Life insurers have to face facts: 2013 is going to be another challenging year. The same factors that have led to slow growth and diminished profit margins in recent years – including low interest rates and a sluggish economic recovery – will stay in play in 2013. More troubling, perhaps, are long-term changes in consumer preferences and behavior.
In a recent consumer survey conducted by Accenture, 75 percent of consumers feel insurers generally offer the same products and services. Over 50 percent of consumers do not trust insurers to provide neutral information and advice. Fewer customers are buying life insurance—with LIMRA saying that life insurance purchases reached a 50 year low in 2012—and consumers see little differentiation among insurers.
As life insurers report on their fourth quarter and year-end performance for 2012, the impact of these trends can be seen in financial results. Pressure on premium and investment income led to lower net income, higher expense ratios and lower return on equity.
Yet, while these underlying trends may seem discouraging, life insurers can take comfort in the emergence of several major market opportunities, including the large number of uninsured or underinsured Americans; the significant need for retirement solutions; and the increased demand for voluntary and/or workplace benefit provisions stemming from fundamental changes in employee benefits cost structures and service models.
These are large numbers indeed. For example, LIMRA says roughly 35 million U.S. households are uninsured, and half of all households say they need more life insurance. Similarly, LIMRA estimates that nearly half of U.S. households do not contribute to a retirement plan. Our own research, however, indicates that life insurers are not the preferred providers of retirement products. Life insurers must improve their engagement with consumers to take advantage of this huge opportunity.
Life insurers with the right mix of products, the right distribution strategies and the right controls on expenses have the chance to gain market share as these trends re-shape the market. In setting the 2013 management agenda, we think CEOs and other top managers should focus on three key items:
(1) Aggressive Expense Management
Expenses are an area over which insurers can establish and maintain control with immediate, positive returns. Many of the easier expense targets have been identified and addressed, but 2013 can be a year for working on more challenging (but more rewarding) initiatives, such as transforming the operating model through the use of shared services, and innovative outcome based sourcing models.
Integrating functions such as finance and IT is not a new trend, but leading insurers are using shared services to establish centers of excellence and generate real advances in process excellence, service quality and many other key areas. The business model changes that should be considered to drive sustained changes in the cost curve should focus on strategies that shift to variable-based versus fixed cost structures. This permits a faster, more agile response to market changes.
In our experience, transforming the operating model could reduce operating expenses over 30 percent, improve speed and cost to market by 20 to 30 percent, and improve service costs to policyholders by over 20 percent.
(2) Optimization of Distribution and Service Strategies
Life insurers have implemented improvements in the cross-channel customer and agent experience, but have done so in a fragmented, piecemeal manner. It’s time to recognize the importance of a comprehensive approach encompassing distribution strategy and management, enhancing the marketing process, and capturing the voice of both the customer and the agent. Reshaping distribution strategies for advisors and directly to consumers is required to increase the relevancy and value of customer interaction and experience. Doing so should lead to better agency and sales performance through improvements in agency technology, training delivery, recruitment, and incentive compensation.
It’s difficult in this case to accomplish “B” without “A”. Operating model and platform modernization can provide the foundation for new approaches to service and distribution, including expansion of digital capabilities, both mobile and social.
(3) Leveraging Analytics to Increase Customer Insight
In a world in which customers have immediate access to massive quantities of information, it’s harder than ever to discern what drives customer decisions. Analytics can not only help insurers understand their customers’ needs; it can help determine how to provide them with the information they want in the way they want it delivered.
In 2013 and beyond, life insurers must be able to provide their current and prospective customers with products and services tailored to their specific needs. Developing the analytics capabilities to accomplish this—including accessing and reporting on data, predictive modeling, and statistical analysis—will depend on the high quality data generated by modern, integrated systems. There is a significant opportunity to improve cross-selling and up-selling results through deeper insight into how customers want to buy and be serviced; and by tailoring engagement models and offerings to support that desired experience.
Despite the difficult environment that life insurers have experienced since the economic crisis, customers need life insurance and retirement products as much—if not more—than ever. Life insurance companies are now realizing the interdependence between strong operating and IT platforms and the sophisticated use of analytics to support innovative channel and distribution strategies. Life insurers that move quickly and decisively on both sides of the equation in 2013 will see the greatest benefits in an improving economy.