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Spurring growth in the life insurance industry



The opportunities for growth are there, but only for those willing to undertake the right strategic initiatives while improving the effectiveness and efficiency of core activities.

For the past decade, the life insurance and annuities industry has struggled to find growth. Insurers have increasingly focused on the needs of affluent individuals, who tend to be more profitable—but increasing competition from adjacent sectors has cut into even the most successful insurers’ market share.

Further, insurers have been slower to integrate digital channels and need to resolve challenges of an aging workforce accustomed to traditional modes of selling.

Moreover, the industry continues to face strong headwinds including low interest rates, cost pressures, product focus shifts, changing customer behaviors, increased competition and new regulatory initiatives. These and other factors are forcing life insurers to rethink their approach to the market.

The news is not all bad. Interest rates are ticking up and the economy continues its gradual improvement. Change in consumer behavior has become the biggest threat to long-term, profitable growth.

The consumer’s path to purchase was once linear and confined to a single channel. Thanks to technology, that path is now dynamic, accessible, and continuous.

Buyers no longer enter and progress along one channel; rather, they move rapidly from one channel to another. Consumers have become more aware of, and more sensitive to price. When coupled with competing financial priorities, this has led to decreased levels of loyalty and trust.

Consumers have higher expectations for service and expect more transparency from service providers, especially when using online channels. The focus has switched from purchase to evaluation, with consumers constantly re-assessing their choices.

We have seen, across all age groups, increasing use of digital and social media along with mobile devices such as smartphones and tablets. Consumers are exposed to content beyond the brand’s control, and that content is more insistent and more influential. In this challenging environment, insurers need to quicken the pace of change and move forward on multiple fronts.

The opportunities for growth are there, but only for those willing to undertake the right strategic initiatives while improving the effectiveness and efficiency of core activities.

The Four strategies to spur growth

The challenge for life insurers is to tailor outreach to specific consumer segments, better prepare to help consumers respond to life’s milestone events, ensure that their company is part of the initial consideration set (ICS), and facilitate the process for evaluating and purchasing insurance.

On all counts, insurers, as an industry, have work to do. In their quest for growth, where should these insurers, especially those with captive distribution, focus their efforts? To capture the next horizon of growth for the industry, insurers should pursue these four interlocking strategies.

Lead with advice and redefine the life value proposition as ‘living’ insurance

For mass-market and middle-market customers, protection in case of death or injury is not on the list of top concerns.

Instead, their main priorities are achieving good financial health (for example, maintaining their standard of living or paying off debt) and planning for retirement (that is, ensuring they don’t outlive their savings).

To appeal more broadly to consumers and embed themselves at the center of clients’ financial lives, life insurance carriers need to redefine their value proposition around a holistic set of financial solutions focused on ongoing “living” benefits.

This shift will require changing the sales conversation to address the client’s overall financial goals and situation, redeploying product strategies focused on the longevity market, and tailoring products to individuals’ financial context.

In mortality, for example, carriers could offer a student loan rider to pay off debt first, reward healthy life choices by adjusting premiums, offer budget tools that help reduce expenses, and divert a portion of savings to increase coverage levels over time.

Catalyze demand through targeted outreach during trigger events

The research clearly demonstrates that engagement at the time of life trigger events is critical for both mass-market and middlemarket consumers—and financial advisers are essential to boosting purchasing rates.

Activities led by a financial adviser, such as devising a financial plan or performing a financial checkup, can increase the likelihood of sales to non-owners of longevity products by 1.7 to 2.4 times. Together, combining triggers with targeted outreach and engagement with a financial adviser increases the likelihood of purchase significantly.

The birth or adoption of a child combined with agent interaction can increase likelihood of purchase by 14 times over a baseline scenario. The second-most likely trigger event is the need to start supporting an adult relative financially, which combined with agent interaction increases purchasing likelihood by 10 times (Exhibit).

Carriers should invest in data management and predictive analytics to enable distinctive micro-targeting and identify the highestpotential consumers on the verge of life milestones. The following tactics demonstrate how these tools can provide greater visibility into consumers:

  • Use advanced analytics to build microsegments of consumers with the highest propensity to purchase, drawing on data from carriers’ existing customer bases, external data, and market research.
  • Identify the highest-value prospective customers in a region (by zip code or work location) and tailor campaigns for that particular segment.
  • Create targeted campaigns with microsegment value propositions across traditional channels (for example, phone, mail, and email) and digital (such as targeted mobile ads) to build brand awareness and further direct high-value leads to agents.

Embed the brand at the right time in the consumer decision journey

Carriers need to ensure they are included in the ICS for mass-market and middle-market consumers—which means they must prioritize digital marketing channels that can reach consumers where they consume information, thereby elevating their market profile and building their brand.

