Issue 14 - Escape trajectories

Welcome to Edition 14.

The life insurance industry is in the growth doldrums in mature global markets. I’ve written before that I think there are two big ‘Exit Doors’: #1) The Customer First Exit — innovating at scale to access large unmet customer needs using digital engagement, ecosystem partnerships, and ‘testing to right’ with the most obvious space being around financial wellness; and #2) Becoming an Asset Management-led Insurer — turning the traditional insurance model focused on liability origination on its head to become, first and foremost, a fast-growing private credit manager with a liability origination engine as one funding source.

I’m increasingly convinced that ‘Exit Door 1’ may be unrealistic. The conditions for success are too hard to achieve. Organizations need a combination of a passionate and visionary CEO, permission to invest at scale —from investors who have gotten (too) used to a rich diet of share buybacks and high dividends, and the ability to build an innovation flywheel within what are mostly very old organizational machines.

While I haven’t entirely lost hope about Door 1, I think Door 2 - Becoming an Asset Management-led insurer - is hard but achievable, and much more likely to be the exit trajectory for at least a few industry players (several of whom are already mobilizing). The attractiveness of the asset management-owned insurer model is summarized in the diagram below.

Exhibit 1: The asset managed-led insurer 'industrial logic'

By way of a brief explanation:

1. There are significant secular tailwinds for debt markets both on the demand-side as a result of derisking of defined benefit pension plans and the rising demand for less volatile investment strategies for aging investors, and on the supply side as a result, for example, of large global infrastructure borrowing requirements. At the same time, we are seeing a secular shift from public to private markets and an ongoing change in the role of banks as lenders displacing capacity to non-bank financial institutions. All these factors mean that the outlook for private credit is very positive (witness, for example, Ares Management trading at 30x forward price/earnings).
2. A majority of large private debt managers with strong credit capabilities now have, or are rapidly building, insurance balance sheets. Why? Because insurance liabilities provide predictable long-term funding which, in turn, means that private credit managers can build more predictable deal flow and also use insurance liabilities to participate in larger deals. So, the combination of an insurance balance sheet and private credit origination and structuring capabilities allows a private credit manager to build scale faster and with more certainty.
3. Numbers 1 and 2 on the exhibit indicate that there are significant synergies from the combination of a private credit business with a life balance sheet. The balance of the economics through time here are to the private credit asset management business. ?The dominant feature of the model is the private credit business, with the balance sheet being an important component but not the main act. In order to pivot, therefore, insurers wishing to head for ‘Exit Door #2’ must turn their model on its head.

What do we mean when we say, ‘turn their model on its head’? At the highest level it’s fairly easy to describe —insurers wishing to make the shift need to transition:

• From: being an insurance business focused on raising liabilities by issuing guarantees to policyholders and then investing some of their general account assets in private credit.
• To: being, first and foremost, an asset management business, providing private credit investment solutions to the full range of third-party customers — institutions (pension funds, sovereign wealth funds, family offices, endowments) and individuals (retail investors) — through a variety of channels, fed by a private credit origination and structuring engine which is partially funded by an insurance balance sheet and stretches across a broad ecosystem of underlying collateral types.

The ’To’ state requires change to almost all aspects of existing organizations — leadership, talent, culture, governance, operating model, technology, incentives/reward, investment prioritization, and organic and inorganic investment agenda. I would say that, while I’m optimistic in terms of a number of incumbents mobilizing around becoming asset management-led insurers, the jury is still out in terms of whether they will be able to ‘cross the chasm,’ and truly transform in a way that will allow sustainable competition in the emerging future state.

That’s it for Edition 14.

Oliver Wyman latest releases

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The Future Is Now For Insurance CEOs: As leaders face 2024, they need to be sharper than ever on where they truly differentiate. We believe the?future is now.?In our latest podcast episode, Mick Moloney and Paul Ricard discussed our 10 actions for CEOs in 2024, including the state of the insurance industry, innovating at scale, shifting market cycles, the growing role of private equity and the asset-management-led insurer model, and using finance and actuarial transformation to accelerate change. Tune in. Website | Apple | Spotify

Reinventing Insurance Newsletters

In this newsletter, my aim is to pick topical issues and news and relate them to the macro issues happening in the insurance industry. I publish regularly and look forward to your thoughts and comments.

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• Edition 1: A look at the macro shape of the Insurance Industry
• Edition 2: A look at the latest insurance macro trends
• Edition 3: A Look at Personal Lines P&C
• Edition 4: Become an Asset Management-Led Insurer
• Edition 5: P&C market cycles, underwriting challenges, and relative sources of profitability
• Edition 6: Private equity’s rapid growth in the insurance sector
• Edition 7: CIAB Meeting Dispatches
• Edition 8: Asset-owned Insurer moves (US & UK); Growth opportunities in Asset & Wealth Management
• Edition 9: Risk Fluidity, Earnings notables
• Edition 10: Macro views and growth trends
• Edition 11: Leadership agendas for 2024
• Edition 12: Surplus lines revolution: Exploring the growth in non-admitted insurance markets
• Edition 13: The trillion-dollar insurer

Mick Moloney is a Partner at Oliver Wyman, based in New York. He is Global Head of Insurance & Asset Management and Managing Partner for Oliver Wyman Actuarial. In combination these groups include over 700 colleagues globally dedicated to providing advice to Life, P&C, and Health insurers, asset managers, and private capital sponsors across strategy, operations, technology, finance, risk, and actuarial disciplines

Mick spends his time working with leading insurers, asset managers, and advisory firms on a range of strategic and execution topics with a particular focus on growth, innovation, and efficiency in retail and institutional markets. He’s passionate about growth and reinvention in the industries he serves, with a strongly held belief that while each is facing disruption and dislocation, there are massive unmet needs which provide the prospect of a bright and vibrant future.