Life insurance 2020: Competing For A Future - PwC

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The key considerations forsurvival and success in asector facing disruptive andrapidly accelerating change

Life insurance 2020: Competing for a future

2 PwC Future of Insurance

PwC Future of Insurance 1

02 Introduction

04 Overview

08 Section oneTwo-speed global growth

14 Section twoDistribution disruption and the customer revolution

18 Section threeInformation advantage through ‘big data’

20 Section fourBig and fast: Evolving business models

24 Are you still going to be in business in five years’ time?

25 Contacts

Contents


The life and pensions sector has many reasons to be upbeat about its future. A largerand longer living global population is increasing demand for retirement products.In turn, the increasing affluence of people within the high-growth markets of SouthAmerica, Asia, Africa and the Middle East (SAAAME) is creating a growing need forwealth protection.

But this is also a time of massive and potentially disruptive change. As customersbecome accustomed to the ease, elegance and intuition of the Apple/Amazon‘experience’, they want the same accessibility, transparency and responsivenessin their life insurance and pensions products. We’ve already seen the emergence ofeasy-to-access and manage products such as target date funds, which automaticallyadjust the asset mix to the policyholder’s selected retirement age. Advances inprocessing capacity, customer profiling and risk analytics are now opening the wayfor a new generation of ‘smart’ policies. While being as affordable and easy tounderstand/compare as today’s off-the-shelf products, these policies would be fullycustomised and able to adapt to the individual customer’s changing needs. Crucially,the technological developments that are making this new generation of policiespossible are also making it easier for new entrants to break into the market at relativelylittle cost.

Looking outside-inThere is always a tendency to focus on what peers are doing and ignore developmentsoutside the industry orbit. But to stay in the game, your business needs to be thinkingand acting at the same rate as technology and customer expectations are evolving. Thisis especially true at a time when start-ups and new entrants are eyeing the potentialwithin life and pensions. We’ve seen in other sectors how even market-leadingcompanies can quickly slide into obsolescence once customers see that they can getwhat they want cheaper and easier. Examples of this rapid decline include Kodak,which, having been America’s market-leading digital camera maker as recently as2008, is now in Chapter 11. In the intervening period, smartphones took away Kodak’smarket by becoming the most popular means of digital photography. In this briefperiod, we’ve also seen music stores lose out to the iTunes store and film rental shopsbeing swept aside by on-demand downloadable films. It’s therefore vital to make surethat your business is alert to emerging threats from both inside and outside theindustry and that you’re ahead of the curve rather than playing catch-up.

While insurance is a highly regulated industry, this shouldn’t be an excuse for doingnothing. If regulatory constraints are standing in the way of developments that couldbenefit customers then it’s your job to make supervisors aware of this and work withthem to bring controls up to date. Moreover, you can’t simply wait for changes indemographics and government policy to create new openings as more proactivecompetitors are going to get in ahead of you. You have to be nurturing the new

Introduction

If the shake-out in other commercialsectors teaches us anything, it isthat no business, includinginsurance, is immune from today’srapid and relentless shifts intechnology and customerexpectations. In this paper, weexplore the forces that are set totransform the life and pensionssector, what the new marketplace isgoing to look like and how yourbusiness can come out on top.

markets, designing the smart newproducts and forging the partnershipsneeded to capitalise on theseopportunities now. You will also need tothink about how to create the integrityand trust within the organisation thatwould allow you to respond to customers’evolving needs faster and more effectivelythan your competitors.

Fresh thinkingMany life and pensions companies areconscious of the need for fresh thinkingand new strategies. Our latest globalCEO survey found that insurers as awhole are just behind the technology,communications and entertainmentsectors in their readiness to embracebusiness model innovation1 (see Figure 1).Yet a survey of life and pensions

executives carried out for this reportraises questions about how far and howquickly they’re prepared to go to adapt tochange and sustain competitiverelevance.2 The uncertainty over wheregrowth is going to come from and howlife and pensions companies are going todeal with the disruptive forces they face isreflected in the generally disappointingshare prices in the sector.

In ‘Life insurance 2020: Competing for afuture’, we examine the developmentsthat are set to have the most decisiveimpact over the next five years and themain opportunities for innovation,growth and competitive differentiation.This includes how to deal with theshifting focus of growth (‘Two-speedglobal growth’), changes in customer

preferences (‘Distribution disruption andthe customer revolution’), sharperprofiling (‘Information advantagethrough big data’) and new competitivethreats (‘Big and fast: Evolving businessmodels’). The aim is to help lifeand pensions companies assess theimplications of a marketplace intransformation for their particularorganisation.


Figure 1: Readiness to innovate

1 1250 CEOs from 60 countries were polled at theend of 2011 as part of PwC’s 15th Annual GlobalCEO Survey, published on 25.01.12

2 150 life and pensions executives were asked tocomment on the impact and likelihood of a seriesof social, technological, environmental, economicand political scenarios, as well as setting out theirshort-and medium-term priorities, PwC 2012

Our latest global CEO survey found that insurersas a whole are just behind the technology,communications and entertainment sectors intheir readiness to embrace business modelinnovation

New business models

50

Global average

40

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00 10 20 30 40

Cos

t reduc

tions

to ex

istin

g proce

sses

To what degree are you changing the emphasis of your company’s overall innovation portfolio in the following areas? Responses of ‘significantly increase’.

Base: All respondents Source: PwC 15th Annual Global CEO Survey 2012

1 Banking & Capital Markets2 Business and Professional Services3 Healthcare4 Automotive5 Transportation & Logistics

6 Metals7 Industrial Manufacturing8 Retail9 Consumer Goods10 Hospitality & Leisure

11 Chemicals12 Forestry, Paper & Packaging13 Global14 Construction/Engineering15 Asset Management

16 Pharma & Life17 Insurance18 Technology19 Communications20 Entertainment & Media

1

2

4

5

6

712

1415

16 1718

20

19

313

11910

8

INSURANCE

Communications

Entertainment & Media

Banking & Capital Markets

AssetManagement

Technology

The forces shaping changeThe life and pensions sector is facing a rapidly evolving and potentially disruptive set ofmarket dynamics:

SocialAn older population: The number of people aged over 60 will more than triple to overtwo billion by 2050,3 creating huge extra demand for retirement solutions.

