compete effectively. 

They may improve their balance sheet by selling books of business or under-performing operating units.  Some carriers may decide that specialization—achieving scale within a more confined operational, product, or geographic footprint—is a surer strategy for success.   Whatever approach insurers take, they will likely require extensive reorganization to address the new capabilities, infrastructure, and operating model needed for continued profitable growth. 

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