Reimagining the life insurance model in 2023 Balasubramanian Ramnath: We believe that the industry will be shaped in the future by a number of factors. First, people are becoming more concerned about their own safety and risk. There has been a greater awareness of and concern about personal health, savings, and financial security since the pandemic ended.
Over the next 30 years, the number of people over 65 is expected to double, from about 0.8 billion to 1.7 billion. While developing economies like India and China will account for a significant portion of that growth, developed economies will continue to account for a significant portion of that population.
Due to a number of government-funded social security programs dealing with high levels of debt, many citizens are realizing that they will be personally responsible for their healthcare and retirement savings. For instance, we estimate that the funding gap for some social security programs in the world’s most advanced economies is close to $41 trillion. The life and retirement industry has a chance to meet the needs of citizens all over the world because of this gap.
The second factor is the challenging economic climate, which is likely to result in ratings migration and deterioration of credit. Life insurance companies will therefore need to actively manage risk and rebalance their investment portfolio. The third factor is that inflation has grown faster than nominal interest rates, which is why real interest rates have remained low despite their rise. As the number of people of working age declines, we anticipate that this pattern will continue for several years.
Are there any other forces you think are important?
Kotanko, Bernhard: Two factors: One is more specific to Asia’s position on the global insurance stage, while the other is global in scope. Technology is the first one. Life insurance and insurance are businesses based on information. Technology has received a significant amount of investment over time. IT spending has increased to 3% of gross premium, up from 2%. Life insurance is about to enter a new era where it can use data, analytics, and digital customer engagement to its full potential. As a result, insurers will be able to address the gap Ramnath mentioned in a variety of ways and devise more effective approaches to engagement and operation as a result of this.
Henri de Combles de Nayves Bernard, Pierre-Ignace: Over the past few decades, the industry’s performance has been subpar. Industry activity’s nominal growth has been significantly lower than GDP’s. Over the past few decades, for instance, there has been an average gap of two percentage points between premium growth and GDP growth in the United States and Europe. There is a startling difference of 7% between Japan and the rest of Asia.
In addition, productivity growth has been subpar compared to that of other service industries over the past few decades. The growth of the cost base reflects the life insurance industry’s failure to achieve productivity gains. As a result, the business has struggled to generate returns that exceed the cost of capital.
Last but not least, market caps have decreased over the long term. 40 years ago, the top 20 US life insurers’ combined market capitalization was comparable to that of the top 20 US banks’ combined market capitalization. It is now only one sixth. Naturally, these are averages, and certain markets and players have performed better than others and achieved greater success than others.
How do value-creation sources change over time?
Kotanko, Bernhard: Examining individual value pools across and within geographies is essential. Products that offer primary protection and some upside based on market performance have performed well in the United States. More market-oriented annuity products have struggled during the same time. Equity markets have grown significantly in France, while general accounts have suffered. We’ll find out if the trend changes in the years to come. However, it demonstrates the significance of scrutinizing each product in its own market.
The picture is on the product side in Asia, especially when it comes to health products. We also observe that some Southeast Asian markets have high demand, despite the fact that China and India are the major growth hotspots and have numerous opportunities for value creation driven by the underlying macroeconomics. It is crucial that we see a shift from value creation to investment alpha, beyond the product and market mix. We anticipate low-for-long real rates in spite of the nominal advantages. In that setting, insurers must make a shift to generate investment alpha.
Last but not least, many insurers want to be the global insurer. In Asia, many insurers have a lot of different portfolios and are trying to figure out how to trim them to create value. We anticipate that pressure to demonstrate how a portfolio generates value and growth will grow.
Balasubramanian Ramnath: The emergence of private capital, particularly platforms that have been known to some private-asset and alternative-asset managers, is one of the major trends we have observed over the past ten years. Private capital finds the life insurance industry appealing for a number of reasons, including: The industry has performed poorly, returned less than the cost of capital, and productivity gains have not materialized. This gives someone else the chance to take charge of improving performance and elevating the return trajectory of some specific businesses.
Life insurance is also seen as a source of permanent capital by many alternative asset managers and private capitalists. It is a stable pool of long-dated liabilities that can be used in a variety of asset strategies, including traditional fixed income and more structured products and alternatives. That makes it easier for these alternative asset managers to raise money and creates income streams that are more predictable.
As a result, you are witnessing a phenomenon in which platforms owned by private capital now account for nearly 9 percent of the industry’s assets in the United States, up from less than 1 percent a decade ago. Through mergers and acquisitions, they are not only acquiring legacy liabilities from traditional insurers and beginning to play a significant role in the acquisition of new business.
For fixed-index annuities, for instance,
private capital-owned insurers account for close to 40% of the total market share and are expanding at a faster rate than the market. These annuities have experienced significant growth in North America. Additionally, these insurers offer the industry solutions for investment management. Therefore, in many respects, this group of insurers is not significantly contributing to the structure of the industry.
The way distribution is changing is the second major structural shift. The total shareholder returns of pure-play distribution companies have been close to two and a half times higher than those of traditional life insurers when compared to life insurers’ market caps. In accordance with Bernhard’s assertion, we are witnessing a consistent shift in value toward distribution The Role of Life Insurance in Wealth Planning in 2023.
Value and premiums are also shifting from a traditional captive-carrier-tied distribution to more of an independent distribution, which is a phenomenon that we are witnessing. For instance, independent distribution now accounts for close to 55% of all premiums paid by life insurers and annuities in the United States. Europe and Asia also have similar trends. Henri de Combles, Count of Nayves: The sector is at a real turning point. How can the carriers rethink their operating model to survive in this
Environment in light of these new trends?
Balasubramanian Ramnath: Evolution will not be sufficient in the insurance industry’s current setting. It will necessitate fundamental revisions to the business model. The majority of life insurers today carry out all business system and value chain activities in accordance with the conventional model. Additionally, we are merely
average across the majority, if not all, of the value chain activities. Additionally, we are witnessing the phenomenon of customer needs convergently spanning investment management, wealth management, retirement, and health care. Consequently, future life insurers will need to unbundle the value chain and develop a simpler, more focused, and narrower business model.