2015 EY US life-annuity insurance outlook
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2015 EY US life-annuity insurance outlook Market summary Prospects are generally upbeat in 2015 for providers of life insurance and annuities in the US. Insurers can expect to build upon recent improvements in annuity sales, as credit rates continue to increase and customers return to simplified, tax- deferred products. Life insurance sales will benefit from rising levels of consumer confidence and personal wealth, both driven by the ongoing economic recovery and expectations for gradual increases in interest rates (see figure 1 for industry growth and profitability). Yet, these opportunities are not evenly distributed across the industry, and companies are challenged to break into underpenetrated markets with new products, strategies and advice models. To execute these strategies, life insurers will need to leverage technology advances in distribution, underwriting and customer service.
At the same time, competition is Figure 1: US life insurance industry growth and profitability
intensifying in the life insurance-annuity
market. Both carriers and consumers are
realizing the benefits of expanded access
to technology, as new capital entrants
disrupt traditional market positions. New
players are developing new business
models and market approaches to
better align with customer expectations.
However, these actions by non-traditional
capital sources also have increased
regulatory scrutiny of new business
models, investment strategies and risk
profiles. This adds to the continuing debate
on the broader areas of risk management
and regulation that carriers face.
Source: Conning, Inc., “Life-Annuity Forecast & Analysis, Midyear 2014”
New players are developing
new business models and
market approaches to
better align with customer
expectations.
2 2015 EY US life-annuity insurance outlook
In 2015, distribution priorities will Straightforward products that are easy to
continue to focus on expanding market understand and compare will be of great
opportunities. While the high-net-worth appeal to consumers. Such products also
market drives sales and attracts distributor lead to more streamlined transactions,
attention, the financial protection and increased efficiency and broader market The challenge for insurers is to
savings needs of the middle-market remain reach. Streamlined underwriting through execute an efficient middle-market
underserved. The challenge for insurers data analytics based on electronic health strategy, without disrupting the
is to execute an efficient middle market records, prescription databases, credit industry’s high-net-worth mainstay.
strategy, without disrupting the industry’s information and other big data sources
high-net-worth mainstay. will help control underwriting risk and
speed product application approval and
A digital presence through the internet,
delivery times. While these technologies to adjust their distribution and marketing
mobile technology and social media has
can transform the back office, they increase efforts to comply with the new standards.
become the new “storefront.” Digital
privacy and cybersecurity risks. As more New regulations also may encourage new
advances will enable insurers to effectively
applications and technology solutions are product and marketing opportunities, such
reach more diverse and demanding
based in the cloud, this creates additional as products addressing the new “Qualified
customers and distributors. Providing
third-party exposures. Longevity Annuity Contract” definition.
self-service capabilities will empower both
constituencies and widen participation On the regulatory front, the implementation These changes are underway in an era of
in the voluntary marketing channel. of Own Risk and Solvency Assessment is increasing tension between federal and state
Clearly, customers will continue to search compelling carriers to shift from preparation regulators, with the new Federal Insurance
the internet for information on financial and testing to execution. The differences Office flexing its muscles as the NAIC and
services and insurance. The rise in consumer in fiduciary standards among various state insurance commissioners fight back
education and self-service capabilities will regulatory agencies, such as the Financial to preserve their roles. In this combative
have broad implications for both the life Industry Regulatory Authority, the National environment, insurers are increasingly
insurance distribution and advice models, Association of Insurance Commissioners caught in the middle.
as well as the cost of those services. and the U.S. Department of Labor will be US life-annuity insurers that better
resolved in 2015, requiring companies
External forces in 2015
Interest rates and Consumer Technology
Customer needs Regulations Capital adequacy
economic factors confidence changes
Slight interest rate Capital rebuilt,
Needs and Steady increase
rise, but still near Confidence Pace of change continued
expectations and new regulators
lows; slow economic improving dramatic accumulation and
increasing appearing
growth new entrants
2015 EY US life-annuity insurance outlook 3
Willingness to Use Digital Chan
Percent of Consumers Willing to Use Digital Channels1
U.S. Life and Annuity
Figure 2: Percent of consumers willing to use digital channels* by activity — US life-annuity
understand and accept these forces Percent
of change are in a position to seize
competitive opportunities by modernizing
Question about an existing policy 80 20
their products, services, operations and
distribution. Manage current policy 79 21
Specifically, successful insurers in
Assistance with a claim 77 23
2015 will:
1. Reposition distribution strategies to Inquire about a new policy 68 32
expand market opportunities
Research types of insurance 67 33
2. Embrace digital as the new storefront
3. Develop simplified products to expand Renew policy 65 35
customer markets
Seek financial advice 59 41
4. Transform back office systems and
processes Cancel policy 58 42
5. Enhance data security
Willing to use digital channels Not willing to use digital channels
6. Adjust to new competition from
alternative capital sources
*Includes web chat, video tutorials, interactive support, 24-hour phone hotline, email, mobile apps.
