Low interest rate has been the main cause in the decline and negative performance of the life insurance market in USA in recent years

Definition / Scope

Life insurance is a contract made between a life insurance company and the insurance policy holder. Here, the insurance company is known as ‘Insurer’ and one who buys the policy is called’ insured’. It serves as a financial protection for the beneficiary in case of the death of the insured.

The insured pays periodic amounts called premiums for the duration of the policy and upon death, the insurance company pays a specific sum of money to the beneficiary. Payment from the policy can be a lump sum or an annuity (installments paid on regular basis).

It falls under the life & health sector or normally called life sector of the insurance industry in USA. There are three basic forms of Life insurance in US which are:

Term: It provides coverage for limited period of time and is generally preferred by people who have children.

Universal: It is similar to whole life but there is flexibility regarding the premiums and coverage as they can be adjusted and changed according to the requirements of policyholders

Whole life: It’s a form of perpetual life insurance, as it provides lifetime coverage and the face amount of the policy is paid to beneficiary upon death of the policy holder. The cash collected as premium can sometimes be withdrawn as well.

Market Overview

Within the life insurance the highest share of revenue is captured by the following five plans:

• Annuities- They are the series of payments made at equal intervals.Some of the examples are: Regular deposits to savings, monthly home mortgage payments, monthly insurance payments etc.

(51 percent)

• Individual whole life- Whole life insurance or sometimes called “straight life” or “ordinary life” is a life insurance policy which remains in force for the insured’s entire lifetime,if required premiums are paid, or to the maturity date.

(11.3 percent)

• Individual term life- The death benefit will be paid to the beneficiary if the insured dies within the predetermined term. Term insurance is typically the least expensive way to purchase a substantial death benefit on a coverage amount for a specified period of time

(6.7 percent)

• Individual Universal life-It is a permanent life insurance which is similar to whole life but has a low premium or flexible premium payment options.

(6.1 percent)

• Group life-In a single contract, it covers an entire group of people. The policy owner is an employer or an entity such as a labor organization, and the policy covers the employees or members of the group.

Market Risks

The low interest rate has been the main cause in the decline and negative performance of the life insurance market in USA in recent years. Generally, this risk arises for the insurers on the part of reinvestment as low interest rates would allow them to only earn less returns on the premiums invested. The net income has declined and was found to be lowest in 2016 among the last decade.

The various programs tailored under the InsurTech also presents possible risks for insurers and insurance consumers. For example, the more dependent insurers become on data and data analytics, the data will be exposed to the risk of cyber theft, or other data breaches. Other related issues with such technologies are the loss of human contact, loss of privacy and illegal discrimination.

Top Market Opportunities

Meeting the changing needs and demands of the consumers is essential to the life insurers. Customers have various expectations from these companies such as easy, reliable and quick service. A simple product is preferred by most of the customers and this would help the advisers to explain the insurance product to customers very well.

There are various undeserved markets despite having a huge potential such as middle-income group. Affluent class and young consumers. The middle income group can be served by using digital means to distribute insurance products, affluent class can be attended by acquiring sophisticated insurance advisers whereas the young market can be penetrated by addressing to their unique needs and preferences regarding the insurance product.

The distribution of the products from the internet has still remained unexplored. However in near future this channel can be used not only for underwriting, distributing but also from the consumers end for the payment of premium. Using this channel can help the companies to realize efficiency in operation, high penetration of millennial segment and also place a better position in minds of customers.

Generally, life insurance industry has been product-centric so far but there is opportunity for the companies is to shift their focus towards customer-centric so that they can create a core competency in comparison to others. For instance, many consumers especially the younger segment are not comfortable with the face to face conversations. Thus, this need can be addressed by developing a system through technology which will allow this segment of consumers to complete the process with little to no interaction.

Market Trends

There are options for the insurance companies to gain back their market position with the help of M&A and partnerships. New distribution channel such as internet and collaborating with InsurTechs will assist in improving the long-term positioning among the minds of consumers.

An amount of US$ 4.6 billion in funding has been received by the InsurTechs to innovate technologies to address existing issues of life insurance industry. The use of technology in the life insurance sector will continue to save cost and innovate the product and premium schemes.

While nearly five million more US households had life insurance as of 2016 than in 2010, those gains were fueled by population growth.

As similar financial institutions exist in the American economy such as banks, retailers, employers. Partnerships with these entities will allow the insurers to drive their productivity and sales. It will be easier to access more customers for the insurance companies by carrying out integrated operations.

Slow population growth has restrained the growth and sales of life insurance within the country. During the period of 2004-2016, the household headed by individual aged 25 faced a slow growth in the US. 

