How the life insurance industry can restore its relevance

By Ramnath Balasubramanian

The life insurance industry has some bright spots. High interest rates have spurred demand and annuity sales have reached record levels. In other ways, though, there are distinct shadows. The sector’s rate of growth is slower than that of gross domestic product, and performance among public companies lags that of their financial-services peers.

An important underlying reason for these sobering trends is that as social norms change, many households don’t see the relevance of traditional life insurance products. In the U.S., for example, life insurance penetration dropped from 63% in 2011 to 52% in 2023. Across major markets, traditional life insurance is stagnating.

There are other structural forces at work, however, such as longer life expectancies, less assurance of retirement income, rising health care costs, and the increased availability of private capital. These structural forces could help the industry find new life.

Here are three ways the industry take advantage of them.

Adapt to social changes. By 2050, 16% of the global population, or 1.6 billion people, will be aged 65 or above. At the same time, traditional pension provision is falling short for this population. In 2023, the global retirement savings gap was $106 trillion, and it is growing fast — almost 5% a year in the U.S.

One implication of an aging population is that many people are drawing down their retirement assets, rather than building them up. This is an opportunity for life insurers to grow by providing a stable, secure retirement income, holding on to accumulated assets that might otherwise go to asset and wealth managers.

This is beginning to happen. In the wake of 2020 legislation that increased access to tax-advantaged retirement accounts, there were dozens of product launches or enhancements in the annuity and variable universal life market. In addition, a number of insurers are working with asset managers to imbed annuities into target-date funds.

Another possible source of growth is to offer more flexible policies designed for nontraditional family structures. Consumers are seeking advisors who can address all their financial needs, with insurance integrated into financial planning and wealth management. The opportunity, and the challenge, is to define the value proposition of life insurance products within this context.

Create innovative solutions. The lines between life, health and wealth solutions are blurring, which why it is important to invest in digital capabilities that enable greater personalization at a lower cost of acquisition. In the process, life insurers can put themselves in position to capture recurring revenue streams from wealth management products. “Wealth only” or “life only” advisors won’t be able to meet clients’ full needs.

Another opportunity is in supporting quality of life. The industry is well suited to enter health adjacencies, for example by partnering or acquiring health care and senior care providers to address rising costs of longevity and care. Think of it as not so much as protecting income but as fostering a positive retirement.

Public companies can look to insurers financed by private capital for ideas. The latter have built sophisticated investment management capabilities and accessed new pools of capital in private markets such as pension and sovereign wealth funds. These capabilities are enabling insurers to earn better returns on their assets and then to offer better pricing to their clients. This approach has the potential to create growth and value, but carries credit, regulatory, and liquidity risk, too.

Find new pathways to access and engage customers. The desire for pure protection is not what it used to be: the number of U.S. life insurance policies in force is down 13% since 2011. To find new revenues, insurers can explore getting access to customers at the worksite – both for large employers and increasingly for small and mid-sized ones. Offering a broader product portfolio - such as accident and health, legal plans, pet and identity insurance - might also help bring consumers to the life insurance table.

Customer experience is a critical differentiator, particularly given the ongoing transition from highly intermediated business-to-business relationships to direct consumer engagement. Moving from the bottom to the top quartile of customer satisfaction can bring a 30% increase in the rate of winning new business and an equivalent reduction in policy cancellations. That directly translates into better financial performance.

Consumers are increasingly adept at accessing digital services, and a growing number prefer it. In addition, life insurers typically don’t have many interactions with their consumers. For all these reasons, developing digital expertise is critical for long-term success. Although insurance carriers have been investing in digital platforms, the results have been less than stellar. A McKinsey survey found that the best banks score three to five times higher than insurers in customer satisfaction.

Given social, economic, and regulatory changes, the life insurance industry has no choice but to go beyond its traditional models. The risks are real, but so is the potential for an exciting and profitable future.

Ramnath Balasubramanian, a senior partner in McKinsey & Company’s New York office, is the global co-leader of the life insurance and retirement practice. Contact him at [email protected].