7. Proactively address the uncertain Source: EY Global Consumer Insurance Survey, 2014
regulatory environment
Reposition distribution strategies Includes
more web chat, video tutorials, interactive support, 24 hour phone h
1
is a case in point, with consumers and products before purchasing insurance
to expand market opportunities
buying coverage Source: and Consumer and
EY Global
on the internet annuitySurvey,
Insurance products. The increasing trend
2014
Digital and internet-based technologies will without the involvement of traditional toward wearable tech devices, already seen
continue to alter consumer expectations insurance agents. The purchase of health in health and fitness, may also impact the
and behavior in 2015. In response, insurance has similarly moved in this insurance industry. These revolutionary
Page 4
life-annuity insurers will expand their
1 January 2014 Presentation title
direction, particularly with respect to the changes are shifting the traditional role of
distribution beyond the traditional online exchanges created by the Patient insurance agents and advisors.
paradigm. To succeed in this developing Protection and Affordable Care Act.
To address the digital expectations of
environment, insurers need to reposition
Consumers also have turned to online customers, successful insurers in 2015
their products to fit the new distribution
banking and investment services to manage will invest further in direct-to-consumer
models.
their finances. In fact, many investment advice models, online marketing and
As exemplified by shopping and purchasing firms now offer online financial planning online self-service capabilities. Focused
trends in diverse industries, consumers are tools complementing more personal testing of online sales, perhaps with some
increasingly buying insurance and savings financial planning methods. Aggregator internal agent support, will be another
products online. Automobile insurance sites enable consumers to compare prices ongoing effort. These investments will
4 2015 EY US life-annuity insurance outlook
enable insurers to build competencies that products. Leading insurers will leverage a
may one day evolve into significant online digital presence to outgrow their competitors,
distribution capabilities. increase self-service capabilities, reduce
business risk and enhance productivity.
To meet the expense of these distribution
changes and respond to more price- The rapid pace of change in online To build a future-ready digital
conscious online consumers, insurers access to insurance products challenges insurance presence, carriers
will re-evaluate their pricing margins and insurers in presenting a consistent digital must be able to assess the true
recalibrate compensation structures. The customer experience. Insurers also have financial benefit that digital
need to adjust compensation may intensify, struggled with uneven data capture and currently is providing the business.
as various regulatory agencies settle their analysis of consumer online activities.
differences around fiduciary standards and They will need to retool their digital and
advisor compensation. distribution strategies and systems to
create a consistent omnichannel customer
Insurers are expected to expand their
experience, breaking down product,
distribution landscape in 2015. To reduce Develop simplified products
customer and prospect data silos. By
costs and meet customer expectations, they to expand customer markets
delivering superior and homogeneous
will need to simplify products and reduce
customer experiences across all digital As insurers seek to expand their market
friction in the sales process. As they expand
touch points and effectively capturing presence, they are reaching beyond the high-
distribution beyond traditional agents,
and analyzing online consumer behaviors, net-worth market to the mass affluent and
insurers will seek greater opportunities for
successful insurers will achieve competitive middle market (see figure 3). These segments
competitive differentiation.
differentiation in 2015. are more likely to use online product
comparison sites for informational purposes
The ability to accurately measure social
and pricing insights. Simplified products with
Embrace digital as network activity and mobile usage is
modular riders tend to be more successful
the new storefront critical to making effective resource
with middle-market consumers perusing
Social media will continue to play a crucial allocation decisions. Marketing teams
these sites. This, in turn, will give innovative
role in insurer marketing, as will mobile must track the business impact of their
companies a competitive advantage as they
technologies for marketing and sales companies’ expanded digital presence
expand their market presence.
support, administration and customer on sales, customer loyalty and customer
satisfaction through definitive metrics. A case in point is the attractiveness of
service. A survey1 of the digital practices of
These measures must withstand combination products, such as a life
more than 100 leading US and European
management’s scrutiny regarding the insurance policy with a long-term care
life and non-life insurers indicates that most
total cost of ownership and return on accelerated benefit rider. The rider avoids
insurers are focusing their digital efforts in
investment. In other words, to build a the “use it or lose it” problem associated
marketing (83% of respondents) and sales
future-ready digital insurance presence, with stand-alone long-term care products,
(78% of respondents). The survey further
carriers must be able to assess the true while keeping the base insurance product in
demonstrates that insurers are as focused
financial benefit that digital currently is force for a longer period of time — a benefit
on improving and streamlining the processes
providing the business. to both the company and the customer.