Understanding the most effective channels to boost awareness and ICS inclusion is the first step. Traditional advertising, such as print, radio, and television ads, is responsible for 15 percent of ICS inclusion.

Meanwhile, the internet accounts for 29 percent. Agent interaction is still important but costly (24 percent of ICS inclusion but almost twice as expensive as the cost of digital advertising for carriers).

Since our research found that many customers find online chat and videos to be nearly as helpful as in-person meetings with financial advisers, carriers should create and offer virtual education tools to support consumer engagement at a low cost.

Create a dynamic and seamless consumer experience, including m u l t i c h a n n e l distribution and engagement that does not rely on a human adviser Carriers have an opportunity to both delight consumers and generate superior economics through a multichannel engagement model that reduces reliance on in-person agent interactions by harnessing remote and digital capabilities to provide similarly consultative solutions.

Our research found that two-thirds of consumers want to be able to chart journeys across in-person, online, and virtual modes of interaction.

Consumers are increasingly comfortable gathering information from online and remote sources: more respondents prefer remote and online sources (36 and 35 percent, respectively) compared with in-person advice (29 percent).

The experience also needs to be tailored to different consumer types within the mass-market and middle-market segments. These consumers look fundamentally different from traditional, affluent customers in their starting knowledge around the industry, carriers and products, financial situation and needs, barriers, and preferences around shopping experience.

Carriers that delight consumers throughout the purchasing process and offer best-inclass service before, during, and after the sale could dramatically improve client experience and opportunities to deepen penetration with clients.

Making the transition from a predominantly in-person, agency-based distribution system to a portfolio of models, including digital direct and call center– based remote advisers, will require carriers to change the way they operate in several important areas.

Carriers often focus on the needs of advisers when building new capabilities, but in the future they will need to adopt a more consumer-centric mind-set and reorient their strategies and processes accordingly. Improving customer experience and engagement can also drive cross-sell and up-sell opportunities.

Existing customers are 2.5 times more likely to buy additional products within 12 months of their initial purchase and twice as likely to return to the same carrier.

In summary, growth has been a long-standing challenge for life insurers, and changing customer preferences—namely toward a multichannel, digital-enabled experience— have proved to be obstacles.

However, these changing behaviors represent an opportunity to rethink distribution in ways that meet the needs of consumers and address the economic challenges associated with traditional agentbased distribution.

Carriers that succeed will be well positioned to capture tremendous growth, improve profitability, and provide comprehensive solutions to consumers, many of whom are underserved today.

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Climbing the Power Curve: Winning in the Insurance Market



Insurers can take concrete, evidence-backed actions to move them in the right direction and, cumulatively, improve their odds of long-term success. Purposeful, bold moves aimed at shifting resources, boosting underwriting margins and productivity, and delivering on a series of programmatic M&A deals can dramatically improve an insurer’s odds of reaching the top quintile of economic profit. While these moves may sound instinctive, many companies fail to pursue them rigorously. In fact, these moves are most powerful when undertaken in combination, at or beyond the thresholds of materiality described in this narration. The point isn’t that there’s a magic formula for achieving strategic differentiation. Rather, by taking a hard look at the potential of your key initiatives to achieve bold results in these areas, one can get a realistic forecast of the odds that one’s strategy will transform performance.

Understanding the power curve and how to apply it

Research identified a power curve—proof that economic profit is unevenly distributed among insurance companies (exhibit) across geographies from 2013 to 2017. The power curve illustrates the uneven distribution of insurance industry economic profit.

These findings may come as a wake-up call to insurers that find themselves outside the top quintile—but embarking on an effort to move up the power curve is difficult.

How to move up the power curve

Research shows that moving up the power curve requires a laser focus on the factors such as foundational factors and bold moves that have an outsized impact on success, measured as economic profit.

Pursuing the five bold moves by Insurers

While the five bold moves may seem intuitive, and many companies may already be doing them in some form, two factors set these actions apart. First, magnitude and intensity matter; these efforts force insurers to break free from their standard processes of investment and initiative prioritization. Even if a company is doing something in each of these dimensions, how much it is doing often makes a difference. In other words, strategy is not only about the directionality of moves but also their materiality.

Second, the impact of these moves is cumulative. Companies that employ three or more of these moves in concert are likely to be propelled up the curve. Findings show empirically that companies that focus on multiple moves over time can learn from and adapt to them, reaping even further benefits.

Dynamically shift resources between businesses

Some carriers offer customers too many legacy products that do not produce meaningful profit. These legacy products take attention away from distribution, product development, and policy administration. Instead, companies should reallocate capital to higher return-on-equity (ROE) activities and away from lower-ROE lines of business. Proactive measures are critical given the sector’s highly competitive pricing environment.

