Is growth on the horizon for European life insurers?
I recently chaired a panel at an industry conference on the growing retirement savings gap. It was a lively debate between industry and regulatory representatives, but I was left feeling somewhat unsatisfied, having not got to the bottom of a solution to one of the most profound societal challenges of our time.
My mother turned 75 this year and is fortunate enough to be enjoying a financially secure retirement. Although we were never a wealthy family, my parents were big savers and made many sound investment decisions, including opening a private pension, which is now enabling my mother to enjoy a relaxed lifestyle in older age.
When we consider the scope of the global retirement savings gap ($1tn by some estimates and growing), it’s easy to miss what a staggering number it is in human impact terms. In Europe, a recent EIOPA survey found that more than half of the current working population do not feel confident they have sufficient assets to sustain their lifestyle in retirement. That means a generation of people will potentially enter financial hardship unless something is done to address the issue.
The good news is that the gap should also be viewed a major growth opportunity for the life insurance sector.
What are the macroeconomic and demographic trends telling us?
The demographic trends that have contributed to the retirement savings gap include an increase in life expectancy and a subsequently ageing population; and baby boomers exiting the workforce without enough of the next generation to replace them.? Macroeconomic trends have also had an impact, with inflation leading to higher cost of living and rising healthcare costs.? Market volatility and the past decade of low interest rates have put pressure on investment returns for pension schemes and the fiscal purse.
These are not new trends, and many challenge whether the impacts of this retirement savings gap will ever be felt, instead pointing to counterforces, such as individuals working longer and an uptick in the labor participation rate. Still, most industry observers agree that these counterforces serve only to slow the trend but not reverse it.
Action-oriented business leaders are keen to explore new ways for the industry to contribute to greater financial security for citizens. There is an opportunity for the insurance sector to play a larger role in helping customers to achieve better financial outcomes throughout different life stages, whether through better advice and customer engagement models or more flexible and cost-effective savings, investment and protection products.
How has the life and retirement industry responded so far?
The past decade of low interest rates across Europe, coupled with some of the biggest changes in prudential regulation and accounting standards ever experienced by the industry, have proven to be a major challenge for firms. The market’s response has generally been transformation of finance and risk functions, a redesign of products and investment strategies to reduce capital intensity, and cost optimization efforts. In some cases, insurers have transferred legacy businesses to closed book consolidators. These actions have helped insurance providers navigate regulatory change, strengthen balance sheets and protect dividend capacity.
However, what has often taken a backseat has been innovation in customer experience and product design.? Many of the solutions offered are the same as they have been for generations, and suffer from lack of flexibility, low touch and high cost to serve.?
For customer segments at the higher end of the wealth scale, these shortcomings have allowed new competitors in the wealth and asset management sector to muscle in and achieve significant growth with simple, flexible and inexpensive savings products.
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For mass market segments the insurance proposition is often still the only game in town, supported by tax incentives and some product guarantees.? However, firms are facing challenges in connecting with new customers as agency forces are costly and losing relevance to younger savers. ?Workforce pensions offer good access to customers in some markets, but at much lower margins – requiring significant improvements in efficiency.? ?The result is that fewer mass market customers are getting the advice and products that they need, when they need it.
A more optimistic future?
As I talk to leaders around the life insurance industry, I am hearing more executives sharing an optimistic view on this topic, not least as regulatory change slows pace and interest rates rise, allowing management to reprioritize time and budgets to innovation strategies.
Increasingly, leaders at life insurance companies see their role as providing holistic “solutions for living” as opposed to products focused on a specific event. We are seeing more flexible products come to market, with options to shift the balance between protection, accumulation and decumulation through longer and more mobile lifespans. ??Successful collaborations between life insurers and the InsurTech ecosystems present a unique and compelling opportunity for insurers to connect more meaningfully and frequently with their customers, and can take multiple forms.? Links into health ecosystems offer opportunities when it comes to building solutions that support healthier lifestyles and physical wellness, engaging customers whilst continuing to offer many of the features of traditional life policies. ?Participating in financial literacy and education programs that provide a combination of human and robo-advice for underserved customer segments are another option to help bridge the advice gap.
We are also starting to see more firms embrace the challenge of reducing the costs of life insurance advice and products, leveraging emerging technology to drive a step change in efficiency through the organization.
Where to start?
For insurers looking to re-energize their business models for the future, the key is to balance cost optimization with customer-centric innovation. That journey starts with asking the right questions:
I’m an optimist in that I believe there’s a huge growth opportunity for insurers, but I’m still a realist to the extent that I know it will be a challenging task requiring new technology, new talent and new ways of working. For a sector that has struggled with low growth for some time, the potential upside does justify the necessary effort and significant investments in product innovation and organizational transformation.
For more on the EY perspective on the gap and how the life insurance sector can make significant contributions to bridging it, see our NextWave life, health and retirement report. And look out for the upcoming publications our series on the reframing the UK life and pensions sector, launched last week by my colleague Martina Neary . In all of these pieces, our goal is to help the industry as it enables more individuals and families lead secure, healthy and comfortable lives well after their working years.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.