An increasingly wealthy global population: The number of middle class people(earning more than $10 a day) will grow from 430 million in 2000 to 1.2 billion in2030,4 with two-thirds of this growth coming from India and China, creating muchmore wealth to protect and more demand for life cover.

An increasingly connected global population: The number ofpeople connected to the internet will increase from 1.8 billiontoday to 5 billion by 2020,5 changing how customers interactwith your business and their expectations over the speed andintuition of response.

TechnologicalSurge in data traffic and development of advanced analyticaltechniques: The amount of data flowing around the internetwill reach 1.3 billion terabytes by 2016 (from around 240exabytes in 2010).7 Advanced analytical techniques would allowyour business to turn this goldmine of digital information into acomplete picture of how individual customers behave, what theyexpect and the risks they present.

Sensors track behaviour: Sensors are now being applied to driving and health,allowing customers to be more proactive about their safety, health and well being andtherefore providing insurers with invaluable insights about their policyholders.

Cloud transforms cost equation: Cloud computing is allowing businesses to turnfixed costs into variable costs. This could reduce expenses for your business, but alsolower barriers to entry from new competitors.

EnvironmentalInflux into the cities:Over the next 30 years, some 1.8 billion people are expectedto move into cities, most of them in Asia and Africa, increasing the world’s urbanpopulation to 5.6 billion8 and reshaping the marketplace for insurers and otherfinancial services businesses.


Overview

Nearly 50% of the life andpensions executives in oursurvey believe that the internetwill not only change howcustomers buy insurance, butalso the type of products theychoose6

3 UN Population Division media release, 11.03.09

4 ‘Is the Developing World Catching Up? GlobalConvergence and National Rising Dispersion’ byMaurizio Bussolo, Rafael E. De Hoyos and DenisMedvedev, The World Bank DevelopmentEconomics Prospects Group, September 2008.Middle class is defined as people whose incomelevels are between the average incomes of Braziland Italy, in purchasing power parity terms.

5 The Internet in 2020, published by Intac, 22.07.10

6 PwC life and pensions survey 2012

7 Cisco Visual Networking Index, updated estimate,30.06.12

8 United Nations, Department of Economic andSocial Affairs, Population Division, 2009 Revision


Nearly 50% of the life andpensions executives believe thatharnessing ‘big data’developments will provide akey source of competitiveadvantage and increasedmarket share9


10 United Nations Population Division; World Bank World Development Indicators and PwC analysis 2012

11 Swiss Re Sigma World Insurance 2010

Most life and pensionsexecutives believe thatpollution is increasing, with asignificant proportion (one ineight) seeing it as a threat tohealth and well-being, thoughmost believe it will becontained9

Pollution: The global increase inindustrialisation and urbanisation isfuelling further rises in pollution and thedangers to health this creates. This couldlead to increased demand for your lifeproducts on the one side and the need toadjust premiums to reflect shifts in healthand mortality rates on the other.

Limits of medicine: The rise reflectedin pandemics such as avian flu anddrug-resistant strains of diseases liketuberculosis highlights the limits ofmedicine in the face of mutating virusesand will heighten risks and liabilities.

EconomicSAAAME grows, mature markets slow:As growth in developed markets stalls andSAAAME markets continue to expandrapidly, the focus of investment andgrowth within the insurance market isgoing to shift.

Huge potential for further growth inSAAAME markets:GDP per capita hasbeen growing at 9% in China and at 4%in India over the past 20 years.10 Yet mostSAAAME markets still have life insuranceto GDP penetration of less than 3%11 andtherefore considerable room to grow.

Pressure of debt burden: Sovereigndebt concerns and slowing growth indeveloped markets are leading toinstability in capital markets, which couldaffect both demand for your productsand your position as an investor.


Social

Technology

Economy

Environment

Political

Figure 2: The new market dynamics

Source: PwC Insurance 2020, January 2012

‘Two-Speed’Global Growth

DistributionDisruption and

CustomerRevolution

InformationAdvantage through

‘Big Data’

EvolvingBusiness Models‘Big and Fast’

Why

Where

What

How

Nearly 50% of life and pensionsexecutives believe that acombination of inflation,rising government debt anddefaults in bond marketsthreaten the solvency ofsmaller insurers, especially inthe Western world12

More than 70% of life andpensions executives believe thatpublic health provision willworsen and more than 40% feelsocial security systems willeither ‘crumble’ or bedrastically pared back over thenext ten years12

PoliticalCash-strapped governments withdrawwelfare: State support for ageingpopulations in many markets is beingeroded by a combination of governmentdebt and a decline in the ratio of peopleworking to retired (‘dependency ratio’).As governments look to insurers to helpfill the gap in public provision, reputationand social responsibility are going tobecome ever more crucial competitivedifferentiators, spurring smart firms tolook beyond short-term ‘transactional’gains at how to meet more enduringobjectives in areas such as public trust,health and well-being.

Governments look to overhaulregulation: Regulatory change is going tobe a way of life for the foreseeable future.It is important to look beyond complianceto understand how regulatorydevelopments will affect your strategy,product design, costs and organisationalstructure.



The implicationsfor the competitiveenvironmentDealing with the STEEP dynamicscalls for a major rethink of strategicassumptions, routes to market andorganisational models, with the ability tolook outside-in on your business at thecore (Figure 2 sets out the four mainchallenges we address in this paper):

Two-speed global growth• Demand for retirement solutions in

mature markets is increasing, but lifecover sales as a proportion of GDP in anumber of major developed marketsincluding the US are declining.13 InSAAAME markets, the big rise is in lifecover, with sales of retirement productsgrowing less quickly. Your business willneed to develop an agile operatingmodel capable of dealing with thedifferent trajectories of growth. Thisincludes developing innovative growthstrategies on the one side and meetingthe need for scale and efficiency tosustain margins on the other. It will alsobe important to support thedevelopment of insurance markets,including investment in professionaltraining and educating consumersabout the value of life and pensioncover and how it works.

