“Life insurance is dead” is probably the most provocative thing a life insurance executive can hear. While such a statement may sound unnecessarily pessimistic, many senior life insurance executives with whom we’ve spoken agree that their business needs to fundamentally change. In this and a subsequent article, we will address some of the challenges facing the life insurance industry and offer constructive suggestions on how the industry can reinvent and redesign its business model.
First, let’s take a hard look at the facts supporting the view that life insurance is dead (or at least badly stagnating). In 1950, there were 22.8 million life policies in the US, covering 14.6 percent of a population of 156 million. In 2010, there were 28.6 million policies covering a population of 311 million. In other words, the US population has nearly doubled in the past 60 years, while life policies have increased by just over a quarter. More recently, the number of families owning life insurance assets has decreased from 34.8 percent in 1992 to just 23 percent in 2007. The stagnation or decline of life insurance contrasts with the rise of mutual funds; 23.4 percent of the population owned such investments in 1990 but 43.7 percent (or 51 million households and 88 million investors) did by 2009.
A number of socio-demographic, behavioural economic, competitive, and technological changes explain why this has come to pass:
1. From demographic “pyramids” to “skyscrapers”: By age, the U.S. population has been tapering from a “pyramid” to a “skyscraper” over the past few decades. As Figure 1 shows, around 11.7 percent of men and an equal number of women were between the ages of 25-40 in 1950. However, only 10.2% of males and 9.9% of females were between the ages of 25-40 in 2010, and the percentage is set to drop to 9.6% and 9.1%, respectively, by 2050. There are two related factors that impact life insurance as the pyramid tapers. First, the segment of the overall population that is in the typical age bracket for purchasing life insurance decreases. Second, as people see their parents and grandparents live longer (and, in many cases, remain in good health at advanced ages), they tend to de-value the death benefits associated with life insurance.
2. From product simplicity to complexity: The life insurance industry initially offered simple products, namely term and then the whole life insurance. In the 1980s, universal life and variable universal life became popular. The 1990s saw the proliferation of various riders to existing products, like the GMWB, GMIB etc. There was a similar proliferation of products in the annuities sector. In response to socio-demographic changes and longer life expectancies, the industry tried to appeal more to these products’ living benefits rather than (or in addition to) death benefits. These living benefits are not always easy for policyholders and customers to understand, and in the wake of the financial crisis, some complex products had both surprising and unwelcome effects on insurers themselves.
3. From institutional decision-making to individual decision-making: The baby boomers and the previous generation, the so called Silent Generation, were used to the government and employers providing them benefits in the form of life insurance, disability coverage and pensions. Over the past three decades, changes in government and employer policies have progressively pushed often complex retirement investment decisions onto individuals. Behavioral economics clearly shows that when individuals have to choose between near-term gratification (e.g. spending) and delayed gratification (e.g. saving), they invariably choose the former. Now free to make decisions about purchasing life insurance for themselves, many people have eschewed it and elected to spend their money elsewhere; if they have elected to avoid instant gratification and invested, they often have chosen mutual funds, which grew exponentially on the back of the strong stock market and resulting high returns of the mid-1980s to early 2000s.
4. Growth of Intermediated distribution: The life insurance industry started with a simple distribution model (i.e., captive agents and a mutual structure), a simple product set, and a simple value proposition. However, changes in governmental policies, individual decision-making, changing demographics and behavioral attitudes, increased competition from the mutual fund industry, and the need to explain the complexity of products, led to the growth of intermediated distribution. Increasing life insurance product shelf space became most insurers’ primary strategy. Many insurers now distribute their products through independent brokers, captive agents, broker-dealers, bank channels, aggregators and also directly; it is expensive and difficult to effectively recruit, train, and retain such a diffuse workforce, which has led to problems catering to existing policyholders and customers.