Life insurers need to prepare for a different future, says new PwC report

Half of life and pensions executives believe that the internet will influence the types of products that consumers choose

The emerging markets (Africa, Asia, the Middle East and South America) are seeing a rising demand for insurance products as their economies expand and their consumers acquire more wealth to protect, according to a report released by professional services firm PwC. Furthermore, almost 50% of insurance industry leaders see the emerging markets as more important than developed markets to their companies future.

These are some of the highlights from PwC’s new report entitled ‘Life Insurance 2020: Competing for a future’, in which 150 life and pensions executives were asked to comment on the effect and likelihood of a series of social, technological, environmental, economic and political situations, as well as setting out their short and medium-term priorities. The report also examines the developments that are likely to have the most decisive impact over the next five years and main opportunities for innovation, growth and competitive differentiation.

Victor Muguto, PwC Long-term Insurance Leader for Southern Africa, says: “The old adage that insurance is sole, not bought is being challenged. As customers use the internet and their own social networks to gain knowledge about the kind of products they need and use technology to determine the affordability and worth of insurance products, life insurers will need to adapt accordingly.

“The growth agenda is being shaped by the very different economic prospects and demographic profiles of emerging and developed markets. As urbanisation and longevity are increasing in emerging countries at a faster rate than in developed economies, there is enormous potential for life insurance businesses to grow in these markets.”

The study shows that life insurance is a shrinking market in some countries such as the US where the number of life policies is the lowest for 50 years. On the other hand, pensions and retirement income is a growing sector for developed nations and South Africa due to the changing demographics. The demand for pension products in the emerging markets is likely to catch up with the West as health improves and consumers live longer. As people live longer and government and employer support is withdrawn, there is a need to save more for retirement. Some countries, such as Australia have stepped in to make the taking out of pension plans compulsory. Others, such as the UK, are looking to influence behaviour by requiring all employers to make sure their employees are signed up for a pension.

Life insurers are likely to make significant changes to their business models over the next ten years. The cap on financial advisers’ fees in many countries and the planned elimination of commission for advisers in the UK will bring the value policyholders receive from these changes into the spotlight. Furthermore, technology will have an increasing influence over the way in which insurance is purchased in the future, states the report.

The traditional life and pensions model in which policies are sold through intermediaries receiving a commission from the provider still prevails in China, India and many other South America, Africa, Asia and
Middle-East (SAAAME) markets. More than 80% of the executives in the study believe that intermediaries in the future will become less tied to insurers as adviser commissions are withdrawn in some markets and customers seek greater impartiality. This could leave life companies with little direct contact with the customer and put further pressure on margins.

The report also found that half of insurance leaders believe that a combination of inflation, rising government debt and economic turmoil threatens the business of smaller insurers, particularly those in Western markets.

Muguto says: “Insurers, particularly smaller ones in Western markets, need to be brave enough to look beyond the short to mid-term problems facing their businesses and position themselves for the future. That means mapping the potential impact of social, technological, environmental, economic and political change. The amount of information and change out there is overwhelming but getting to grips with what the life insurance sector will look like in 2020 will help define a vision for the future.

“The effective use of technology by insurers is going to be a crucial factor. Consumers have become accustomed to the ease, intuition and elegance of digital retail interaction and want the same experience from life insurers. As smart phones and other mobile devices proliferate, customers will increasingly demand to be able to buy what, when and where they want. Insurers need to look at how best they can use technology to assist their customers and also consider simplifying products so that customers feel comfortable buying from them.”

“There is no certainty that existing players will be in the best position in five years’ time; indeed, with technology set to have such an impact, unwieldy legacy systems in many life companies could put them at a competitive disadvantage. There is however a great opportunity for life insurers to play a part in resolving current issues. Finding a vision for the future that responds to some of the new macro trends will help demonstrate the value and purpose of insurance and also have a significant impact on how the industry is perceived.”

Other findings from the report include:

1. 70% of insurance leaders said they expected public health provision to worsen and 40% believe social security systems will be drastically pared back over the next ten years. State support for ageing populations in many markets is being eroded by a combination of government debt and a decline in the ratio of working people to retirees and governments are looking to insurers to fill in the gaps in public provision.

2. 50% believe that harnessing “big data” developments will provide a key source of competitive advantage and increased market share.

3. A third (34%) expects that consumers will turn to their social networks to obtain advice and share information, reinforcing the demands for greater transparency.