• As cities grow and make up an ever-increasing share of global GDP, theywill become a key competitive‘battleground’ for insurers. Citydwellers’ demand for insurance andother financial services is greater thanthat of their rural counterparts,especially in SAAAME markets. Indeed,some observers now see the realdistinction as not between emergingand developed markets, but ratherbetween city and rural areas.

Distribution disruption and thecustomer revolution• Consumers have become accustomed to

the ease, intuition and elegance ofdigital retail interaction and want thesame experience from your business.As smartphones, iPads and other suchversatile mobile devices proliferate,they also want to be able to conductbusiness when they want, where theywant and on the channel of theirchoice.

• Customers want greater transparency(allowing them to compare products),flexibility (products that adapt to theirchanging needs) and control (thecomfort of being able to change theirmind if not satisfied).

• Regulatory insistence on greatertransparency will make it easier tocompare prices and value.Developments such as the caps on feesin India and the planned elimination ofcommissions for advisers in the UK aregoing to bring charges and the valuepolicyholders receive in return furtherinto the spotlight.

• The emergence of virtual networks,multichannel interaction and direct-to-consumer life insurance is fragmentingthe value chain.

• Risk-based capital regimes are raisingcapital demands for variable annuitiesand could lead to higher prices, just asmany customers are once again lookingfor the assurance of guarantees.

Information advantage through‘big data’• Extracting profiling data from all of the

unstructured purchasing, social mediaand other digital trails people leavebehind would allow your business togain unprecedented insights into theirhealth, wealth and behaviour. Thetechnology to make this possible isalready available. The challenge is howto channel the data into actionableinsights and build the results intodecision making, product design andthe underlying culture of the business.

• Sensor technology could be used to helpdevelop a more proactive approach torisk management and customer supportby allowing your business to monitorpolicyholders’ health in real time andalert them to any early signs of illness.Your business would benefit fromreduced liabilities and could offer lowerpremiums in return.

Big and fast: Evolving business models• The improved ability to sense consumer

sentiment would allow your businessto adjust your position in the marketand provide products and services thatmeet customer demands in shortertimeframes. Gathering informationthroughout the customer lifecycle,in near real-time, would allow yourbusiness to shorten managementdecision cycles, speed up developmentcycles and ultimately better serveyour customers.

• Use of cloud computing and othertechnology developments to harnessmore data and automate underwritingis opening up customised solutions atlower cost.

• Use of technology to create ‘virtualoutsourcing’ solutions can improveservice and reduce costs.

• Cheap and easy access to opensource software and cloud computingallow new players to enter themarket and take advantage of flexiblerented computing capacity and smartnew analytics to develop theirbusinesses without the need for highstart-up costs.

• A combination of more informed riskmanagement and use of automation tolower costs would allow your businessto provide policies offering securereturns at reasonable premiums undera risk-based capital regime.

Dealing with the STEEP dynamics calls for a majorrethink of strategic assumptions, routes to marketand organisational models, with the ability tolook outside-in on your business at the core

13 According to Swiss Re Sigma World Insurance in2005 and 2010, life insurance premiums as aproportion of GDP in the US fell from 4.14% in2005 to 3.5% in 2010


SAAAME markets are seeing rising demand for insurance as economies expand andpeople acquire more wealth to protect (Figure 3 compares increases in population andGDP per capita in SAAAME and developed markets). Our CEO survey found that nearlyhalf of insurance industry leaders see emerging markets as more important thandeveloped markets to their company’s future.14

Life policies are likely to be the main focus of growth for now. The relatively youngaverage age of most SAAAME markets means that demand for pension products isgrowing less quickly. While the opportunities may be slow to emerge, the demographic

Section oneTwo-speed global growth

The growth agenda is being shapedby the diverging economic prospectsand demographic profiles of mostSAAAME and developed markets.

Figure 3: Rising middle class

GDP per capita growth; percentage compound annual growth rate, 1980–2010

SAAAME Non-SAAAME

Sources: United Nations Population Division; World Bank World Development Indicators and PwC analysisNotes: GDP per capita is in constant 2005 US$

10

9

8

7

6

5

4

3

2

1

00 0.5 1 1.5 2

IndiaThailand

Indonesia

Turkey

FranceItaly

Germany

Chile

Philippines

United States

Brazil Nigeria

Japan

2.5 3

China

United Kingdom

Canada

Population growth, percentage compound annual growth rate, 1980–2010

14 121 insurance CEOs from 42 countries weresurveyed as part of the 15th Annual PwC GlobalCEO Survey

profile will eventually begin to catch upwith the West as health improves andpeople live longer. There are currentlyaround 600 million people aged over 60in the world. By 2050, there will be morethan 2 billion,15 with SAAAME marketsaccounting for much of this growth.China already has an ageing populationrelative to other major markets such asIndia. In turn, Brazil has more pensionersfor every 100 contributing workers thanthe US. As the Brazilian governmentspends more on pensions as a percentageof GDP than Germany, France or Japan,16

the pensions sector will need to growquickly to relieve the pressure on thepublic purse.

Urbanisation fuels demandA further spur for growth in SAAAMEmarkets will come from rapidurbanisation. Over the next 30 years,some 1.8 billion people are expected to

move into cities, most of them in Asia andAfrica, increasing the world’s urbanpopulation to 5.6 billion.17 By 2030,around half of the world’s urbanpopulation will be living in Asia. Urbanpopulations tend to have a higherdemand for insurance and other financialservices. In the case of life and pensions,the factors contributing to this includegreater exposure to financial productsand the need for life cover when takingout a mortgage. Family sizes also tend togo down as people move off the land andinto confined cities. This leaves peoplewith fewer children to support them intheir old age and therefore increases theneed for pensions and life cover. Thechallenge will be how to capitalise onurban growth, while developingprofitable services for rural customers.


