The European life insurance market is facing several challenges and opportunities that are going to shape the future of the industry. Chief among these is an aging European population, which is having a polarizing effect on how insurers service their clients, as well as how they win new ones.
A key impact of these aging populations is that state-funded pensions are becoming costlier to manage. Governments are responding by placing more responsibility on individuals to plan for their own retirement, which is shifting the emphasis to private sector solutions. For instance, in the UK, the introduction of automatic enrollment in workplace pension schemes has brought 10 million new individuals into pension saving so far, all as private pension customers.
At the same time, where once retiring typically meant buying an annuity and then sitting back, forgetting about your pension arrangements, and simply cashing your pension check each month, regulatory changes across Europe mean that this is no longer the case. Retirees now have much more choice in how they can use their funds. This is creating opportunities for insurance firms looking to meet their needs.
However, there are also immediate challenges that need to be addressed at a much more rapid pace than most retirement-focused companies are used to moving.
Dealing with financial challenges
Muted economic growth across the continent since the financial and eurozone crises of 2007-09 has led to the stagnation of wages, an extended period of low-interest rates, and a subsequent lack of growth in the returns that funds are seeing. Despite recent interest rate rises by the Federal Reserve and the Bank of England, it is likely that a comparatively low interest rate environment is here to stay, making it one of the biggest problems facing the industry. On top of this, Europe’s mature asset management sector poses a serious threat to life insurers’ ability to grow.
Low growth across the sector has also been exacerbated by increased financial pressure being placed on the region’s working generation – a situation that has only been made worse by the Covid-19 pandemic. With another economic crisis looming large, individuals are being compelled to choose between their long-term goals of saving for a comfortable retirement and meeting short-term financial obligations, such as mortgage repayments or rent.
This downward pressure on pension schemes is significant. However, the current crisis is also an opportunity for life insurers to adjust their business models to building lasting, meaningful relationships with customers and increase their own profit margins. In practice, this will mean a shift to:
- More personalized products that offer the customer greater value
- Better access to product distribution via digital tools
- Adjacent products and services that complement the broader insurance ecosystem
The benefits for insurance organizations could range from increased customer loyalty to reduce acquisition, distribution, and admin costs, and an opportunity to grow from adjacent sources of profit.
Addressing the ongoing evolution of customer needs
The changing nature of work – exacerbated by Covid-19 – is affecting not only businesses and individuals but also the way that offices and retail spaces are being used. If more people are working from home, there may be different patterns of demand for office space and other commercial units going forward. This may, in turn, dampen returns and increase the risks associated with property-related asset classes.
Even without the rapid shift to working from home, the trend has been toward individuals being much more flexible in the choice and direction of their careers. Moreover, the rise of flexible working is expected to accelerate as we move through 2022 and beyond.
However, to reach a generation of project contract workers who are often lower-paid, the industry will need to transform its business model to reach a lower price point and find new ways to engage such customers in their long-term financial needs. “Employee benefits for the self-employed” might be one gateway offer to attract a more flexible talent. Equally, greater digitization could enable organizations to offer robo-advisory services as a cheaper, yet effective, way of servicing this growing customer segment.
Meeting the growing desire for financial well-being
Financial well-being and resilience are now recognized as crucial to people’s mental health and happiness. However, with government pension and retirement plans looking less viable, such financial well-being will be harder to achieve. Consumers are increasingly looking for partners and service providers to help them manage their day-to-day financial needs while helping them plan for the future.
In the UK, the market is slightly more advanced than in other European countries in the way the retirement sector services customers, largely due to the maturity of its pensions market.
Other countries are at varying stages of progress. Germany, for example, has only recently started introducing defined contribution (DC) pension schemes, while France is currently considering regulations similar to the pension freedom reforms and auto-enrollment measures introduced by the UK government in 2015. The pension freedoms allow people aged 55 and over to access their DC pension pot in whatever way they want – thus allowing them to withdraw one lump sum should they wish to do so.
