This isn’t the first time US life insurers have dealt with dramatic market uncertainty, but the challenges presented by the global spread of COVID-19 are unique and complex in ways the industry has not encountered before. 

Though the immediate impacts of the crisis on the life insurance sector may be more muted than those we will see in the long run, they are certainly being felt. In the 3 months since Jan 2, 2020, life insurers on the S&P 500 experienced drawdowns of 51 percent, exceeding both the broader financial services sector (43 percent) and the index-wide average (34 percent). The number-one issue driving this decline is profitability. 

The immediate issue of profitability

Life insurers are feeling their profits being squeezed, with the biggest factor being investment exposure in capital markets. Some products are even becoming unprofitable, especially in the savings and annuities categories, causing life insurers to rethink the products they offer.   

Even in otherwise ‘normal’ times, current levels of market volatility combined with zero-interest rates present an extremely challenging operating environment. But the situation is far from normal and life insurers must also grapple with another series of issues: changing morbidity and mortality rates, COVID-19-related claims and exclusions, adjustments to products, increased customer demands, and maintaining full business operations in a remote working situation. The challenge of returning to a profitable business mix could hardly come at a more complex time.

Unlocking profitability across new business and in-force portfolios 

So what to do? With no end to economic turmoil in sight, insurers must quickly explore ways to unlock value and improve margins across their business. 

A recent McKinsey report on the impact of COVID-19 on life insurance states: “Optimizing the in-force book is the most significant lever for any carrier looking to rapidly improve performance. Reinsurance, buyouts, and closed-block transfers remain the fastest way to improve performance for most carriers.”

There are four key levers worth exploring: 

  1. In-Force Management: Ensuring activity is focused to retain existing value and drive additional profits from current blocks of business. This requires making decisions based on a granular understanding of lapse propensities, precisely targeting retention programmes to the right clients, optimizing up-sell and cross-sell campaigns, and including benefits reduction in the mix.
  1. New Business: Ensuring products sold are optimally priced to achieve the best trade-off between sales and profitability.
  1. Operational Costs: Deploying people to the most productive areas and providing them with the best possible tools helps automate and increase the effectiveness of business processes. This enables teams to refocus their time on decision making and strategy. 
  1. M&A and Disposals: In cases where an owner’s available resources are insufficient to meet the value-generation potential of a book of business, then positioning this for sale may be the best outcome. Acquirers who are able to achieve economies of scale and deploy advanced data and technology approaches will be best positioned to extract maximum value. 

Underpinning each of these levers is a need to harness data analytics and insights to deeply understand life insurers’ books and opportunities for improved business outcomes. The tools to generate these insights already exist and are readily available for insurers to deploy.

Without these tools, life insurers will lack the granular insights necessary to identify the hidden pockets of value capable of improving profitability, both immediately and in the long-term. The right tools can also deliver insights into how different processes can be adjusted to directly impact competitiveness and meet business objectives. This leads to a better understanding of how decisions they make concerning products and pricing immediately affect growth and profitability. 

The benefits of improved decision making impact every corner of an insurer’s business. Strategies should be built on a foundation of good data, and strong digital capability is now essential to empowering an insurer’s workforce to achieve strategic goals. Moreover, when digital capabilities are fully developed, both front and back offices can weather the challenges of remote working, a reduction in agent-based sales, and a volatile market. 

The need for digital change is urgent today, not tomorrow

In a COVID-19 reality, life insurers must move quickly to develop the capabilities they need to improve profitability immediately. Insurers who are looking towards the future will recognize the long-term benefit of investing in the digital systems and tools required to do this.

Gaining these analytical insights to effectively allocate capital helps life insurers maximize profitability and strike the right balance between in-force value management and new business. Not only does this allow for informed decision making to address today’s challenges, but it sets life insurers up with a system that’s flexible and geared towards repeatable, measurable growth.

Sourced from Montoux

Montoux specializes in decision science software, specifically designed for life insurers. To learn more about how we can help you optimize your pricing process, improve your in-force management, and help you boost profitability, please visit our website at www.montoux.com or via email at hello@montoux.com.

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