The life insurance industry is set to become the next victim of the credit crunch: so say the doomsayers. Life insurers’ exposure to global equity markets, commercial property and corporate bonds – asset classes which have suffered heavy falls this year – has had a severe impact on balance sheets.
But the outlook is not as poor as it might at first appear. Booz & Company believes that many players will prove resilient, provided that they position themselves well in response to six key trends affecting the industry. Aggression and radical action will, in some cases, be required – unusual behaviour for life and pensions businesses.
1. Changes in the competitive environment: scale or specialization?
With new entrants joining the market and the distressed assets of businesses damaged by the credit crunch up for sale, now is the moment for insurers to make a clear strategic choice: to pursue scale or specialization. Those players who occupy the middle ground will either have to make acquisitions or position themselves for takeover.
Players will need to take a much more radical approach, to progress past the initial stages of ensuring business continuity and migrating future business. They will need to consider:
shifting in force polices, both open and closed;
addressing the issue of rationalising legacy systems; and
eliminating sources of complexity.
2. Fortune favours the brave: moving into asset management
A shift towards asset management may seem highly counterintuitive given the state of global equity markets; however, over the longer term those players who take bold steps into the sector now may be richly rewarded. Booz & Company forecasts the compound annual growth rate for the asset management industry between 2006 and 2017 will be around 6%, compared with less than 4% in life and pensions.
Some traditional insurers have already repositioned themselves as asset managers: Allianz, for example, took over Pimco advisors in 2001 and Nicholas-Applegate in 2001. Other players will need to follow suit if they wish to exploit the long-term growth in funds under management.
3. Looking east: growth to be found outside mature markets
There is a strong case for continued investment and expansion in Asian and other developing markets. Booz & Company predicts that by 2017, the highest margins in the life and pensions business will be found outside mature markets: in China, India, south east Asia and Brazil, profit margins are forecast to be 8%. By contrast, in most western markets, where competition is fierce and distribution networks firmly established, margins will be thinner – most likely around 5%.
Growth in emerging markets will need to be explored – balancing short-term with long-term opportunities. Short-term, there is clearly value in riding the wave created by the current downturn. Longer-term, there will be growth opportunities in emerging markets, such as the BRIC countries. These will require in-market “know who” as well as “know how”.
4. The third way: customer needs come to the fore
Volatile equity markets create a greater demand for structured products with built-in guarantees to cap the potential downside. While increased life expectancy increases will create a growing demand for long-term care products and ‘third way’ retirement income plans which offer more flexible annuity and drawdown arrangements. Increased pressure to focus on customer needs comes from regulatory initiatives such as the Financial Services Authority’s Treating Customers Fairly (TCF) scheme, and the Retail Distribution Review (RDR).
In response to these trends, insurers must become more customer centric. The best performers will:
deploy sophisticated segmentations; and
offer tailored products, sales and marketing approaches, as well as smarter packaging based on increased risk appetite and strategic pricing.
5. Techno-advice: looking further into the future
Forward-thinking insurance providers must consider the longer term future of distribution in the light of two key trends:
the value shift towards distributors. With commissions rising, distributors are capturing a larger share of value: between 2000 and 2005, manufacturers saw profits grow by 16% to 17%; but IFAs saw commissions grow by 23% to 25%. IFAs also own client relationships, which means they have critical access to market information and are the players best placed to benefit from cross-selling;
the emergence of remote advice delivery, which could happen sooner rather than later: HSBC is already trialling a remote advice delivery system using video conferencing. Video conferencing, which is expected to hit the mass market within five years, will be used in the affluent and mass affluent segments much sooner; and
Bancassurance and technology-enabled direct channels therefore emerge as major opportunities for insurers to capitalise on.
6. Culture shock: transforming operating models
Life and pensions companies are typically slow-moving beasts. Booz & Company’s Org DNA profile identifies almost 23% of UK insurers as ‘over managed’, while 40% have a ‘passive aggressive’ culture: while the organisation seems consensual, in reality accountabilities are not enforced and governance is cumbersome, resulting in slow and second-guessed decisions.
In some areas the comparisons between benchmark strong execution companies and insurers are shocking: for example, 97% of benchmark companies agree that important strategic and operational decisions are quickly translated into action, compared with just 31% of insurers; 55% of benchmark companies say information flows freely within and between departments compared with 20% of insurers.
If insurers are going to deal with the key trends noted above, if they are to become more customer-centric, to embrace new technologies, develop new products and exploit new markets, they must improve their execution capabilities and operating cultures.
The traditional insurer operates within a small segment of the value chain, covering administration and product manufacture: that needs to change. Players need to expand in both directions, going up the chain into asset management as well as further down into sales, distribution and marketing. These changes need to occur rapidly, and within the context of the most challenging economic and financial environment we have seen for decades.
Booz & Company has articulated the strategic choices life and pensions players will need to make in response to the six key trends impacting the industry.
The changes we have witnessed so far have come at a breathtaking speed. Anticipating and responding to the trends in the life and pension industry will allow insurers to control their own destiny and build a sustainable profitable future. Those who fail to do so might be those having to collect their own retirement funds soon.
By Alan Gemes, Fabienne Konik, Nicholas Donovan and Sid Azad