Reaching into new marketsWhile many SAAAME markets offerstrong growth potential, they can behard for incomers to break into. Theremay be restrictions on foreignownership and licences. Even inrelatively liberalised markets, entrantsmay face prohibitive acquisition pricesor entrenched competition from largelocal players. It’s telling that a numberof international groups have nowchosen to withdraw from someSAAAME markets. While some want tore-focus on core business, others haveclearly faced problems in developingthe critical competitive mass in thesemarkets. Digital distribution would allow yourbusiness to move into new marketswithout the need for expensive anddifficult to establish branch or agencynetworks on the ground. It could beespecially important in reaching remotecustomers – successful models in otherfinancial sectors include Kenya’s M-Pesa, which provides access to paymentand deposits via the mobile phonenetwork and now has 15 millioncustomers, more than all of thecountry’s banks put together.18

Joint ventures are also going to becrucial in reaching customers andgaining a foothold in the market.It’s therefore important to think aboutwhat to offer potential partners thatcompetitors cannot. This may beparticular risk management or productexpertise. It may also be internationalcoverage that would allow the partnerto develop its global presence.

15 UN Population Division media release, 11.03.09

16 Economist, 24.03.12

17 United Nations, Department of Economic andSocial Affairs, Population Division, 2009 Revision

18 www.thinkm-pesa.com, 16.04.12

Promoting marketdevelopmentWhile the market potential of countrieswith low insurance penetration is clear(see Figure 4), there are significantvariations. In Mexico, the Middle East andmany parts of Eastern Europe, premiumsas a proportion of GDP were less than0.5% in 2010, compared to 1.67% foremerging markets as a whole. Thesepenetration rates underline theimportance of market development, notonly in distribution and product launches,but also to educate new markets in theuses and value of life and pensions cover.

Reputational risksThe aggressive pursuit of top-line growthin SAAAME markets creates its owninherent risks, including the potential forasset bubbles and mis-selling. The recentcurbs on commissions for unit-linkedinsurance plans (ULIP) in India, themainstay of the life insurance market,provide a good example of the regulatoryand reputational risks opened up by whathad been rapid and untrammelledgrowth. The new controls precipitateda sharp fall in overall life premiums in201120 and are likely to lead to a shifttowards more traditional products such aswhole life insurance. More broadly, whilerevenue expansion is the key priority formany businesses operating in SAAAMEmarkets, the quality of underwriting andsustainability of growth could prove to bethe key long-term differentiators.


Figure 4: Insurance penetration – Life premiums as a percentage of GDP

84% of life and pensions executives believeageing trends will continue to increase in thedeveloped world. But 59% believe there willonly be a marginal shift in the globalinsurance product portfolio due to offsettingdemographic shifts in SAAAME markets19


20 Financial Times, 27.05.12Source: Swiss Re Sigma World Insurance in 2010

12%

9.5%

7.4%

1.6%

2.5%

4%

4.4%

3.5%

Brazil

China US

South Africa

France

World

India

UK


Putting enough awayThe mature markets are moving in adifferent direction. Demand for life coveris slowing (see Figure 5) – in the US, thenumber of life policies is the lowest for 50years.21 In contrast, pension growthcontinues to accelerate as populationsage. Mature markets are alsocharacterised by the mounting pressureon margins and the disillusionmentcreated by the financial crisis, which hasdented public trust and fundamentallychanged customers’ appetite for risk. Thechallenge is how to develop the trusted,affordable and understandable policiesthat would allow life companies to re-engage with customers.

State support for ageing populations isbeing eroded by fiscal pressures and adecline in the proportion of working toretired people (‘dependency ratio’) inmany markets. The scaling back of statesupport has been compounded by thedecline in employer-provided definedbenefits plans – around half the currentUS workforce will have neither a state noremployer-supported pension plan.22

As people live longer and state andemployer support is withdrawn, there isan obvious need to save more forretirement. Yet most people are fallingshort. In the US, for example, the averageworker has saved just $25,000 fortheir retirement or just 7% of therecommended $350,000.23

Some countries such as Australia havestepped in to make taking out a pensionplan compulsory. Others such as the UKare looking to influence behaviour byrequiring all employers to make sure theiremployees are signed up for a pensionand thus putting the onus on theemployee to opt out if they don’t want tobe covered. Applying such behaviouraleconomic principles would certainlyovercome some of the inertia that detersmany people from putting money asidefor their old age.

Figure 6: Openings for combined health and wealth solutions

21 USA Today, 02.12.10

22 ‘Pension coverage and retiremement security’ published by Center for Retirement Research at Boston College, 22.12.09

23 Wells Fargo Retirement Survey 2011

Sources: PwC subject matter experts and analysis

Converging customerhealth-wealth needs

Available industrysolutions

Integratedsolutionsand advice

Life andhealth risksolutions

Incomesolutionsand assetprotection

• Huge retirement population (BabyBoomers)

• Retirees living longer lives; healthcareneeds increasing

• In addition, healthcare is becomingincreasingly more expensive (due toexpensive advances in medical devices,technology, treatment)

• Government and insurance transferringmore of the healthcare costs toindividuals

• More than ever before greater needfor individual wealth preservation

Gap

Source: Swiss Re, Sigma Data

Figure 5: Insurance density – change in ratio of life premium(in US$) to population (2001–2010)

2%88%

35%

84%

94% 56%

57%

25%

China

World

Brazil

US

UK

France

South Africa

India

Accessible options The development of low cost and easy-to-understand and compare policies will becrucial in filling the gaps created by thewithdrawal of social welfare and definedbenefits plans.

