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.
Nine out of ten individual life policies are currently sold through an agent, who is, on average, in their 50s. And, on average, most of their sales are to clients of the same age as they gravitate to customers of their own generation. But as the client base — and the industry that serves it — ages in lockstep, life companies are struggling both to bring in a new generation of distribution, and to serve customers from the ages of 25–45, where the mortality gap is biggest. From a pure life insurance need, the industry is ignoring the 25–45 segment, Sprackling said, and serving that segment is the industry’s greatest need right now.
“We have chased the more affluent end of the market and a higher overall age of client, in the boomer and senior generations. As a result, we simply are not good at addressing the 25–45 bracket,” Sprackling says. “Do most people want to sit down with an agent or not? Most people do not want that. But this band of consumers in particular may not want traditional outreach. Maybe they want to do their business over the net. Maybe they want to meet with a producer by way of Skype. Is the industry really ready for that? No. It might be getting better at it, but it still is not ready.”
Being mindful of how to engage those customers is also key, he notes. Right now, it is not particularly easy for a customer to buy life insurance online. But what about personal auto coverage? A customer can go to a personal auto website and get a quote with a single click. Life insurers could have that capability if desired, but instead it stresses that clients call their agent instead. That is presumptuous, Sprackling says, and it results in a loss of sales flexibility.
Simplifying policy issuance would also go a long way. Much of the industry, Sprackling says, is still operating on a 25-year-old methodology when it comes to deciding how to issue policies, and there is room for a different approach. “Can we ask fewer medical questions? Can we just run some kind of medical background check? And, if we did do this, do we run the risk of anti-selection. The way the life business is currently underwritten, whether you get your coverage through some kind of automatic quote or through an agent…there is not a lot else to add to the product to differentiate it except for service.”
Fifty years ago, Sprackling says, an agent visited a client, collected premium and was done. Those days are gone. Producers need to get people to think of the product, to not fear death so much that they don’t even want to talk about life insurance, and to think about how they want to care for their family. “At the same time, we also need the customer to understand that life insurance isn’t all about death, either,” Sprackling says. “What if you are disabled? Life insurance is income protection, too. It’s not just protecting against mortality. It is protecting against morbidity.”
Every developed life insurance market is grappling with how to connect better and more directly with the consumer world. But only a few of those same customers are served best by the current agent model, Sprackling says, which does not make selling to the middle market especially lucrative. Sprackling is reminded of how the travel industry disintermediated, and how most travel customers do not want to talk face to face, preferring to be empowered to make their own calls. It is a development the life industry has to take seriously, he says, and it is something it can utilize if it wants, using direct methods to reach those who want them, and more traditional agent solutions to clients who want that.
“The direct market has scale, and life insurers can use that to craft a solution, whether it’s selling online, selling direct through a retailer or something else,” Sprackling says. “These are the issues we can address, because the truth is, we are just going to have to live with the macro issues like interest rates and the economy. We have to be realistic about what the industry can control, and what it cannot control.”