McKinsey: Life insurance business may segment in search of greater yields

CHICAGO – Pressure to make targeted plays for value could push life insurers into more segmented business operations going forward.

Specifically, four areas of insurance could evolve along independent paths over the next decade, said Andrew Reich, associate partner with McKinsey & Co. Reich was joined by Ramnath Balasubramanian, senior partner at McKinsey & Co.

The two analysts hosted one of the 2022 LIMRA Annual Conference's opening sessions,  entitled "Life Insurance 'Unbundling," during which they peeked down the road at evolution of the life insurance market.

"The next kind of sources of value creation will mean that insurers are going to take deliberate approaches to specific parts of the value chain, figuring out which ones they're most distinctive in, and they're going to double down in those areas," Reich explained. Insurers will look to "partner or outsource the other parts of the value chain."

The analysts broke down life insurance evolution into four distinct areas:

1. Distribution specialists. These are the players who have "deep consumer insights, privileged distribution access and client-facing technology" the analysts noted in an accompanying slide. They will likely begin to "leverage and double down in that distribution access," Reich said.

2. Product manufacturing and origination specialists. These specialists will try to leverage customer insights, underwriting capabilities and distribution access into effective partnerships and strategic management, Reich said. He called this group, "kind of a close cousin of the distribution specialist, but we think that they'll actually retain some of the risks themselves, particularly for the most capital-efficient products."

3. Balance sheet specialists. These are the business segments with "robust investment management capabilities," the analysts noted. They have the partnerships and ammunition via surplus capital and strong cash flow generation.

"The thing they may not have is access to distribution," Reich explained. "If you think about it, you have your folks who have access to the customer over here, product origination and distribution, then you have your balance sheet specialists over here who have an appetite for that type of risk. We could see those two models beginning to kind of partner together, and then kind of optimizing what each one is looking for in terms of their risk in their business model."

4. Full service/integrated insurers. Finally, we have the model that is most similar to the traditional life insurers involved in all steps of the chain.

"But we think it's a super high bar to be distinctive in all four elements of the value chain," Reich said. "So we actually believe that 10 years from now there will be fewer and fewer of these fully integrated insurers."

Private equity influence

Much of the talk about evolution of life insurers can be traced to the extended low-interest rate period. Historically, insurers could take in premium and turn it into comfortable revenue via safe investments due to interest rates that rarely dipped below 5% for decades. Interest rates plummeted to near zero following the 2008-09 housing crash and have not recovered.

That has many life insurers turning to private equity firms to deliver investment returns. Those investments are increasingly risky, which worries some regulators and consumer advocates. But the trend seems unlikely to reverse any time soon.

An active year for mergers and acquisitions in 2021 and large block reinsurance transactions led to a 41% increase in admitted assets owned by private equity firms in 2021, according to a recent AM Best special report.

With the year-over-year increase in admitted assets to $849.6 billion, private equity insurers now have a 10% share of the U.S. life/annuity’s total assets, more than double the share from five years ago.

The increased emphasis on return on investment left many in the LIMRA crowd concerned that life insurers will forget who they serve: the consumer. The McKinsey analysts maintained that the reverse might come true.

"We actually think that this thesis will be net beneficial to clients in the long term," Balasubramanian said. "I think the reason being that today you're seeing the retreat of capacity from the market. You don't have providers who are willing to actually go out there and meet customer needs in the way they should be meeting them because of all the considerations around economic value. Because the economics of this doesn't work."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

© Entire contents copyright 2022 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.