No one disputes that life insurance ownership in the US has been on the decline for decades.
The question up for debate is what to do about it.
The emergence of an insurtech sector is an indicator of entrepreneur and investor confidence in upside potential. The hundreds of millions of dollars being poured into technology by carriers is another.
But before piles of capital are poured into attempts to capture the opportunity, investors and legacy insurers should reflect upon the root causes of this seemingly unstoppable trend, and prioritize innovations that aim at solving the biggest issues:
• Carriers have evolved through their own cumulative behavior over decades away from serving the needs of the majority of Americans to meeting the needs of a shrinking high net worth population • A declining pool of independent agents are chasing bigger policies within this segment • The industry has, effectively, painted itself into a corner, and is trapped in a business model that, given its own complexity, is difficult to change from within
How have carriers painted themselves into a corner?
Carriers face what Clayton Christensen termed, in his eponymous 1997 classic, “the innovator’s dilemma.” While continuing to do what they do brings carriers closer to mass-market irrelevance, today’s practices, products processes, and policies don’t change. They deliver near-term financials and maintain alignment with regulatory requirements.
- Demutualization shifted focus to a new shareholder profile. Over 200 mutual life insurance companies have demutualized since 1930. This trend includes major carriers who were either acquired or pursued direct public ownership, beginning around 2000, e.g., Prudential, MetLife, John Hancock, Mutual of New York, Manulife, Sun Life, Principal, and Phoenix Mutual.
- Disbanding of captive agent networks for cost reasons has also meant the loss of a (more) loyal distribution channel. The carriers that used to maintain captive agent networks enjoyed the benefits of a branded channel whose agents were motivated to promote the respective carrier’s products. They chose instead to …
- Shift to third party distribution, increasing dependency on a channel with less control, and where they face greater risk of commoditization. Placing life insurance products in a broad array of third-party channels, including everything from wealth management firms to brokerages and property/casualty networks, has added complexity and increased emphasis on managing intermediated, non-digital channels. This focus comes at a time when other sectors are accelerating the move to direct, digital selling, aligning with changing demographics, technology trends, and consumer preferences for digital-first, multi-channel relationships.
- Product cost and complexity has raised the bar to close sales and has increased the focus on a smaller base of the wealthy and ultra-wealthy. With the exception of basic term life, life insurance products can be complex. They can be expensive. And, as a decent level of insurance at a fair premium requires a medical exam including blood and urine sampling, it takes hand holding to get potential policyholders through the purchase process. For the high and ultra-high net worth segments, the benefit of life insurance is often as a tax shelter, not simply to protect loved ones from the catastrophic consequences of unexpected earnings loss. More complexity equals more diversion from the mass market.
- Intense focus on distribution has come at the expense of connecting with the client. Insurance company executives have long insisted – and behaved as though — the agent is the client – if not in word then effectively in deed. The model perpetuated by the industry delegates the client relationship to the agent. This has its plusses and minuses for the client, and certainly has come back to bite the carriers as they contemplate a digital approach to the marketplace where client data and a branded relationship matter. Carriers certainly do not win fans with clients – overall Net Promoter Score ratings for the insurance sector broadly are even lower than Congress’ approval ratings, and for at least one major carrier are reportedly negative.
- The number of licensed agents is on the decline. The average age of an insurance agent or broker has increased from 37 years in 1983 and is now 59, based on McKinsey data. Agents have a poor survival rate: only 15% of agents who start on the independent agent career path are still in the game four years later. Base salary is negligible and it’s an you eat what you kill business. This is a tough, impractical career path for most, and has become less attractive over time.
- The industry is legendarily slow and risk averse. Think about actuaries – the function that anchors the business model makes a living by looking backwards and surfacing what can go wrong – a valid role, but the antithesis of what it takes to build a culture where innovation can thrive.
What is the path to opportunity?
Here are innovation thought-starters to create value for an industry undergoing transformation:
- Clients must be at the center of strategy. Twentieth-century carrier strategy may have been grounded in creating distribution advantage and pushing product, but twenty-first century success will come to those who put the client at the center of all aspects of execution. “Client centricity” is a way of operating a business, not a slogan.
- Innovation starts with a new answer to the question, “who is the customer.” The agent is a valuable partner, but s/he is not the client. There is white space in the mass market – the middle class – not being served by the current system beyond a limited offering. Life insurance ownership has been linked to the stability of the middle class. We should all be concerned with the decline in life insurance ownership and lack of attention paid to this segment.
- The orthodoxy, “insurance is sold not bought,” sets a self-inflicted set of limitations that can and should be disrupted. The existing product set may have to be pushed to clients because of its complexity, pricing, target audience, channels and near-term performance dependencies.
- Getting the economics right and meeting the needs of today’s clients will demand a digital-first offering – from being discoverable via SEO and social on mobile screens, to supporting application processing, self-service, premium payments, document storage and downloads, and connection to licensed reps whenever clients feel that is necessary. It will require full digital enablement of agents to create the right client experience, and favorably impact revenues and expenses. Ask anyone who has purchased life insurance about his or her decision journey, and invariably you will find out that shopping for insurance is a social, multi-channel experience. People ask people whom they like and trust when it comes to making important life event-based decisions. Aligning to how people behave already is a winning approach, and is what customer-centricity is about.
- In a world of big data, it’s ironic that the insurance sector is one of the most sophisticated in its historical use of data. Winners will realize the potential of new data sources, unstructured data, artificial intelligence and the many other manifestations of big data to personalize underwriting, anticipate client needs and create positive experiences including multi-channel distribution and servicing. Amazon, Apple and Google have set the standard on what is possible in customer experience, and no one will be exempt from that standard.
- Life insurance products may be an infrequent purchase, but the need to protect one’s loved ones can be daily. In today’s product-push model, an ongoing relationship beyond the annual policy renewal is the exception. Consider the potential of prevention services as a means of boosting lifetime value and client loyalty. In a world full of insecurity, there is a role for an ongoing conversation about prevention and protection. But, the conversation must be reimagined beyond pushing the next product to one that places a priority on serving the client.