What 2018 Could Bring To the Life/Annuity Industry

As 2017 gives way to 2018, forecasters and pundits released their crystal balls and offered glimpses of what life and annuity advisors can expect when it comes to product development, distribution and insurance company performance.

Consulting firms Deloitte, McKinsey and Boston Consulting Group (BCG) focused more on the digital distribution aspect of the industry.

Ratings agencies, meanwhile, preferred to talk about rates and regulation.

A snapshot of some outlook 2018 reports, edited for length, appear below.

Consulting Firms: Deloitte

Insurers can capitalize on connectivity and digitization to overcome reluctance to buy life and annuity products, wrote Gary Shaw, vice chairman, U.S. insurance leader at Deloitte, and Jim Eckenrode, managing director, Deloitte Center for Financial Services, Deloitte Services.

Insurers are experimenting with connectivity and advanced analytics to narrow the life application-to-closing process from weeks to minutes. This is lowering costs and minimizing the consumer dropout rate, the experts wrote.

Accelerated underwriting metrics - based on medical data, drug prescription information and even facial analytics technology - can be used to estimate an applicant’s life expectancy and eliminate traditional medical tests.

Digitization of underwriting also can speed up online distribution. This allows insurers to cast their nets wider and embrace younger buyers who prefer a more virtual experience.

The likelihood of prospects buying a policy once they apply increases from about 70 percent to nearly 90 percent as the underwriting and application process gets closer to real time, Deloitte research has found.

Distribution also seems ripe for digitization. Additional details about the insurance technology landscape are available here.

Consulting Firms: McKinsey

Serving mass-market and middle-market consumers more efficiently could add $10 billion in annual premiums, wrote consultants Jon Godsall, Aditi Jain, Kia Javanmardian, and Fritz Nauck.

Expect life and annuity insurers to push further into that market segment in 2018 as competition from other financial services sectors eats into insurer market share.

Products sold to mass-market consumers are less profitable but these segments are growing faster than other segments, and often doing so with less competition, the consultants wrote.

Insurers, therefore, need to build distribution with traditional advisors and remote capabilities around trigger events.

Financial-advisor outreach at the time of a trigger event is up to 14 times more likely to generate a sale than outreach outside of trigger events, the consultants wrote.

Consumer engagement is a necessity that can yield big profitability benefits, the researchers found. Customers have a higher probability of buying more products within 12 months of their initial purchase.

To make this transition to the mass market, insurers should invest in four areas:

*Lead with advice and redefine products as “living” insurance, emphasizing the benefits of life insurance while the policyholder is alive.
*Move demand through targeted outreach during trigger events.
*Create a seamless consumer experience, including multichannel distribution and engagement that does not rely solely on a human advisor.

Consulting Firms: BCG

When it comes to customer service, it’s no longer enough for insurers to aspire to outperform the companies within their own industry, according to consultants with Boston Consulting Group.

Customers expect insurers to deliver service standards set by Amazon, Google and Apple. This means shorter response times and seamless interaction, as well as simple, understandable and personalized service, and greater transparency.

To guard against losing customers to competitors and to attract new buyers, insurers must improve their service standards and become truly customer-centric.

The key is to focus on three dimensions of customer satisfaction: speed, quality and transparency.

• Speed. Customer concerns don’t necessarily need to be processed in real time, but companies must meet customer-defined expectations, which typically measure turnaround time in hours, not days, researchers wrote.
• Quality. Today’s consumers won’t settle for a processing rate that is less than 95 percent error-free. That’s well beyond the 70 percent to 80 percent error-free rate that most insurers deliver today.
• Transparency. Customers need to understand exactly where in the process their application or claim is at any given time. Transparency into these processes affects customer satisfaction scores at least as much as speed and quality do.

Ratings Agencies: A.M. Best

A.M. Best maintained its negative outlook for the U.S. life and annuity industry in 2018, citing volatility across economic and regulatory fronts and the potential for stock or credit market corrections, the ratings agency said.

Despite earnings headwinds, due in part to low interest rates, the industry has been able to grow overall capital, according to Best’s "Market Segment Outlook: Life/Annuity" briefing.

The lower-for-longer interest rate environment continues to move insurers into potentially less liquid asset classes.

Other factors accounting for the negative 2018 outlook include:

*A flattening yield curve, which can continue to pressure insurers' operating earnings.

*Declining annuity sales, which hit a 15-year record low in third-quarter 2017 despite an improving U.S. economy.

*Lack of heavy investment in insurance technology to modernize business models.

*Evolving regulatory issues. These include the proposed update to risk-based capital bond factors, which could affect asset allocation strategies, and new ways of calculating reserves under principle-based reserving, which has not improved operating margins as some insurers have deferred adoption.

The decline in corporate tax rates under tax reform and a cap on the corporate tax deduction may make corporate bond issuance less attractive. This would be a negative for an industry that relies heavily on corporate bond issuance, the analysts wrote.

Ratings Agencies: Fitch

The 2018 outlook for the U.S. life insurance sector was upgraded to “stable” from “negative” as better-than-expected operating performance and a benign credit environment are likely to continue into next year, Fitch reported.

Fitch's base case scenario calls for a modest increase in rates in 2018, said Douglas Meyer, managing director, Fitch Ratings.

More declines in portfolio investment yields, interest margins and reserve adequacy are expected in 2018. These declines are due to low reinvestment rates and limited crediting rate flexibility on in-force business, Fitch analysts also wrote.

Low interest rates will continue to factor into additional life insurance industry restructuring and mergers and acquisitions.

Credit-related investment losses are expected to remain modest. Although concerns have shifted to insurance company portfolio exposures to the retail sector, the exposure is manageable, Fitch experts wrote.

Near-term sales of variable annuities and fixed indexed annuities will continue to lag due to delays with implementing key portions of the Department of Labor fiduciary rule, Fitch wrote.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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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].