This increased choice – and the accompanying customer confusion for less financially-savvy consumers – presents a real opportunity for life insurers and pension providers. By educating their customers and supporting them in making the right decisions through related services such as financial planning tools, insurers can not only improve the financial well-being and resilience of customers but also build loyalty and trust.
Supporting customers in their long-term financial decision-making can turn into a sustainable revenue stream, running from the beginning of an individual’s career all the way to retirement.
Building trust in technology
The threat of disruption from FinTech companies and Insurtechs continues to form part of the conversation around the future of the life insurance industry. Yet, to date, these companies have struggled to make significant headway.
Put simply, customers do not yet trust these relatively untested, young start-ups to take care of their long-term retirement funds. This gives traditional players a real opportunity to take advantage of their established reputations.
To build on this, and compete effectively with FinTechs, traditional insurers must act faster to embrace new technologies – to not only service their customers better but to also attract the next generation of talent. Widespread use of automation and self-service can help to achieve a level of cost efficiency that allows for both asset growth for customers and profit margin for the provider.
Open finance continues to offer customers a complete overview of their pensions, insurance products and savings. With more power to choose the financial product that suits them best, customers will increasingly look to insurers for improved technological capabilities and digital product offerings.
Several established European insurers are already making efforts to improve these capabilities – often in partnership with FinTechs and other start-ups.
Covid-19 could also provide the push needed to help insurers make this leap and provide the digital tools that customers are demanding. The lockdown restrictions that came in across Europe have increased demand for online solutions that offer peace of mind and ease of use such as electronic signatures and document exchange. With these initiatives, organizations can provide the kind of personalized guidance and support that builds lasting customer trust and loyalty.
Thinking differently about risk
As we’ve mentioned, the pressure from low and negative interest rates is of particular concern in Europe, where regulations surrounding solvency make it more difficult for insurers to offer traditional products backed by a life fund. With rates around 1%, costs are a key differentiator for long-term investment providers.
Overall, the life insurance sector is much more sensitive to interest rates given the fact that the sector is dominated by savings products and long-dated multi-year contracts. In Switzerland for example, life insurers have long suffered in this environment, with an average interest rate of just 0.66% since 2000, and -0.75% as of March 2021.
Insurers have taken some steps such as changing product features and looking for higher investment returns to help them manage the persistently low-interest-rate environment. For instance, some players have lowered the guaranteed benefits of new savings products.
In effect, some insurers are gradually beginning to move some of the interest rates and other investment risks to the customer. The focus is shifting to unit-linked products, thereby reducing insurers’ exposure to financial market risks.
However, it remains to be seen whether this strategy will work in the long run. Insurers must still lean toward their unique selling proposition: risk protection. Protection from both biometric and financial risk should not be abandoned in favor of performance-oriented products. However, it is a difficult balance to strike. To give themselves the best chance of success, insurers will have to work hard to transform their organizations. Investing heavily in technology will help reduce costs and increase the range of ancillary services that will favor the customer’s overall well-being.
Providing more value through ecosystems
Accumulated savings will serve different retirement needs for different customers. To accommodate each customer, insurers will have to provide an ecosystem of evolving products and services (also by partnering with others). Here, health services are a natural integration. Several insurers now offer combinations of health and retirement products. This ecosystem can be further enhanced by digital health platforms with personal customer portals.
The insurers that will thrive in this new normal will offer their customers not only the products they need to aid them in realizing their financial and life goals, but also the support, advice, expertise, and personalized user journeys that they have come to expect from all industries. Here, an effective use of technology will be key to both providing the levels of service required and improving insurers’ efficiency. This, in turn, is crucial to increasing individuals’ confidence in being able to save for a comfortable retirement – and society’s ability to meet the needs of an aging population.
Peter Manchester is Global Insurance Consulting Leader and EMEIA Insurance Leader at EY