Beyond the day-to-day challenges facing insurers in an uncertain economy, underwriters are grappling with broader issues as they reassess their operating models, technology infrastructure, distribution platforms, and personnel management. With transformational changes underway or on the horizon, what opportunities and threats could insurers face? Analysts at Deloit in their assessment for 2014 business environment see industry and operators bringing innovations to enhance consumer and shareholder value.
Transformation most likely path to sustain long-term growth
Life insurers and annuity writers may gain some sales traction in the year ahead thanks to modest economic growth, declining unemployment, and the possibility of an uptick in interest rates. And yet many have begun to realise that to sustain growth over the long term, fundamental changes in their business models are necessary in the near term.
Therefore, expect more life and annuity carriers to break out of their historical operating molds over the next couple of years. The goal will be to make more efficient use of capital as well as expand the overall market pie by reaching out to underserved consumer segments in innovative ways.
Whether you prefer to be a pioneer or fast-follower, before too long most insurers will likely have to transform their standard operating procedures. And with growth re-emerging as the chief imperative, both in the short run as well as over the long haul, more carriers will be revamping their products, core systems, and distribution options.
While reshaping how they conduct operations can make a big difference in revenue and profitability, carriers also need the right people and capabilities to propel and maintain momentum for innovation. Indeed, talent transformation could ultimately be one of the most important distinguishing features determining how well life insurance and annuity carriers perform in this evolving environment.
To capitalise on emerging opportunities instead of being undermined by the disruptive changes likely to alter the competitive landscape, top insurance executives should be more predisposed towards bigger-picture innovations.
Going for growth
While cost-cutting has been a major goal of many carriers since the financial crisis of 2008, and share buybacks have been a prime option to improve returns to shareholders for a number of publicly-held insurers, growth is re-emerging this year as the chief imperative, not merely to bolster bottom lines in the short run, but to assure the industry’s continuing relevance over the long haul.
Rather than settling for subtle changes along the edges, we expect to see more carriers shifting into a higher gear by revamping their products, core systems, and distribution options.
Another theme you’ll see throughout this report is that while reshaping how a carrier conducts its operations can make a big difference in revenue and profitability, carriers need the right people and capabilities to propel and maintain momentum for innovation. Indeed, talent transformation could ultimately be one of the most important distinguishing features determining how well carriers perform in this evolving competitive environment
Mergers and Acquisition may heat up despite headwinds
Economic challenges over the past few years have prompted many life insurers and annuity carriers to reassess their strategic priorities. As a result, some have revamped their product portfolios. Others have altered policy features. A few have exited markets entirely. Yet despite this volatile environment, merger and acquisition activity in 2013 was quieter than many anticipated, for a number of reasons.
For one, a number of publicly-held carriers have been bolstering their share price by allocating excess capital to initiate stock buybacks. However, there are indications that the impact of such a strategy may be playing out, perhaps prompting renewed interest in boosting shareholder value by making an acquisition.
Another factor that has slowed down deal-making in the U.S. market is that potential foreign buyers appear more interested in targeting those doing business in the Asia-Pacific and Latin American regions these days, where they may see greater prospects for growth and profitability.
On the flip side, among U.S. carriers there are only a limited set of players that might be interested in or have the ability to pursue a foreign M&A. Indeed, some U.S. players with global footprints may be more likely to consider spinning off non-core foreign books at the moment.
One countervailing trend has been the growing interest of private equity firms in the life insurance and annuity business. Such capital market players see an opportunity to leverage their asset management skills and improve their returns by tapping into a large pool of capital while diversifying their portfolios.
Insurers look to evolve products, mindset to expand growth horizon
The dynamics driving traditional insurer growth strategies are changing dramatically and players will look to keep pace in order remaining competitive. Historically lucrative products and target markets are no longer producing sufficient returns, and tweaks to current strategies may not have a dramatic impact on growth and market share.
The bread-and-butter demographic for life insurers — he profitable, affluent baby boomer segment — has become quite saturated. However, acquisition costs are often too high to give enough incentives to many agents to spend time selling to under-penetrated segments, including the middle market.
These untapped demographics may require different targeting and sales techniques than the ones developed for the mass affluent, or for those nearing retirement.
Consequently, those who can figure out how to cost-effectively bridge the coverage gap of the under- and uninsured could potentially appropriate the lion’s share of this market.
However, infiltrating new demographics will require novel approaches to make the efforts worthwhile for stakeholders. More tech savvy, but perhaps less financially confident than the baby boomer set and middle-market consumers will likely respond better to simplified products made available through a wider variety of distribution options.
Meanwhile, insurers are seizing opportunities to shift private sector pension liabilities to individual annuities, as more corporations look to lay off their legacy retirement obligations. This provides a conduit to effectively create a new group annuities market, featuring more capital efficient products and services than carriers might be able to market to individual buyers. This could significantly increase the pool of assets insurers manage, and generate a much-needed infusion of revenue.
In 2014, look for more life and annuity carriers to begin developing simplified products and more cost-efficient strategies to target under-penetrated and emerging market segments, as methodologies shift from ‘sharing the proverbial pie’ to ‘enlarging the size of the pie’.
By paying closer attention to these classes of the population and needs, including simple products that offer value that are bought and serviced over varied but integrated distribution platforms, insurers might more effectively connect with this segment.
Insurers will also explore broader distribution platforms, including alliances formed with retailers such as the MetLife alignment with Wal-Mart to sell simple life policies at the latter’s stores.
Moreover, setting up highly-engaging online communities along with an interactive and easy-to-navigate multi-media website could give insurers cost-effective platforms to engage with tech-savvy tens to gain deeper consumer insights. One leading life insurer developed an online interactive tool to alleviate the factors that often discourage this segment from buying life insurance.