Life insurance companies have been slow to adapt the digital trends and technologies. As the companies like Amazon have increased the pressure upon rest of the industries to use and create personalized experience for consumers through the use of technologies.

Similarly, information distribution regarding the insurance products is not done effectively. According to a survey conducted by LIMRA, 30 percent of American adults say they need some or more life insurance, but fewer than half of them are likely to purchase any in the next year, because they do not know where to start.

The market positioning of the consumers in USA has changed. The generation X who were more concerned about the death and retirement opted for an insurance policy. At present the Americans are more worried about standard of living and survival. Thus, the insurance policy dominates no more in the market due to the lack of policies failing to address to the changing demands.

Industry Challenges

The possible new entrant in the industry are search engines, medical labs and credit card companies are in a verge to interrupt the life insurance industry. They are adept in data mining and thus they can use such technology to identify the customer segments who are less risk averse and those have a high probability to purchase life insurance policies.

Such data in other hand is used for the sake to meet the consumer requirements and if the insurance industry fails to address to these demands of consumers, the data aggregators will seize the opportunity. 

Similarly, the private equity firms are interested to venture in life insurance companies. These firms have effective business models and high risk forbearance in compared to the existing companies operating in the industry. This may help the equity firms to easily capture the market share of existing traditional life insurance companies. 

The customers have various inefficient and unpleasant experiences when coming into contact with the services provided by the companies. For instance, the underwriting process completion can take up to 8 weeks and this has also led to drop-out of applicants. There have also been problem with the agents where 4 out of 5 agents create policyholders without a personal contact with the insurer.

Another challenge is to engage consumers in the life insurance products. The brand equity of the company can never be built well among customers because of the agents and carriers who don’t make a sincere effort further the usual policy administration and purchase process.

The asset management companies are growing at an accelerated pace from having only 36%of market share during 1990 up to 70% at present. Introducing various products related to retirement plans, they are catering such plans to the older people who opted for insurance policy before. Today, many people who have reached their retirement age have shifted to these asset management companies that are providing higher returns on their investments.

Technology Trends

‘InsurTech’ is the ground-breaking use of technology in insurance. These include some of the development in the field of insurance through technology means such as digital platforms; the Internet of Things; telematics; big data; robot-advisors; machine learning and artificial intelligence; block chain; and P2P, usage-based, and on-demand insurance. 

P2P, or in other words ‘social’ insurance allows the policyholders to pool their capital and self-organize their own insurance. This is the source to create shared insurance experience through crowd funding. For example, one P2P entirely uses mobile application to help policyholders purchase insurance and make claims without paperwork.

To make the process of underwriting easy, the life insurers have been directly receiving information about the applicant’s health from the Medical examination bureau’s online data and limiting the response to less questions regarding lifestyle and health of the applicants. The traditional method of lab examination and fluid collection is soon to be replaced by the automated underwriting process.

Similarly, recently a firm which is adept in Science research has created a facial analytics technology which mines information on the biological, genetic, and behavioral traits of an individual insurance applicant and links these traits to variations in mortality risk. Using such new technologies U.S. life insurers can increase their progress to target the right customers in the marketplace.

Regulatory Trends

In the United States, state insurance regulators continue to collect and report on data regarding cyber and identity theft insurance products through the Cybersecurity and Identity Theft Insurance Coverage Supplement, now in its second annual reporting cycle.

In May 2017, President Trump issued Executive Order 13800 drawing attention to four objectives for enhancing cyber security which include securing federal networks, protecting critical infrastructure, promoting workforce development. Treasury, will continue to work for cyber security across the insurance industry.

The NAIC, for example, has formed an Innovation and Technology Task Force – which includes the Big Data Working Group. This provides a means to discuss emerging products and technology in the insurance sector, monitor technology developments that may impact state regulation, and develop regulatory supervision as needed.

Another entity, IAIS has also begun analyzing InsurTech and other similar developments in the Insurance Sector, which provides insights about technologies affecting the insurance industry, sets out a number of situations evaluating how InsurTech may change the insurance industry in the future, and identifies potential supervisory challenges caused by innovation.

January 1, 2017 marked significant changes in the regulation of reserves established by U.S. insurers to support their life insurance policy liabilities. The traditional way of calculating reserve requirements is replaced by the approach that identifies the risk of complex insurance products and then determine the right size of reserves. 

Other Key Market Trends

At present, the insurance products are mostly combination based or serving to the multipurpose needs. For instance, LTC (Long-term care) and critical illness issues are addressed by a single product where the health costs throughout the life of an insured is covered along with the nursing and medicine costs if critical condition arises. Such type of product has been the new trend among life insurers in USA.