Resource allocation should also be employed across various strategic lines, not just products. Based on research, the threshold for outperformance is the reallocation of 60 percent of surplus generated over a decade. Insurers that optimize their business mix accordingly have a better chance of improving their odds of ascending the power curve. This threshold parallels our findings across industries that dynamic resource reallocators gain approximately three to four more percentage points of total return to shareholders each year compared with low reallocators.

Other companies have increased economic profit by divesting underperforming assets. In the wake of the financial crisis of 2007–08, a number of companies exited underperforming businesses through closed-block transactions through either legal entity sales or reinsurance transactions. These transactions were with organizations that were more natural owners of the distressed assets by virtue of their capital structures or business models. These back-book transactions, when thoughtfully structured, have freed up capital that helped move sellers up the curve.

Reinvest a substantial share of capital in organic growth opportunities

Reinvesting earnings in profitable and well-performing businesses is a reliable way to increase economic profit, but finding these opportunities has been challenging for many insurers over the past ten years. Companies meet the threshold in this area if they are in the top 20 percent of the industry by strategic reinvestment relative to new business premiums; typically, that means spending 1.7 times the industry median.

Often considered innovators in the industry, companies that achieve this high ratio of reinvestment to sales have a track record of introducing disruptive products and services, enabling them to grow faster than their peers. Indeed, these insurers are successful at finding accretive internal rates of return. And as they push the boundaries of new offerings, they are often able to achieve higher margins (and ROEs) thanks to the reduced competition at the vanguard.

Pursue thematic and programmatic M&A

The third move centers on the use of programmatic M&A, an important approach for insurers with financial flexibility and access to available targets. A programmatic approach to M&A focuses on executing a series of deals in which no individual deal is larger than 30 percent of market cap but in which the total over ten years is greater than 30 percent of market cap. This is often done in thematic areas of technology and capability building or in extensions to new product lines and geographic markets. Typically, programmatic M&A outperforms both pursuing very large transactions and avoiding M&A altogether. By using a series of small, thoughtfully curated transactions to advance innovation and growth, programmatic acquirers have several advantages: they can simplify integration, avoid competitive bidding, and facilitate the exploration of new opportunities without committing large amounts of capital up front. This approach to M&A also enables more effective acquisition of new capabilities, such as digital and analytics.

Enhance underwriting margins

The fourth bold move involves making ROE improvements through better underwriting and lower loss ratios—a particularly important objective given how, as a core competency of all insurers and particularly in the P&C segment, underwriting efficiency can serve as a differentiating factor that leads to higher economic profit. Insurers accomplish these results either through privileged access to particular customer segments or better use of customer or risk data through analytics. Benefits from productivity improvement are often reinvested to improve product margins. To maximize the odds of moving up the curve, companies need to be in the top 30 percent of the industry by gross underwriting margin.

Make game-changing function improvements in productivity

Insurers feel continued pressure to reduce costs because of increasing price transparency, the effects of digitization, and low interest rates. Indeed, new entrants are closing the gap on incumbents. It’s generally recognized that even though the loss ratio has the greatest leverage, insurers benefit significantly from improving efficiency, lowering expense ratios, and increasing revenues per employee. Many executives in the industry believe that a dramatic wave of efficiency and retooling will crest in the next three to five years, and many are embarking on these high-ambition, enterprise-wide efficiency journeys now. Research reveals that to maximize the odds of entering the top quintile, companies should aim for a cost improvement that is in the top 30 percent of the insurance industry.

The odds of moving up the curve become exponentially larger as insurers pull more levers, while a strategy that does not incorporate any of the moves will likely fail. Indeed, the CEO, CFO, other senior executives, and board members can often use these bold moves as a test of strategies brought to them by their teams. Strategies that neglect to engage these actions typically have a one in ten chance of succeeding, compared with one in two (or better) for those that do.

Rather than thinking about strategy as primarily a matter of frameworks and broad themes, leaders should ask themselves what they are doing to make bold moves along the five dimensions that matter and whether efforts already underway are truly significant. The extent of the moves matters a great deal—materiality matters, not just directionality. And CEOs are in a unique position to calibrate materiality; this, in fact, is one of the greatest aspects of their role and a productive means of challenging their teams. If proposed plans don’t meet the required threshold of activity to bend the odds of moving up the power curve, they are likely not aggressive enough. What often gets in the way is a resource allocation process hindered by social dynamics. Other common obstacles include a lack of objectivity on opportunities and an insufficient understanding of critical thresholds needed to move the needle. As a result, too many companies simply check the box on certain priorities while investing too little in the ones that truly matter.

Improved economic profit is within reach for insurers that can adjust their business models in the face of an efficient market and inject a newfound objectivity into their strategic processes. Indeed, insurers that have a favorable endowment, navigate industry and geographic trends, and make bold moves will be in a good position to climb the power curve.

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