Some life companies may be reluctant todevote too much investment to what theysee as low-margin business. But it isn’tjust low-income policyholders who wantsimplicity. Tech-savvy millennials andgeneration X-ers are using the internetand social media to compare and buyproducts, with direct-to-consumer lifepolicies likely to be a key growth area.

The availability of easy-to-understandproducts could also help to attract morecustomers from SAAAME markets, manyof whom may be unfamiliar with lifeinsurance.

To date, such policies have tended to befairly unsophisticated. But as we outlinelater in the paper, developments in riskanalytics and customer profiling are goingto bring greater customisation andsophistication to such low-cost and fast-access products. Even complex productsneed not be complicated for customersto understand if designed and marketedwell. Providers can take care of theintricacies of ‘lifetime’ managementand adjustment, while the goals andperformance are clear to the customer.

New generation solutions The paring back of social welfare islikely to heighten consumer uncertaintyabout health care and pension provision.Life and pensions companies are ideallyplaced to address these uncertainties bybringing together solutions for health,wealth and retirement (see Figure 6),which would provide an opportunityto develop more tailored and highermargin packages.

With the financial crisis having madepeople less confident about the adequacyof returns from their pensions and otherinvestments, they’re coming to favourassurance over yield. The desire forgreater certainty is reflected in therenewed popularity of guarantees. Theproblem is that the risk-based capitaldemands being ushered in by EUSolvency II and comparabledevelopments in other parts of the worldcould increase the capital charges forguaranteed annuity products. Some lifeand pensions companies are alreadybeginning to scale back such products.Even if they remain, the high cost of thecapital requirements may make someannuities too expensive for a lot of massmarket consumers. There are thereforeopportunities if your business couldmanage the market risks more effectivelyand hence reduce the capital demandsand product prices.

New solutions inspired by behaviouraleconomic principles are also emerging,which adapt to each life stage beforeseeking to offer a target return forpolicyholders once they enter retirement.By offering relatively high-risk/high-yieldinvestments in the initial years of thepolicy and then moving to lower riskassets later on, the provider takesresponsibility for managing risk andreward, without holding the risks on itsbalance sheet. Policyholders gain someassurance over future income, while stillassuming the risk from a regulatorycapital perspective.

This approach can be developed furtherthrough contracts offering lifetimesupport. These would help to manage thefinancial needs of policyholders in theiryounger years, such as paying off astudent loan or saving for a mortgage,and then shift to life cover and pensionsolutions as children come along andattention turns towards saving forretirement.


New solutions inspired by behavioural economicprinciples are also emerging, which adapt to eachlife stage before seeking to offer a target return forpolicyholders once they enter retirement.


QQuestions for your organisation

n How can you provide greater certainty for policyholders and helpthem to address their evolving needs?

n How can you turn demands for greater transparency to youradvantage by creating more straightforward, cost-competitive andeasy-to-understand products?

n Is your business sufficiently agile to capitalise on emergingdevelopments and operate at two different speeds of growth?


Most insurers tend to look at what their competitors are doing and then see how theycould do this better. But customer expectations are now being set outside the sector asthey become accustomed to the choice and accessibility of retail sites, such as Amazonand the one click interaction of an Apple app. They now want this experience fromtheir insurers.

We’ve already seen in the UK how quickly market comparison sites have transformedmotor insurance. Aggregators now control nearly 50% of the private motor market,24

and with it much of the customer relationship. They are now reaching into home andlife cover, with easier comparison leading to a sharp fall in insurers’ margins. Socialmedia is taking customer rating one stage further by allowing consumers to shareratings and become advocates for a particular product or service.

But the distribution revolution goes much further than just comparison and price.For example, some companies are developing apps that let policyholders send througha photo of the damage when they have a car accident. In this way, they can get theirclaim in train there and then. On the life side, a lot of companies are now able to offerimmediate quotes and coverage over the internet, doing away with the long wait formedical checks.

Changing routes to marketThe traditional life and pensions model in which policies aresold through intermediaries receiving a commission from theprovider still prevails in India, China and many other SAAAMEmarkets. But even here its grip is loosening as new regulatorycontrols are introduced and more customers opt to self-serve orseek out fully impartial guidance.

More than 80% of the executives in our survey believe thatintermediaries will become less tied to insurers as advisercommissions are withdrawn in some markets and customersseek greater impartiality. This could leave life companies withlittle direct contact with the customer and put further pressureon margins.

The change in fee structures is also likely to reduce the number of IFAs operating in themass market. Some life and pensions companies may therefore look to build up theirdirect sales forces or strengthen their digital distribution capabilities. Others will seekto market their products through affinity or corporate channels. Examples include theextension of employee cover to families. This allows policyholders to take advantage ofeconomies of scale on price. In turn, your company could benefit from preferred access

Section twoDistribution disruption and the customer revolution

As customer expectations becomemore exacting and the supply chainbecomes more fragmented, yourbusiness will need to develop newroutes to market or risk being cutout of the loop.

34% of life and pensionsexecutives expect thatconsumers will turn to theirsocial networks to obtainadvice and share information,reinforcing the demands forgreater transparency25

24 UK Insurance Aggregators 2011, An in-depthanalysis of the UK Insurance Aggregator market,published by Datamonitor, 12.01.12


to a known customer segment. Otherexamples include new web communitiesthat not only negotiate discounts withproviders, but also pool subscribers’contributions to pay for small claims.The insurers’ savings on theadministrative costs of these claims canbe passed on to the customers buyingthrough the network.

Even where agency channels stillpredominate, it will be crucial to thinkabout how you engage with yourcustomers and how they receive advice,as many customers will choose toaugment face-to-face advice withinformation gleaned from the internetand social media. India and China areclear examples of markets wherecustomers find it useful to researchproducts online, but still feel morecomfortable buying through anintermediary.

Operating under the spotlightRegulatory developments such as the UK’s Retail Distribution Review(RDR) are set to spark a major shake-up in how pensions and otherinvestment products are priced, marketed and sold by curbing or puttingan end to the inducements paid to advisers to sell particular products.

