The problem is well-known: Individual life sales remain in a historic trench, and as a result, the difference between the levels of insurance that people have versus the levels that they really need, is growing from a gap into a chasm. The solution is just as well-known, and in its own way is part of the problem: It is the middle market that suffers the worst mortality protection gap, many of whom have some form of group insurance that provides a sliver of coverage, but covers one’s needs about as well as ordering a steak dinner and only getting the sprig of parsley on the side. At the same time, the real opportunity for life sales to pick back up is for insurers across the board to target the middle market aggressively and effectively. But the industry has built in some inherent roadblocks to that, and unless it figures out how to deal with them, it will continue to be the architect of its own problems.
So says Neil Sprackling, managing director of Swiss Re’s life insurance operations, and a key mind behind Swiss Re’s 2012 report, “The mortality protection gap in the U.S.” National Underwriter met with Sprackling this spring to discuss the conclusions of the report, and how, even more than a year later, so little has changed in the market that the report might as well have been published yesterday.
According to the study, in 2012, the average U.S. family with a primary breadwinner under the age of 55 had an income of $77,800. That family would need a lump sum of $797,000 in an investment portfolio — with Social Security picking up the remaining $17,900 a year — to maintain its standards of living if the primary breadwinner were to die. There would be an additional $49,100 required to cover existing household debt ($114,200 of debts vs. $65,100 in available financial assets). The average life insurance coverage is $226,100 per family, leaving a mortality protection gap of $377,900. Nationwide, that means Americans are underinsured by some $20 trillion, or 135 percent of the GDP. That number is 10 percent higher than it was in 2001.
Sprackling says that Swiss Re updates its protection gap report every two years, but that he does not expect to see any big movement in any particular life market from one year to the next. The gap, as it were, is remaining a depressingly evergreen topic, especially when a healthy 35-year-old man can buy $450,000 worth of coverage for 20 years for about half the cost of a cup of coffee a day.
“We are using the protection gap to track improvement and reduction of that gap,” Sprackling explains. “The only way to see that materially is if the market has engaged with the concept. If the industry really picks up on the middle market, in time, we’ll see the protection gap shrink over a three- to five-year period.” But therein lies the challenge: Getting the industry to do a better job in engaging the middle market, and getting the middle market to understand better why buying life insurance is a really good idea.
With a low interest rate environment challenging sales of more traditional permanent life products, and with regulatory changes coming at the beginning of this year, with the AG38 actuarial standard to strengthen reserves on universal life products … a lot of companies are finding the sale of heavily interest rate-driven products more challenging than they were in the past, Sprackling says. Those products are still relevant. But it’s just a tough environment to sell something underwritten by interest rate guarantees.
As a result, Sprackling sees a big push on pure protection products, such as term life. “We’re seeing companies coming out with classic, simplified-issue term products, and stripping back some of the complexities that got into those products over the last 15 to 20 years,” Sprackling says. “We’re getting back to asking the prospect fewer questions, and relying more on background checks so there can be quicker issue.”
He adds that the work MetLife has done in conjunction with Walmart, to provide a simple life insurance product in a box you can buy right off the shelf, has done a lot to raise consumer awareness. “People can mention it by name because of the advertising around it,” Sprackling says, “And that is a really good thing for both the industry and for the end consumer. A lot of this effort is built around awareness and to get people to understand the underlying need. Getting the message out with strong brands like MetLife and Walmart is the point.”
These kinds of effort only go halfway, though. For Sprackling, there are fundamental issues with the nature of the products themselves, and the distribution system designed to sell them, that are inherently limiting the potential of the life insurance industry.