New technology devices such as smart watch or similar wearable are also being researched to be used in the insurance industry. For instance, the data from pedometer can exhibit whether how much an individual is driven towards healthy behavior. Further, people sharing those data to their insurance companies may enjoy a less premium. Such, schemes can definitely takeoff if used by the life insurers.

Market Size and Forecast

The industry has a generated a consolidated revenue of $952 billion in 2018 and has grown at a CAGR of 3.8 percent between 2013 to 2018 In the year 2016, the life & health insurance industry generated a total revenue of $851.9 billion.

In 2016, Life & Health insurance sector net premiums written were $600 billion, marking a 6 percent decrease from the $638 billion in 2015. Total revenues were $852 billion in 2016, an essentially stagnant position from the previous $848 billion in 2015.

The US life insurance coverage gap averages about $200,000 per household, totaling $12 trillion.

Market Outlook

There are a total of 8884 companies involved in life insurance business and the industry generates a total employment opportunities of 341,717.

The competition in the life insurance industry is intense and there is a high volume of proliferation of product.

Total of 88.8% insurance market was captured by the life and health insurance sector in USA in 2012.

The number of life insurance policies sales value has almost halved-down from 17 million to almost 10 million.

The net premium in the life insurance sector decreased by six percent in 2016.

On the life insurers side they can still improve their stability in 2018 if interest rates are raised on a more regular basis.

Technology Roadmap

The insurance companies can provide effective solution through the use of information technology through following ways:

• Automating and providing seamless customer experience- The entire infrastructure cannot be changed however the core processes can be digitized. It can not only speed up the process of applications but also save time and money.
• Offer digitally based products- Various types of life insurance products can be distributed through the means of technology such as internet. For instance, mobile applications that allows to compare the insurance product schemes, rates and return, file application, make payments and complete the entire process.

Competitive Landscape

As of 2016, there are 598 life insurance companies in the United States most of them belong to the life and health insurance sector. In the same year, Metlife was the largest life insurance company in the country according to the market capitalization. 

Competitive Factors

Several insurers are experimenting with connectivity and advanced analytics to narrow the life application to-closing process from weeks to minutes, lowering on boarding costs, and minimizing the consumer dropout rate.

Digitization of underwriting can also enable online distribution capabilities, allowing insurers to cast their nets wider and embrace younger demographics that often prefer a more virtual experience.

There are already some positive signs. The gap is widening between what consumers can earn on fixed annuity contracts and bank certificates of deposit, with annuity holders having the added benefit of tax deferred status on gains.

Abaris, an InsurTech startup, launched a direct-to-consumer online platform for deferred income annuities. On the life insurance side, Ladder, another InsurTech startup, is now offering direct-to-consumer policies within minutes, particularly targeting younger consumers who may often avoid purchasing such coverage, given the time it traditionally takes to do so.

Key Market Players

In terms of the revenue generated by the companies, the largest players in the life Insurance market in USA are as follows:

• MetLife
• Northwestern Mutual
• New York Life
• Prudential
• Lincoln National
• MassMutual
• John Hancock
• Transamerica

Strategic Conclusion

Life insurers today are faced with a hard-hitting situation and need to act swiftly to remain competitive in the market. To respond to rapidly changing market needs, life insurers must ensure their company to become innovative, flexible, and responsive.

They can begin by focusing on customer experiences and use of digital transformation to create seamless operations. The sector may be heavily regulated and the condition of the current economy may hamper their performance but they need to build effective strategies to overcome the challenges and make cyber security the top priority at the present context.

References

1. https://www.statista.com/topics/1411/life-insurance/
2. https://www.freedoniafocusreports.com/Content/Blog/2018/01/10/Lively-Insights-into-the-US-Life-Insurance-Industry
3. https://www.treasury.gov/initiatives/fio/reports-and-notices/Documents/2017_FIO_Annual_Report.pdf
4. https://www.ey.com/Publication/vwLUAssets/ey-retail-life-insurance-industry-at-a-crossroads/$FILE/ey-retail-life-insurance-industry-at-a-crossroads.pdf
5. tiny.cc/ynv4yy
6. https://www.ey.com/Publication/vwLUAssets/EY_-_2017_US_life-annuity_insurance_outlook/$FILE/EY-2017-US-life-annuity-insurance-outlook.pdf
7. https://www.ibisworld.com/industry-trends/market-research-reports/finance-insurance/carriers-related-activities/life-insurance-annuities.html
8. https://www.statista.com/statistics/214544/total-revenue-of-us-life-and-health-insurance-industry/
9. https://www.investopedia.com/articles/personal-finance/092915/biggest-life-insurance-companies-us.asp