U.S. Life Insurance Getting to 2020: Strategies for Profitable Growth
The U.S. life insurance industry has been slow to recover from the economic crisis and returns in this large, mature industry have been low. While the life industry share index outperformed the S&P 500 in 2013, as Figure 1 shows, it has yet to return to pre-crisis levels. 2
Figure 1: While the life industry share index outperformed the S&P 500 in 2013, it has yet to return to pre-crisis levels. Index Value 120 100 80 60 40 20 AMBUL = A.M. Best's U.S. Life Insurance Index AMBUL Composite P/BV AMBUL index S&P 500 INDEX 0 12-31-07 04-30-08 08-31-08 12-31-08 04-30-09 08-31-09 12-31-09 04-30-10 08-31-10 12-31-10 04-30-11 08-31-11 12-31-11 04-30-12 08-31-12 12-31-12 04-30-13 08-31-13 Source: Accenture Research based on data from Capital IQ and AM Best In addition, the industry has been challenged to make a sustained impact on its ROE s or find top-line growth in new or existing markets in the U.S. In the first half of 2013 Accenture completed some modeling and scenario planning analysis around strategies for future growth. As we look into the future, there are no expectations that growth will appreciably accelerate with businessas-usual strategies. Forecasted top-line premium growth through 2020 is only expected to compound at a very slow 1.9% rate and net gains from operations at a similarly slow 3.0% rate. The industry continues to face strong headwinds, including low interest rates, cost pressures, product focus shifts, changing customer behaviors, increased competition and new regulatory initiatives. These and other factors are forcing life insurers to re-think their approach to the market. With some possible relief on interest rates and an improving economy, change in consumer behavior has become the biggest threat to long term, profitable growth. The consumer s path to purchase used to be linear and confined to a single channel. Thanks to technology, the journey now is dynamic, accessible and continuous. As discussed in the Accenture Point of View What Today s Nonstop Customers Want from Life Insurers and How to Give It to Them, buyers no longer enter one channel but are continuously in multiple channels. Consumers have become more aware of and sensitive to price and, when coupled with competing financial priorities, this has led to decreased levels of loyalty and trust. They have higher expectations for service and expect more transparency from service providers, especially when using online channels. Evaluation, rather than purchase, is now the focal point, with consumers constantly re-assessing their choices. Across all age groups, there is increasing use of digital and social media, and mobile devices such as smartphones and tablets. Consumers are exposed to content beyond the brand s control, and that content is more insistent and more influential. Despite this challenging environment, insurers will need to quicken the pace of change and move forward on multiple fronts. The good news is that opportunities for growth are out there for those willing to undertake the right strategic initiatives while addressing improvements to core activities. 3
Insurers planning for a return to profitable growth should focus on the following key areas as seen in Figure 2 to drive a balanced attention to growth through customer experience transformation and operational excellence. This will deliver a sustained shift in their cost curves and ROEs. Figure 2: Improving life insurance industry performance will require leveraging a focused set of value drivers Percentage point ROE improvement Bottom-line impact Top-line impact 7.8% 2.5% 0.6% 2.1% 13% Current 2020 slow growth scenario Reduce general expenses Optimize commissions Grow top-line premium Formula driven 13% ROE Value drivers to improve performance Operating model/organization transformation - Consolidate/breakdown silos/adopt shared services - Process excellence - Spans/layers IT transformation - Application rationalization - Automation/self service - Platform modernization - Demand management Sales & service - Analytics/segmentation - Lean agency structure - Multi-channel capability Sourcing/procurement - Cost arbitrage - Effectiveness (outcome based) Optimize compensation spending - Refine sales credit participation and validate compensation eligibility - Re-align pay mix and refine pay for performance guidelines Reduce overpayments - Enforce policies in processes and tools to improve compliance Reduce operations costs - Reduce operational support requirements from compensation administrators and IT personnel - Re-purpose time from data validation to value-added analysis - Enhance self-service capabilities for the field - Reduce labor costs via consolidation - Increase new business by improving market penetration and exploring emerging markets - Improve retention - Increase cross-sell rate - Optimize multi-channel distribution to enhance customer experience and channel profitability - Enhance distribution model and offerings to reach attractive underpenetrated customers /customer segments (Gen X, Gen Y, middle market, ethnic, retirement services) - Recruit advisors who improve productivity and retention - M&A to expand offering, reach and returns Priority focus should be on strategic cost reduction through operating model transformation, and enhanced customer experience for growth through analytics and digital technology, and improved multi-channel distribution. 4
