(Image credit: aKs_phOtOs.)
The shock of the global financial crisis put life insurance, as an industry, on the back foot. A period of de-risking and retrenchment inevitably followed as companies looked to consolidate their positions and weather the storm. A decade on, and much of this necessary work has been done. The life insurance sector is on a much firmer financial footing, and growth is back on the agenda. Indeed, for many providers, growth is now vital. An aging population means mounting payouts, thanks to policies of old which were designed when data painted a different picture of risk than the one we see today. Securing new sources of revenue is crucial.
There is a huge problem, however: the “pie” of potential customers for traditional life insurance offerings simply isn’t what it used to be, and grows smaller every year. Whereas in the mid 20th Century it was something that most households purchased as a matter of course, younger generations tend to view it as optional at best, if they even consider it at all. The number of U.S. households that hold life insurance of some sort is now at a 50-year low, and according to trade association LIMRA some 38 million households don’t have any form of life insurance at all. According to a recent study by the same organisation, less than 20 per cent of millennials indicated an interest in purchasing life insurance at any point.
So life insurers looking for new revenue have two options. They can try and increase market share of the existing, dwindling pie by wrenching already-engaged customers from rivals in an increasingly competitive environment. Or, they can look for new ways to engage new customers—to grow the pie, so to speak. While the first option is the easy route, any truly ambitious provider needs to think about ways to achieve the second, and the future of the sector in general will depend on re-engaging new generations of customers.
The challenge is one of engagement. The need for life insurance, and the protection it provides, hasn’t changed. What has changed, dramatically so, is how people consume information and purchase products and services. Much of this change has been underpinned by advances in online and digital technologies. Unfortunately, the decade of retrenchment following the crisis also meant life insurers stopped innovating. The sector has always had a reputation for lagging slightly behind the times. More than anything else, growing the life insurance pie will mean embracing these new technologies.
The process of gaining and keeping new customers can be broken down into marketing (funnelling people to the point of potential sale), policy creation and sale, and then customer retention and upselling. Digital technology holds the potential to transform each stage, and how they interrelate.
On the marketing front, part of the problem with the current set-up is overreliance on brokers and agents, who are incentivised to target wealthier households of the sort that still routinely look to buy the product (the dwindling pie). But newer forms of media, such as social networks—as well as the sheer ease of sending slick and professional communications in the digital era—can enable a more direct-to-market approach, allowing insurers to supplement their relationships with brokers by directly targeting the lower income and younger households that the existing model systematically overlooks. Research suggests that younger generations commonly perceive life insurance to be far more expensive than it is in reality—what better way to bust this myth?
On the policy design and sales front, younger, online consumers expect flexibility, speed and convenience above all, and are far warier of large or long-term financial commitments than their forebears. Modern advanced, automated underwriting capabilities can allow for the creation of a far wider range of niche, temporary policies, as opposed to the one-size-fits-all blanket coverage the industry is used to trafficking in. For example, an individual who engages in extreme sports at the weekend may not currently be interested in buying a whole life insurance policy—but may well see the value in taking out time-limited policies for the periods when they know they will be engaging in these riskier activities. By getting new customers into the ecosystem in this piecemeal fashion, the task of then getting those individuals to add on more coverage, or convert over to full-blown policies, becomes that much easier.
The Role of Data and Automation
Data and automation can play a key role in efficiently connecting these two steps together. Part of the reason the industry has avoided lots of smaller, niche policies in the past is that most will not apply to any given customer at any given time. But targeted, direct, data-driven marketing on social networks and other channels can get around this, to ensure potential customers are offered what they specifically need, when they need it.
To take the previous example, a Facebook group for extreme sports enthusiasts could be an appropriate channel. Or it could be taken further still, down to an individual level. Part of the problem the industry currently has with engagement is that it still relies heavily on the old fashioned approach of an annual sit-down with a financial agent or some other intermediary. The ability to identify customers in specific situations and engage them in a timely fashion—someone who has just gotten married, or is buying a house, for example – could prove a huge advantage, and the tools needed to achieve this do now exist.
The sales process itself also needs to be brought in line with modern consumer habits. In a world where people are used to being able to buy most things at the touch of a few buttons on a desktop or mobile device, this approach needs to apply to life insurance too. Rather than reams of paper forms filled with incomprehensible and irrelevant information, the process should be simple, user-friendly, and quick. Advanced, automated, real-time underwriting technology will again have a key role to play here, and this is one area where life insurers can learn from other insurance sectors that are further along this road. With modern technology, the entire process of policy creation and sign-up, from start to finish, needn’t take more than seven minutes.
It is the third stage, however—customer retention and upselling—where digital technologies could arguably play the most transformative role in redefining the relationship between life insurers and their customers. There is much excitement about the potential of apps and wearables. A regular stream of real-time data from an individual, relating to, for instance, heart rate or exercise levels, could be very useful for designing precisely the sort of tailored, niche policies mentioned above, as well as for the purpose of targeted marketing.
But why should the information only flow in one direction? The life insurance industry has always centred around the collection and analysis of data, and embracing a new digital approach will increase the volume—and individualised nature—of that data by orders of magnitude. The life insurer of the future may have more precise information regarding the health and habits of their customers than the individual themselves, their doctor, or anyone else.
So why not give back? This is where what we call ‘Reciprocal Intelligence’ will come in. As well as providing the core insurance service, insurers could provide regular updates to customers regarding their own data and information – for instance, a message could inform a customer than they’ve reduced their average heart rate by X over Y period, or that their exercise levels have dipped by Z amount. This could be tied to incentives, function as a health warning, or could even connect to policy design through, for example, targets to reduce premiums. It would allow insurers to engage with their customers on a regular and meaningful basis, in a non-sales-oriented fashion, as opposed to the far more remote, irregular and formal relationship that has become traditional. This in turn would create far more opportunities for firms to educate and inform customers of the benefits of more comprehensive policies, as well as for more targeted upselling.
All of this potential for change carries big implications for insurance firms themselves, in terms of structure and culture. Utilising these new approaches will mean accumulating and processing huge amounts of data, and then knowing how to use it to maximum effect. It means that life insurance companies will need to become tech-savvy to the core, on an institutional basis. As has often been said in the era of Google and Amazon – “We’re all tech companies now.”
Firms looking to engage new customers will need to give serious consideration to the question of how to recruit, or collaborate with, those with the right skills and talent going forward. This will require a top-down element: firms wishing to lead the way will need to consider creating new digital departments, including new board level positions encompassing responsibility for delivering digital strategies (Head of Reciprocal Intelligence included). Firms will also need to work to find ways of integrating the right technology solutions into their businesses. There are already numerous InsurTechs that address some of the most pressing problems along the insurance value chain, so collaboration is key.
There is no real reason why life insurance shouldn’t be as much of a standard part of life as it was for individuals in the 20th Century. This isn’t a case of VHS being surpassed by the internet, or steam by electric. It is a matter of technological and cultural adaptation to new habits and ways of living. Those that fail to adapt will find themselves scrabbling over an ever-dwindling pie of revenue. Those that do adapt, that grow the pie, could find themselves at the forefront of a new golden age for life insurance.