Even without such regulation, life companies are facing much greatermedia scrutiny over their pricing. Indeed the key issue for the industry isnot new regulation, but how to deliver value and fairness while stillbeing able to generate reasonable profits and shareholder returns. Theelimination of payments from providers to agents will also spur furtherdisaggregation in the sector, requiring businesses to consider where inthe value chain of advice, distribution, design and administration theycan best compete.

Without commissions, life companies face the challenge of how todifferentiate their products more effectively. Greater choice,transparency and customer focus will heighten the challenges forproduct design, pricing and cost control. While some business modelswill come under threat, this is also an opportunity to stand out fromthe pack.

Our market research underlines the importance of being much clearerabout the value you provide for customers and making sure the qualityof delivery stands up to more comprehensive market comparison.26

The findings also show that many products and distribution strategieswill only attract enough customers and deliver an acceptable margin ifthey’re targeted at very specific market segments. The ‘serve all’ modelwill be all but redundant as a result. To stay in the game, businessesneed to be absolutely clear about who they’re targeting, what they’regoing to sell to them and how they’re going to make money.


26 Staying in the game: Customer perspectives on apost-RDR world, published by PwC in June 2012

Figure 7: The evolving model of advice, sales and service

Source: PwC

Customer

Call centre

Website

Partner/Whitelabel website

Mobile Apps

Mobilewebsite

Socialmedia

Customer

Broker

Aggregators/online

intermediaries

On the customer’s wavelengthAs customers become more confidentabout researching and buying productsdirect, it is important to look at how tointeract with virtual networks, provideguidance and access for customerslooking to self-serve, and develop aninfrastructure of multi-channel advice,sales and assistance. Comparable changeshave been seen in the travel industry,where the traditional agency model hasbeen largely replaced by the unbundlingof flights, hotels and car hire, many ofwhich are bought online.

More than half of the executives in oursurvey believe consumers will use onlinechannels to research life and pensionsproducts and around a third believeconsumers will use multiple channels.These developments call for speedy on-demand service and seamless information

integration across all channels (see Figure 7). If you can effectively managecustomer preferences and tailor productofferings to different segments you will bemore likely to win and retain customers.

Repositioning your businessA more complex and fragmented sales,advice and service model is set to emergeas a result of the distribution disruptionand customer revolution. This wouldrequire your business to judge whetherit can most effectively compete asmanufacturer, distributor oradministrator and, if so, in whichcustomer segments. The evolving valuechain is likely to feature a number ofloose collaborations and virtual networks.Examples might include generalistsbringing in specialists to support theiradvice in areas such as financial andtax planning.


More than half of theexecutives in our surveybelieve consumers willuse online channels toresearch life andpensions products andaround a third believeconsmers will usemultiple channels.



n Where in the value chain are you best positioned to compete?

n Do you need to build or strengthen your own distributioncapabilities?

n How can you reach out to customers and sustain marginswhen you can no longer rely on the incentive of advisercommissions?

n How best can you use technology to assist your customersand your intermediaries?

n How could products be simplified so they wouldn’t need to besold through an adviser?

Bancassurance comesto the foreThe move towards holistic health,wealth and retirement solutionscreates important openings forbancassurers.

Bancassurance is also one of thefastest-growing channels in manySAAAME markets including Chinaand India. Banks have the advantageof being able to build on theirexisting relationships and are oftenmore trusted than independentadvisers in these markets.

In some countries, including the US,regulatory and market separationbetween insurers and banks willneed to be overcome to make themost of the holistic opportunity.


Advances in analytics are already allowing life and pensions businesses to develop abetter understanding of their risks and price more keenly. But we’ve only beenscratching the surface up until now. The most important differentiator is going to behow to extract customer profiling data from all the purchasing, social media and otherdigital trails people leave. A lot of this information is unstructured, and new techniquesare emerging to analyse this ‘big data’ (see Figure 8). For example, transactional data isbeing used to find out where and what customers buy to determine ‘well-being’ scores,which can then be used to identify whether they are a good risk.

Analysis of these rich sources of data would allow you to develop a clear andcomprehensive profile of the health, wealth and behaviour of the customer before he orshe applies, saving all the form filling and verification needed. This would in turn allowyou to target particular customers and offer instant online cover.

Proactive cover cuts risksNext up in the big data revolution are sensors. Sensor technology is already cominginto play in motor cover, allowing insurers to judge how carefully the policyholderdrives and reflect this in their pricing. In turn, safer drivers benefit from lowerpremiums. Importantly, these devices have also lowered accident rates by helping toencourage more careful driving.

Section threeInformation advantage through ‘big data’

Increased processing power andsmarter analytics will pave the wayfor more informed prevention, riskselection and premium pricing,allowing your business to offercheaper and more personalisedproducts, while still sustainingmargins.

Big Data refers to the phenomenal amount ofstructured, semi-structured, and unstructuredinternal and external organisational data that isexchanged every day, but most of which goes unused.

Figure 8: Tapping into rich new sources of data

Patterns generated by phones,appliances and other devices thatcan provide insight into eventsand habits

Conversations and images that improve customerexperience through captured attitudes and beliefs

Data captured through business operationswaiting to be enhanced with unstructureddata from the outside world

Economic trends and global events thatimpact investments and buying habits

Sentiment, relationships andpreferences that consumers broadcastdaily

Untapped business knowledge hiddenin documents and emails

Source: PwC

Big data

EverydayCommuni-cation

Multimedia

Businessintelligence

Operationaldata

News andmarkets

Text

Socialmedia

For life and health insurers, sensortechnology is helping to monitorpolicyholders’ health (see Figure 9).The devices would alert them to any earlysigns of illness so they can see a doctorin good time. They could also help topromote safer choices and supportverification in areas such as healthy eatingand alcohol consumption. Your businesswould benefit from reduced liabilities andcould offer lower premiums in return.

