By Steven A. Morelli
NEW YORK CITY – The life insurance business is still struggling to find its way since the 2008 bust and that path seems to be diverging from independent producers, according to a McKinsey & Co. analysis unveiled at the LIMRA annual conference.
Peter Walker, ASA, a researcher at McKinsey & Co., discussed details of his presentation, “The Life Journey, Post Financial Meltdown,” with InsuranceNewsNet. He said his two years of research into the life industry revealed some systemic and alarming changes, particularly in the distribution channels.
Before the downturn, independent producers saw their share of the new business dollar grow from 50 percent in 2000 to 56 percent in 2007, dropping to 54 percent in 2008 to 47 percent in 2009 and 2010, said Peter Walker, ASA, McKinsey & Co. New sales overall dropped from a high of $14 billion in 2008 to $12 billion in 2009 and 2010.
A big reason for the shift is the economic storm of 2008 blew back the companies that also happen to depend on third-party distribution. They were heavily involved in variable annuities and other products with guarantees that companies struggled to sustain.
“They overcommitted to guarantees that could not be hedged,” Walker said. “That caused those companies to pull in their horns a bit.”
Mutuals, on the other hand, tended not to offer those kinds of guarantees and came out of the downturn in a stronger position. So strong, in fact, that they are primarily responsible for a reversing a decades-long trend of growing third-party distribution and shrinking company-owned distribution. For the past four years, the growth in the number of captive producers has substantially outpaced independents.
“The big mutuals are doing really well and they are recruiting at a rapid rate,” Walker said. “And meanwhile the third-party providers are cutting back their product portfolios because they have been hurt in the balance sheet. They are more in the fix-it mode.”
The sales numbers also illustrate the shift. Between 2000 and 2010, sales grew 60 percent in the company-owned distribution and dropped 40 percent in the third-party segment.
Beyond distribution, the entire life insurance industry faces steep challenges. Household wealth grew rapidly over the past 30 years, from $7 trillion in 1980 to $48 trillion in 2010. A growing percentage of that wealth went into bank deposits, stocks and bonds, mutual funds and pensions during that period. Yet, life insurance missed out on that growth.
“Life insurance is the only area with a declining share of the consumer balance sheet,” Walker said. “That has quite a bit to do with the aging of the distribution force.”
That demographic shift in sellers corresponded with a shift in buyers, Walker said.
“The industry has been moving upscale to the affluent market and leaving the middle market unserved,” Walker said. “Life insurance has become a niche product.”
The number of individual policies sold dropped from 17.1 million in 1985 to 9.3 million in 2010, a 46 percent decline. Over that same period, the average face value of each policy grew from $53,000 to $177,000, a 233 percent increase.
The sales trend went hand in hand with the growth in third-party distribution and an aging sales force. Salespeople age with their clients, Walker explained. So, as clients gain wealth, they buy bigger policies and then age out. The life insurance industry needs younger agents to bring in younger clients.
“Older agents don’t naturally connect with younger clients. Agents typically sell to their peers,” Walker said. “The industry is missing out on those relationships with younger families and those opportunities. The bigger question is if you continue to shrink and not pick up people at a younger age, what’s going to happen to the overall size of the life business when you go out a decade?”
But there is a bright spot within the troubling numbers, the analyst said.
The aging of the sales force might also hold a key to the industry’s distribution problem. A quarter of the already shrinking number of producers are over 60 years old. That number in itself represents a problem for the industry, but those producers have a problem themselves.
Only 34 percent of the over-60 group of producers have a succession plan. This presents an opportunity for insurance companies to help recruit younger producers into those practices to accomplish two goals: perpetuate the sales force and bring in younger clients.
Walker sees the replenishing of the sales force as a vital imperative for the industry because his study showed that the current fundamentals will not sustain long-term growth.
“When you look at the underlying drivers and see that you’re losing the next generation,” Walker said, “you have to be really worried.”