By Cyril Tuohy
Big changes are afoot in the life insurance industry even if the tectonic shifts are not immediately apparent to U.S. policyholders or advisors who sell to them. With Moody’s, among other observers, downgrading the industry some experts are even questioning whether the sector will bear much resemblance to its present appearance.
In a recent webinar titled “The End of Life Insurance as We Know It,” Jamie Macgregor, senior vice president of insurance for the consulting firm Celent, said that the financial crisis of 2008 has “made transparent what’s been hidden for many, many years.”
Changing demographics coupled with greater economic uncertainty have increased the burdens on life insurance providers.
Macgregor said that life expectancy is increasing while the average age of the world’s population is becoming younger. “One third of the babies in the U.K. are now expected to live to 100, which is pretty phenomenal if you think about your parents and your grandparents and their expectations of living overall,” Macgregor said in the webinar.
Better medical technology and healthier eating habits are fueling longer lifespans, he said. More fluid work-life patterns in which workers are employed not by one or two employers but by as many as two dozen before entering semiretirement, means life insurance policies will have to change the way they protect policyholders.
The defined benefit pension plan based on long-term employment with one or two companies, is headed for extinction. It will be replaced by a journey filled with starts, stops, restarts and 90-degree turns.
“The pattern of both accumulating wealth and then spending it, and supporting you though life, plus the protection needs you have during that life journey potentially, have changed quite radically within one to two generations,” Macgregor said.
Some insurance carriers and distributors have been preparing for buyers to shop and buy simple life transactions via smartphone. The use of self-service programs is also likely to increase, while a few firms are partnering with big brand retailers.
MetLife last year announced a pilot program to sell life insurance through Wal-Mart in the wake of Aetna announcing it would sell insurance through Costco. These kinds of pilot programs, which are taking place in the U.S. and the U.K., “potentially show the direction in which the industry could go,” Macgregor said.
A separate LIMRA survey found that 17 percent of consumers would buy life insurance through a retail channel.
Ongoing low interest rates will make it harder for the industry to achieve high returns. That “exposes any inefficiency in the core business” of an insurance carrier, Macgregor said.
“We believe that low rates, along with below-trend economic growth and prolonged volatility in the equity markets, will continue to erode insurers' earnings and revenues, gradually weakening their financial flexibility,” Moody’s vice president Laura Bazer wrote in a research note to investors last year.
In the U.S. and Europe, life expectancy without a concurrent rise in the effective retirement age has put the squeeze on insurers.
In the U.S., for example, while the effective retirement age for workers in 1970 was between 65 and 70, according to Celent, average life expectancy among men and women was 70.8 years. In 2009, workers’ effective retirement age hovered around 65 years old, but average life expectancy for men and women rose to more than 78 years, according to the National Center for Health Statistics.
For many workers in developed nations, retirement is a 30-year proposition so the issue for insurers is how to fund that longevity risk, Macgregor said.
Looking into his crystal ball, Macgregor said the future for life insurers is likely to be one where many of their products are simple, transportable from one professional or personal situation to another, shorter term, more transparent, available digitally and geared toward self-service.
“As with many things in this sector, distribution becomes very, very key overall to secure the right level of distribution going forward,” he said. “As channels change, some of the traditional partnerships may also need to change.”
If Wal-Mart becomes an important channel, how many insurance providers are prepared to link into that channel, he said.
“The end of life insurance as we know it is pretty much coming to a close overall,” he said.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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