Life insurance companies in Europe and around the world are facing significant challenges due to the expectation of continued extremely low interest rates. This has implications for financial revenues, capital requirements, and the value proposition of life insurers in savings products. New regulations such as IFRS 17 further add to the challenges. Some executives are considering focusing efforts on unit-linked products, but there are complications in meeting customer demands and regulatory requirements.
To navigate this new normal, life insurers should consider four key measures:
1. Pulling tactical levers: This involves implementing short-term relief measures to address the low-rate challenge. Examples include applying additional underwriting criteria for guaranteed products, revising pricing policies, aligning distributor remuneration with product economics, reviewing investment possibilities and asset allocation, and selectively protecting the balance sheet through reinsurance contracts and derivatives.
2. Evolving the product range: Life insurers need to expand their product offerings to better meet customer needs. This includes investment products with capital-protection solutions, retirement-savings vehicles, and exploring new risk coverages. Segmentation and developing solutions for different market segments are crucial.
3. Reshaping customer journeys: With a shift away from guaranteed products, distribution channels need to rethink sales and advisory processes. This involves adopting hybrid digital sales formats, personalized offerings, and leveraging technology such as remote and video-based advice platforms, chatbots, and automation tools. Technology will play a crucial role in enhancing efficiency and compliance with regulations.
4. Taking structural action: Some life insurers may need to take more radical measures to address the challenges they face. This can include transferring traditional life portfolios to other insurers or specialized players, splitting segregated funds to better match maturity profiles, and pooling IT infrastructure or outsourcing business processes for economies of scale.
The time to act is now, as the traditional business models may not be sustainable in the new normal of low interest rates. Life insurers must embrace profound changes across their business models to adapt and thrive in the long term. Those that recognize the need for action and implement the necessary measures are more likely to succeed and shape the industry in the coming decade.