Much of the technology needed to captureand sift through this big data is alreadyavailable. The bigger question is howthe results are used. To make the most ofthe potential, your business needs to beable to aggregate the analysis and turn itinto the actionable insights that wouldallow you to target customers, developcustomised products and tap into newmarket opportunities more quicklyand effectively than your competitors.This in turn requires speed of decisionmaking, organisational agility and theright talent, along with the customer-centric culture that underpins theseattributes.

Figure 9: Sensor technology enhances insight and prevention


79% of life and pensions executives feel that privacy concerns and thecosts of sensor technology would be overcome and we would begin to seeincreased adoption of medical devices over the next decade27


Source: PwC

Doctor’sconsideration

Immediateemergencyattention

File for futurereference

BloodPressure

Hearing

EEG

Vision

Positioning

Toxins

Implants

DNA Protein

Glucose

ECG

Wireless

Mobile/cellphones

Telephone

Pricing granularityAccess to richer, more accurate medicalinformation has enabled a better understandingof risk. By developing sharper pricingcapabilities, life insurers can now compete more effectively for share.

Product designWith access to more granular, quickerinformation about customers, it is now possibleto customise not just insurance products, butalso develop holistic income solutions cateringto individuals’ specific needs.

SimplicityAutomation of core processes has started toreduce cycle time, making it possible to improvecustomer abandon rates through the quotingprocess and allow for greater market capture.

Network

Advances in medical technology, devices and preventative care are increasing life expectancy and also generating richer information for pricing, productdevelopment and analytics

Body area networks and embedded devices and sensors will result in more preventative healthcare, but will generate more information


n How can you harness the latest advances in analytics to improverisk understanding and design and price products to satisfycustomer needs and expectations more effectively?

n When will big data capabilities become a competitive imperative?

n Will your legacy systems allow you to keep pace?

n Do your organisational and decision-making structures allow youto make the most effective use of the risk and customer profilinganalysis at your disposal?


In the past, scale (‘big’) would have gone a long way towards meeting customerdemands for choice and value. Now, your business also needs to be fast to succeed.

To meet evolving customer expectations, your business needs to be able to speed up itsdecision making and customer delivery cycles within the front office. This would allowyou to harness new sources of information, develop more responsive products andoperate across multiple channels.

Effective use of technology is going to be a crucial factor in sharpening productivity andcustomer responsiveness. This isn’t just making use of greater automation to reducecosts and quicken delivery, but also harnessing digital developments to spur greaterinnovation and differentiation.

Organisationally, it will be important to streamline decision-making processes and cutthrough the functional dependencies and other needless complexities that slow downyour company’s ability to respond to market demands. The underlying attribute is theability to understand customers’ needs and put their needs first, which in turn makesculture a key component in enhancing productivity.

The deployment of talent is also critical. This includes automating the underwriting ofroutine risks, which would release underwriting and product development teams tofocus their skills on complex, specialised and unfamiliar risks. For example,underwriters could be switched to analysing risks and developing responsive productsfor customers in SAAAME markets where risk data and openings for underwritingautomation are limited.

The result would be a more productive and profitable operating model in whichresources are better aligned with the level of return. This approach would also allowyour business to eliminate many of the low value tasks carried out by underwriters,while allowing businesses to maintain more flexible cost structures and move in onopportunities with greater agility.

Section fourBig and fast: Evolving business models

The changing focus of globalgrowth, shifts in customerexpectations and the opportunitiesfor smarter underwriting arecoalescing into new business,operational and organisationalmodels, creating openings for newentrants and forcing existingplayers to raise their game.

Effective use of technology is going to be a crucialfactor in sharpening productivity and customerresponsiveness. This isn’t just making use ofgreater automation to reduce costs and quickendelivery, but also harnessing digital developmentsto spur greater innovation and differentiation.

The moments that matterCulture and behaviour cut across allthe factors that will allow you to meetcustomer expectations. The insightand agility of your staff are clearlycrucial in responding to customerneeds. Equally important is theintegrity needed to put the customerfirst and provide solutions that aregenuinely right for them rather thanjust meeting sales and bonus targets.Such integrity is not only a key focusfor regulators, it is also a hugelyimportant competitive differentiator,allowing your business to engage andbuild up trust with your customers.

But attributes such as insight,agility and integrity can be difficult toinstil within many organisations. Evenattempts to build them intoperformance objectives and incentivescan falter if the ways people work andthink on a day-to-day basis areunchanged. It is therefore importantto hard wire these aspirations into the‘moments that matter’ within theworking day. It might be whatinformation they use to makedecisions. It might also be what otherteams they collaborate with as yourbusiness looks to develop moreinnovative and effective clientsolutions.

The underlying factor is how staffjudge what they do. This includestaking pride in providing a goodsolution for such an important lifedecision as life and pensions cover andrecognising the value they create forsociety as a whole.

Leadership is critical in defining andproviding the role models for thebehaviour needed under this new wayof working and making sure it is anorganisation-wide priority. HR andline management can also play adecisive role in nurturing the desiredculture and behaviour on the groundand clearing the obstacles that couldget in the way.



Figure 10: New service models

Agile new entrantsThe urgent need to strengthen agility,productivity and customer focus isheightened by the growing threat fromnew entrants.

The development of internet channelshas allowed companies to reach newcustomers and markets without the needfor a physical presence and with lowvariable costs, though the initialinvestment has been considerable.

Cloud computing and other advancesin storage and processing power areallowing agile companies, including newentrants to harness state-of-the-artconnectivity and analytical capabilities,without the high fixed costs. As theywill only be using the computingpower needed to meet their currentrequirements, this just-in-time ‘virtualoutsourcing’ approach would allowthem to break into new markets andflex up as their customer base growswith much greater flexibility and lowercosts than new entrants in previous eras.They can also tap into social mediaand other external data to profile theirtarget customers without the need forextensive databases.

