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.