Customers The dual forces of an economic downturn and a technological boom have created customers who are price conscious yet sophisticated and knowledgeable. They expect more for less, and particularly convenient, customized, holistic solutions. To meet these expectations insurers should choose target segments and tailor communications and offerings appropriately. They need to ensure that the customer experience across channels (web, advisor, call center) is integrated and consistent. While consumers are still interested in working with an advisor during the sales cycle, insurers need to strengthen their web, mobile, and social capabilities to become more engaging and relevant for the entire sales process. Distribution Although customers are increasingly self-educating, they still want and need advice. Consider using adviceled distribution models that can match customers with appropriate levels of advice for their needs and ability to pay. Advice can range from embedded product selection to personal financial management to more complex, personalized advice. There needs to be a fundamental shift from selling product to providing solutions for consumers problems. In this rapidly changing environment insurers are dependent on a sales force that can be in close touch with younger customers, and tech savvy customers young and old. Agents who fit the bill are demanding access to innovative technologies and analytics to gain better insights into the needs of customers. Analytics can also help segment the customer base more accurately and provide deeper knowledge to help producers reach underpenetrated markets, such as the middle market, younger consumers, women, and ethnic markets. Technology Enablement Digital technology should be leveraged to transform every process across the insurance value chain, in addition to the historical focus on sales. Digital technology can enable expanding and personalizing relationships with customers, distributors, and business partners at scale. Software-as-a-service models are being implemented in frontend CRM, to underwriting, to back-end policy administration to increase agility and reduce costs. The new digital insurer will be powered by analytics that puts data to work to drive solutions-based customer insight in areas such as crosssell and next best offer, to predictive underwriting decision models, to customer retention programs. 5
Strategic Cost Reduction While many insurers have cost reduction programs underway, the focus needs to be on making changes to the operating model that creates a material and sustained change in the cost structure. Strategies that can achieve those results include using shared services to establish centers of excellence and generate real advances in process excellence, and service quality in corporate areas such as finance and IT and in core insurance functions such as claims and call centers. Modernizing and transforming the complex policy administration environment is an area where different levers such as surrounding, replacing, and outsourcing should be considered to reduce the significant cost and complexity that currently exist in that part of the operating model. While not new, lean strategies can be applied in a more end-to-end transformation approach, to support standardization and optimization of processes across the entire value chain. Distributor compensation, which typically makes up a large component of insurers expense, can also be optimized by decreasing operational costs, enhancing sales productivity, and strategically aligning with performance. In our experience, transforming the operating model could reduce operating expenses by more than 25 percent, and improve speed and cost to market by 20 to 30 percent. 6
While the journey to sustained growth may still be challenging, the good news is that by taking the necessary strategic steps insurers can expect increased return on investment in both the short and long term. For example, improved back-office functions, increased outsourcing of non-strategic functions, and better use of data analytics can all yield immediate gains in both efficiency and effectiveness. The road to 2020 may not be smooth, but with the right initiatives insurers can withstand the unrelenting external pressures, and position themselves competitively in the changing landscape. 7
About the Authors Brian DeMaster is a Managing Director in Accenture Life Insurance Industry Services, with over 17 years experience working with life and annuity clients on a variety of projects. He has held a series of roles in management consulting, technology delivery, client account leadership and life practice leadership. He is responsible for Accenture s North American life insurance business services and is the account lead for several North American life insurance clients. Patrick M. Lyons is a Managing Director with Accenture s Insurance Client Services Group, and leads Accenture s Life Insurance Transformation Business Service. He has responsibility for the sales, solution delivery, and client satisfaction of our global insurance clients. Patrick has over 20 years of experience advising global insurers in developing and implementing comprehensive business and technology strategies. About Accenture Accenture is a global management consulting, technology services and outsourcing company, with more than 323,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com. Copyright 2015 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. 15-2460