around the purchase of life insurance as
they are on designing and developing new
1 EY Global Insurance Digital Survey 2013, Insurance in a digital world: the time is now.
2015 EY US life-annuity insurance outlook 5
Household Financial Assets
Figure 3: Household financial assets
Holdings of life and annuities* Life and annuity* percent of financial
by household segment assets by household segment
2013 (percent) 2013 (percent)
All other
High net worth 3.8
Middle 8
Companies are creating riders to market
12 Mass affluent 6.3
provide protection for specific life High
events, such as a disability, critical 51 net worth Middle market 7.4
illness or long-term care need, in 29
Mass All other 7.8
response to consumer concerns in affluent
the aftermath of the financial crisis.
*Cashvalue life insurance, excludes term
Source: U.S. Federal Reserve, “Survey of Consumer Finances”; EY analysis, 2014
Insurers are developing various modular
products with different riders attached to
various base products. For example, companies
are creating riders to provide protection for Transform back office systems The customary approach of layering new
specific life events, such as a disability, critical and processes technology on top of outdated systems and
illness or long-term care need, in response to processes is highly inefficient in the current
consumer concerns in the aftermath of the In the current low-interest-rate competitive marketplace. Today’s evolving
financial crisis. Riders may be purchased at environment, operating efficiency will business models demand more simplified
issuance of the base product. continue to be a concern, forcing insurers and streamlined processes matched to
to rationalize their cost structures. To appropriate technology solutions.
Underwriting the base product can be attain the agility and speed demanded
streamlined through the use of data
Page 3 by competitive
1 Januarypressures Presentation The
2014 and customer titleinefficiencies of legacy systems
analytics of electronic health records, preferences, insurance companies must severely affect multiple operating areas
prescription databases, credit information simplify their systems, processes and and inhibit company growth. Underwriting
and other third-party sources. Data structures. processes, in particular, need to change
analytics also can be leveraged to control dramatically and immediately. An outdated
underwriting risk and speed the application In a 2013 EY global insurance digital underwriting process alienates customers
approval process. By focusing on pure survey, 80% of respondents listed “legacy and distributors, while failing to take
protection events and avoiding financial technology constraints” as a top inhibitor advantage of recent advances in data
guarantees, these more simplified base to digital growth. Yet, many insurers still analytics. This compels slower and less
products and riders create a more operate core systems on multiple platforms effective underwriting decisions, with a
acceptable risk profile for the insurer, while that are frequently incompatible, inflexible, corresponding impact on sales.
addressing current consumer concerns. antiquated and expensive to maintain.
6 2015 EY US life-annuity insurance outlook
Cyber Security
Successful insurers in 2015 will optimize Figure 4: Cyber-security Global Insurance
and align their sales, customer service and Top Five Information Security Priorities
Global insurance top five information security priorities
advisory processes with technology. This
back office and process transformation
must occur across the entire organizational 58%
Business continuity
structure to address both internal 58%
requirements and customer needs. Systems
30%
and processes must be owned and led by Data loss prevention
54%
local business units, and aligned with a
strong centralized structure, enterprise 16%
architecture and overall strategy. Identity and access management
53%
Addressing legacy system inefficiencies is
4%
a critical challenge for life-annuity insurers Security testing
42%
in 2015. Organization-wide transformation
will be complex and may take years to 22% 2012
finalize. Insurers that reach this finish Securing emerging technologies
42% 2014
line first will be more agile and adaptable
to changing market and stakeholder
Source: EY Global Information Security Survey (GISS), 2012, 2014
preferences. Those carriers that fail to
rise to the challenge will face new digital
competitors — companies unencumbered
by legacy infrastructure and outdated Insurers risk losing control of data security international companies. While data may be
processes and thus more responsive to because multiple external parties are stored on servers physically located in one
evolving market demands. involved in cloud computing. Unauthorized country, customers may reside in a different
data access can result in adverse jurisdiction with more stringent data security
consequences, such as loss of reputation rules. In
Source: EY Global Information Security Survey (GISS), 2012, March 2014, the European Union
2014
Enhance data security among consumers and distributors, Parliament overwhelmingly voted in favor
regulatory action and legal responses. Data of stronger data protection requirements
Data security has long been a major
gathered in underwriting life insurance for individuals, reinforcing the requirements
concern for insurers and other companies
can be especially sensitive. As large data for explicit permission to transfer certain
that handle sensitive customer personal
sets are used as part of modeling through types of personal data from one country to
information. Newer IT practices, such as
Page 2 1 January 2014 Presentation
cloud computing, title models
access to these other countries. These new data transfer
cloud computing, have exposed insurers to
can expose proprietary information, or restrictions extend to subsidiaries and other
additional technology security risks, despite
the modeling results themselves could be parts of a company, thus affecting internal
the operational value. For instance, insurers
altered in an unsecure environment. risk management.