Intuitive automated adviceA model for rapid and effective marketentry is Mint in the US. Mint is a freepersonal finance and money managementplatform and therefore has closesimilarities with automated life insuranceadvice and guidance. It analyses all theuser’s bank transactions to give them abird’s eye view of their financial situationand how to improve it. Mint reflectsthe market trend towards more flexibleassisted and self-directed models(see Figure 10).

What is also telling about Mint is how fastit has been able to gain significant scaleon a shoestring budget. Most of thetechnology basics needed to set up thesite didn’t cost anything. Rather thanspending money on advertising, Minttrusted its 36,000 Facebook fans topromote its services. The speed at whichcompanies like Mint can get up andrunning and the usability of their servicesmake them a real threat to establishedinsurers.

Source: PwC

Delegated...organise it for me

Assisted...I’ll organise it myself with

a little help

Self-directed...I’ll organise it myself

Delegated giving way to Assisted (personal advice with the support of technology infrastructure); which is evolving towards a co-existence model withSelf-Directed advice


Mint now has seven million users28 andwas recently taken over by Intuit, whichalso markets Turbotax, America’s mostpopular automated tax filing package.Access to Intuit’s tax and transactionaldata would give Mint the potential to gaina complete picture of a user’s finances –spending, savings and earnings from allsources. This would allow it to develop afuller picture of the user’s behaviour andbecome an advocate for their needs.

The challenge is how quickly yourbusiness can respond and how to keepone step ahead of these nimblenewcomers. Around half of the executivesin our survey believe that it will be tenyears before ‘big data’ comes into its own.However, the example of Kodak citedearlier shows that they may not haveanything like that much time to adaptonce the faster, cheaper and moreintuitive products and services becomeavailable.

While most SAAAME markets are still atan early stage of big data development,agile companies are looking at how tocreate the infrastructure that would allowthem to leapfrog into the big data league.The concentration of software designand analytical services in India andother SAAAME markets could providea useful launch pad for the developmentand application of big data withininsurance.

Too little, too slowUnfortunately, few life and pensionscompanies appear to have grasped thespeed and magnitude of the changes inthe competitive landscape or the needfor fundamental strategic shifts thesedevelopments demand. Our surveyfound that their number one priorityis enhancing operational efficiency.New products, data analytics and otherinnovations are much lower down the list.Clearly efficiency is an essential prioritywhen margins are under pressure. But itcan only go so far. Simply doing what youdo a little better may not be enough toguarantee survival and success when thesector is facing transformational change.

58% of life andpensions executivesare planning toimproveoperationaleffectiveness, butonly 32% areplanning to investin their datainfrastructure andanalytical tools29

28 Mint website, 12.06.12



n Could low-cost entrants come in to undercut your business andhow can you compete?

n Would new technology allow you to operate more efficiently andcapitalise on opportunities with greater speed and agility?

n How prepared are you to face fast-growing information-basedplayers that are likely to disrupt your industry?


There is no certainty that existing players will be in the best position. Indeed, withtechnology set to have such a major impact on what customers expect and howproducts are underwritten and marketed, the unwieldy legacy systems employed bymany life companies may put them at a competitive disadvantage.

It is therefore vital to think about how to make sure your business is able to keeppace, and where possible, lead change. We believe that there are five key attributesthat will mark out the businesses that will be able to compete and succeed from thosethat won’t:

• Speed of decision making and agility to respond

• Clear insights into where in the complex new value chain they are best ableto compete

• Using the latest developments in technology to enhance customer profiling, reducecosts and improve customer experience

• Using new technology to industrialise routine underwriting, sharpen their analyticalcapabilities and release talent to focus on high-growth markets and deal with morecomplex risks

• And to make sure they get the benefit from this, being able to communicate valueclearly and convincingly to analysts and investors

While the future may be hard to predict, it’s definitely not impossible to prepare for.The speed at which your business can make use of these attributes to anticipate andadapt to change rather than simply reacting to events is going to be a key differentiatorin the shake-up ahead.

Are you still going to be in business in fiveyears’ time?

The life and pension market hasconsiderable growth potential. Thebig questions are: who is best placedto take advantage of these changesand how?

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability,responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for anydecision based on it.

Research team andlead authors

Jamie YoderUS Insurance Advisory Co-leaderPartner, PwC (US)+1 773 255 [email protected]

Anand RaoPartner, PwC (US)+1 617 633 [email protected]

Mansoor BajowalaDirector, PwC (US)+1 312 298 [email protected]

Anuraag SunderPrincipal Consultant, PwC (India)+91 124 462 [email protected]

Global

David LawGlobal Insurance leaderPartner, PwC (UK)+44 7710 173 [email protected]

John WynnGlobal Insurance Advisory leaderPartner, PwC (Hungary)+44 7802 948 [email protected]

Europe

Achim BauerUK Insurance StrategyConsulting leader, Partner, PwC (UK)+44 (0)20 7212 [email protected]

John WynnGlobal Insurance Advisory leaderPartner, PwC (Hungary)+44 7802 948 [email protected]

Asia

Peter WhalleyHong Kong Insurance leaderPartner, PwC (Hong Kong)+852 2289 [email protected]

Americas

Allan BuitendagNational Insurance Consulting leaderPartner, PwC (Canada)+1 416 815 [email protected]

Anand RaoPartner, PwC (US)+1 617 633 [email protected]

Jamie YoderUS Insurance Advisory Co-leaderPartner, PwC (US)+1 773 255 [email protected]

Jonathan SimmonsCanada Insurance leaderPartner, PwC (Canada)+1 416 869 [email protected]

Paul McDonnellUS Insurance Advisory Co-leaderPartner, PwC (US)+1 646 471 [email protected]

Contacts

www.pwc.com/insurance© 2012 PwC. All rights reserved. Not for further distribution without the permission of PwC. “PwC” refers to the network of member firms of PricewaterhouseCoopersInternational Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act asagent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of itsmember firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions ofany other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way.

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Life insurance 2020: Competing For A Future - PwC

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