Life insurance traditionally has been viewed and treated as a societal good. The relevance of the industry was evident to all as carriers helped individuals and families of all economic strata prepare for unanticipated loss. In doing this, the industry shouldered much of the burden for alleviating the financial hardships associated with the premature death of a family breadwinner. Of course, times change: increasing prosperity, dual-income families, the prevalence of higher education and single-parentage has changed the demographic profile of the family. While much of this change created a boon for life insurance, it also led many companies to migrate to estate-protection strategies and away from pure protection coverage.
The life insurance industry has trillions of dollars in assets, but at the same time penetration of the middle market – arguably the backbone on which our industry was built – continues to decline. Of the 56 million middle-market households identified by LIMRA, more than 25 percent of them possess no life insurance coverage at all, individual or group (LIMRA: “U.S. Consumers Today: The Middle Market”), and many more remain underinsured. And while about 60 percent recognize the need for coverage and report that they are willing to buy, most often they do not or cannot follow through with their intentions.
Reasons for the protection gap
The reasons for this phenomenon are varied. On the supply side, we have an increasing focus on high net worth clients by both carriers and producers. Product portfolios often favor the more complex products to optimize tax and estate provisions. Marketing and selling these products require more agent education, licensing, certifications and other fixed costs which drive producers more into serving the high-net-worth clientele. Meanwhile, term life sales have not fallen, but they also have not kept up with the growing middle class and their needs. (Will producers drive across town 2-3 times for a $300 term premium?) Thus the protection gap has been allowed to grow.
Alongside the cost factor, the industry faces an aging producer pool, with an estimated 25 percent retiring within four years and too few younger producers replacing them. This situation is exacerbated by high turnover among new producers. Where will new business originate in the future?
On the demand side, the financial crisis limited the ability of some consumers to obtain the coverage they know they need, and employment disruption caused some to lose the only coverage they had, group life. For those with individual life only, the mean face amount is about $250,000, or 3.6 times annual household income – far below the 7-10 times that industry experts recommend, contributing to the estimated $20+ trillion coverage gap in the US. Other financial obligations (rent/mortgage payments, car loans, daily expenses) and discretionary goods and services also compete for premium dollars: Many pay $5 a day for a latte but don’t spend $30/month to protect their family from unexpected death and loss of income.
The industry faces supply-demand challenges in other ways. For example, retiring agents take with them financial advising skills and knowledge of the fundamental value proposition of life insurance. These are necessary tools of the trade to sell to middle market consumers. The high-net-worth individual often is financially savvy and understands the value of life insurance and the consequences of insufficient coverage. Moreover, producers commonly are part of a financial planning team that includes the client’s accountant and attorney. The middle income individual, by contrast, may be unfamiliar with insurance in general, the myriad of types of products, and what kind of – and how much – coverage they need. To successfully penetrate this market, sales reps must be able to effectively communicate the life insurance needs-benefits message.
Keep it simple
A number of carriers now are addressing the challenges that must be overcome to properly serve the middle market. They are not turning their business models 180 degrees, but they are making essential changes in order to capitalize on the growth potential of this huge market segment. Above all, they are focusing on simplicity – in products, in the sales process and, most certainly, in underwriting. But simple is not easy.
Products. Many representatives with access to the middle market have had limited exposure to life insurance products. These potential producers, be they registered reps, bank personnel, investment advisors, or simply newer agents may appreciate certain benefits, such as a living benefit or waiver-of-premium rider, but the underlying product is more complicated and opaque. This makes it difficult for them to explain and sell to a less informed middle market buyer. Simplifying traditional whole life and term, with or without riders, is a good starting point. A product designed with fewer risk classes – say 2-3 vs. 4-5 – might be easier to understand and sell. For carriers, the biggest challenge is designing a product that offers reasonably low rates – a must for the middle market – while preserving the desired mortality experience.
The sales process. LIMRA reports indicate a growing interest in Web-based sales approaches, but the majority of prospective customers still value face-to-face engagement with a real person. The notion that insurance is sold, not bought, appears to be as real today as in the past, although research suggests some movement toward a self-serve model in some segments. Selling solutions to buyer needs and building trust through a sales process that emphasizes consumer education cannot be overemphasized. Carriers need tools that make it easier and more economical for producers to engage the middle market. Many carriers today have websites that teach consumers what life insurance is, why it’s important, the consequences of not having insurance, the kinds of policies to consider and how much to get. They also are employing an appropriate mix of media to drive traffic to their sites and trigger action. These initiatives are critical steps in targeting middle market consumers.
Underwriting. Underwriting must be fast and easy. A large portion of middle market consumers are used to self-serve, point-of-sale, transactional processes. They can be approved for a credit card over the Internet. They can be pre-approved for a mortgage with minimal effort. For life insurance, they increasingly expect an immediate quote, similar to how some auto insurers operate. These buyers (like most) do not want to wait 3-4 weeks after filling out a booklet-long application and undergoing medical exams and lab tests. For carriers, this translates to simpler products supported by technologies that enable an underwriting decision in minutes, hours, or a couple of days at the longest.
Turning a quote around quickly usually means foregoing fluids. So being able to capture sufficient alternative information is critical to both closing a sale and mitigating the mortality risk. Automated underwriting tools (prescription drug histories, motor vehicle and MIB reports, and other emerging technologies) are starting to drive significant point-of-sale decisions. As the industry becomes more comfortable with predictive analytics, customers could become “pre-approved” for coverage, similar to consumer loans.
This “simplicity” entails back-office efforts that may exceed the expertise and technical means of many carriers. Today life insurers are forming a number of partnerships to harness the necessary skills and resources needed to simplify life insurance products, underwriting procedures and sales processes. Consulting companies, IT firms and reinsurers are teaming up with carriers to facilitate successful middle market strategies. SCOR Global Life Americas, for example, is helping a number of direct writing companies penetrate the middle market. Velogica, SCOR’s underwriting delivery system, is assisting major clients to drive new models of efficient distribution through predictive risk assessment and point-of-sale policyholder capture. Powered by a sophisticated underwriting algorithm, Velogica has processed more than two million life insurance applications.
The middle market is important to the life insurance industry for both growth opportunities and for maintaining relevancy in the larger financial services sector. The middle market consumer is, in general, receptive to the value and security that life insurance ownership provides. The lack of penetration then may be due less to market potential than to the industry’s approach, presentation, and closing of the sale. Yet, there are success stories in the market – from final expense companies to effective middle market term writers, to insurers dipping their toes into predictive-modeling enabled coverage. To capitalize on the vast protection gap that exists today, life insurers need to adjust business models and embrace simplicity so that products, distribution (traditional and new channels) and processes once again align with the economics of the middle market.
Can your company afford to ignore this market? If current sales trends hold in the future, the answer likely is: Not on your life.