risk losing control of data security because
multiple external parties are involved in Increased regulatory oversight has increased Successful insurers in 2015 will enhance
cloud computing. the need for enhanced data security. Data their data security, navigate and evaluate
sovereignty issues also have arisen for ongoing regulatory requirements, and
2015 EY US life-annuity insurance outlook 7
retirement products with attractive credit insurers seeking to rationalize their
rates. As investors purchase blocks of product portfolios. Recent entrants can
life insurance, the firms are becoming represent new markets for insurers seeking
full-service multi-line insurers. These dispositions of non-core books of business.
new players are pursuing a broad range
of strategies, challenging traditional
insurers to re-evaluate their competitive Proactively address the uncertain
approaches. regulatory environment
The new competitors have the potential to Multiple legislative and regulatory bodies
Insurers that design modular, implemented new regulations in the
make significant inroads into the market,
simplified products supported by immediate aftermath of the financial crisis,
given their unique business models, higher
streamlined distribution and policy creating new demands on the industry.
risk tolerance and financial capacity to gain
maintenance processes can quickly Longer-term regulatory projects that began
market share. They also increase pressures
respond to rapid changes in consumer before the crisis are continuing, with a
on traditional insurers to maintain
needs and product preferences. few broadening in scope. Consequently,
profitability and growth. While traditional
insurers may not have an investment insurer management teams are under
advantage over these new entrants, pressure to respond to multiple regulatory
develop enterprise-wide processes and requirements and disparate goals sought by
they will need to exploit their distribution
procedures to control and monitor the competing regulatory authorities.
channel advantages, financial strength,
security practices of third-party providers.
fundamental processing efficiencies and A case in point is the regulatory differences
The effectiveness of these activities will
capabilities in order to maintain and grow in capital and systemic risk. Some large life
be routinely and closely scrutinized and
their market share. insurers have been designated systemically
reported to the board of directors of
these insurers. This new capital from non-traditional important financial institutions (SIFI) by the
sources has attracted regulatory scrutiny Financial Stability Oversight Council in the
on policyholder security, including US, while these and other internationally
Adjust to new competition from appropriate capital levels, riskiness of active life insurers also have been
alternative capital sources investment strategies, use of captive designated global systemically important
insurers and affiliated transactions. insurers (G-SII) by the Financial Stability
The new companies in the life-annuity
These concerns may not be confined to Board. Although the designations were
market have reshaped the competitive
investor-owned insurers, as all insurers originally announced in 2013 and continue
landscape. Many are large investment
face an increased risk of new regulations. to be updated, it remains unclear if there
firms that recognize the market potential
Insurers will need to monitor regulatory will be additional regulatory expectations
to capture retirement assets. The firms
developments to ensure both a level playing for SIFIs or G-SIIs. Other solvency and
have become active acquirers, leveraging
field and avoid unintended consequences. capital issues have been raised, especially
their significant investment management
At the same time, the new capital can regarding the use of captives by life
capabilities and expertise. The same skills
create additional opportunities for existing insurance companies.
are helping new competitors to offer
8 2015 EY US life-annuity insurance outlookThe regulatory bodies are also under The regulatory pressures are likely to disparate information requests. As a result
pressure. Consequently, regulators have increase through the next three to five of these investments, companies’ senior
increased their demands for information years. In this environment, companies management will have a more holistic view
from insurers and are more apt to closely must focus on future laws and regulations of their organizational risk, leveraging
scrutinize submissions. Insurers are caught and develop associated plans. The a single set of tools for oversight and
between competing forces. Regulatory increasing regulatory demands for testing, as well as reporting to key
competition exists at all levels — state information may not conform to existing stakeholders.
regulators, national regulators and reporting structures, requiring insurers
international regulators are all exercising to build advanced, integrated technology
their respective points of view. systems and processes to respond to these
Regulatory competition exists at all
levels — state regulators, national
regulators and international
regulators are all exercising their
respective points of view.
2015 EY US life-annuity insurance outlook 9Notes 10 2015 EY US life-annuity insurance outlook
Contacts Doug French +1 212 773 4120 doug.french@ey.com Kaenan Hertz +1 212 773 5988 kaenan.hertz@ey.com Dave Czernicki +1 312 879 3666 dave.czernicki@ey.com
EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. © 2014 EYGM Limited All Rights Reserved. EYG No. EG0213 1411-1355136 NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com
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