Resuscitating the life insurance business model

What we currently think of as life insurance dates back to 1760, when the first life insurance product became available in North America. While life products have continuously changed over the past 250 years, they have always primarily focused on death benefits, which protect the income of the insured and his family (or beneficiaries) in the event of his death. In response to longer life expectancy and increasing prosperity in the decades that followed the Second World War, life insurers introduced living benefits, or features that exploit the investment benefits of long-term savings.

See also: A brief history of life insurance

However, the combination of even longer life expectancies, a wide range of consumer-friendly retirement products from other financial services companies, and an increasingly volatile retirement investment market have resulted in declining marketshare in both death and life benefit products. As a result, life insurers are faced with the need to change their business models in order to remain both relevant and viable. Some of the most prescient ones are focusing on the following:

• From living benefits to well-being benefits: Life insurance is traditionally underwritten based on factors including age, gender, health and health history, occupation and occupation history, personal habits (e.g., smoking, consumption of alcohol etc.), and the size of the coverage. The life expectancy or mortality tables based on these factors determine the annual premium for the death benefit coverage, which then is modified for additional living benefit features. There is no incentive built into this calculation for better living (i.e., dietary and exercise) habits because there traditionally has been very little data for determining the correlation between these behaviors and their impact on life expectancy.

  However, the advent of wearable devices, real-time monitoring of exercise and activity levels, and advances in medical sciences (e.g., understanding the causes of and diagnosing diseases and ailments like cancer, heart attacks, strokes, etc.) have resulted in a large body of behavioral data and some preliminary results on how they impact life expectancy and quality of life. There are now even websites that can help people determine their medical age based on their physical, psychological, and physiological behaviors and conditions (e.g., dietary and exercise behavior, medical history, and mental fitness). We refer to all these factors collectively as “well-being behaviors.” Using the notion of a medical age or similar test as part of the life underwriting process, insurers can create an explicit link between “well-being behaviors” and expected mortality. This linkage can fundamentally alter the relevance and utility of life insurance by helping policyholders live longer and more healthily and by helping insurers understand and price risk better.

• Beyond protection to prevention, extension, and enhancement: Well-being benefits offer promise to create a more meaningful connection between insurers and policyholders. Rather than protecting the income of the insured in case of death, insurers can play a more active or proactive role in changing policyholder behaviors in order to delay or help prevent the onset of certain health conditions (e.g., cardiovascular disease), promote a better quality of life and even to extend insureds’ life spans. This change in the value proposition would give insurers the opportunity to engage with policyholders on a daily or even more frequent basis in order to collect behavioural data on their behalf and educate them on more healthy behaviors and life-style changes. In order to encourage sharing of such personal information, insurers could provide policyholders financial (e.g., decrease in premiums) and non-financial (e.g., physical health and psychological) benefits.

• From limited segments to broad appeal: Life insurance purchases are increasingly limited to the risk-averse, young couples, and families with children. Well-being benefits are likely to appeal to younger customers, who tend to focus on staying fit and healthy, as well as aging segments (both pre-retirees and retirees) that lead a healthy lifestyle and/or are actively attempting to delay the onset of chronic diseases. For a sector that has had significant challenges attracting young, single, healthy individuals, this represents a great opportunity to expand the life market.

• From long-term to short-term renewable contracts: Typical life insurance contracts are for the long-term — ten to 30 years. However, we live in impatient times, and the long-term nature of life contracts is a deterrent to most customers. In addition, behavioral economics shows us that individuals are not particularly good at making long-term saving decisions, especially when there may be a high cost (i.e., surrender charges) to recover from a mistake. Therefore, individuals tend to procrastinate and rationalize why they should delay purchasing or not have life insurance at all. With well-being benefits, contract durations can be substantially shorter — annual or even bi-annual.

• From an intermediated distribution model to a disintermediated direct model: Prevailing sentiment is that “life insurance is sold, not bought” and by skilled and knowledgeable advisors who can educate and advise the consumers on complex products. However, well-being benefits offer a value proposition that consumers can understand (e.g., consuming X calories per day and exercising Y hours a day can lead to a decrease in medical age by Z months), as well as much shorter contract durations. As a result, these products can be sold direct-to-the consumer without intermediaries. More health conscious segments (e.g., the young, professional and wealthy) also are likely to be more technologically savvy and hence prefer direct online/call center distribution. Over time, this model could bring down distribution costs because there will be fewer commissions for intermediaries and fixed costs that can be amortized over a large group of early adopters.

Industry observers should be able to see clear similarities between what we describe above and what has happened in the U.S. auto insurance market over the past two decades. Auto insurance has progressively moved from a face-to-face agency driven sale to loyal customers to a real-time, telematics supported, transparent, and direct or multi-channel distribution model. As a result, price transparency has increased, products are now more standardized, customer switching has increased, and real-time information is increasingly informing the pricing and servicing of these products.