Oliver Wyman mapped out profits across the industry and found that the products currently being sold (such as pension savings, annuities, and life protection) will not deliver enough profit to compensate for the run-off of legacy products. In the short term, dividends can continue growing in line with the consensus expectation of around nine percent per year, but after this they will have to flatten off. Together with the high levels of regulation in the core retirement markets, there is a risk that the industry will become nothing more than a utility with relatively high dividend yields.
To counter such a future, insurers need new sources of growth and profit. The pension freedom reforms introduced in 2015 provide a unique opportunity to build a broader retirement franchise that could sustain continued profit growth and lead to an improvement in the rating of the life and pensions industry.
The UK’s life insurance industry will have good reason for optimism if it is bold enough to reform. Pension freedoms removed the requirement to buy an annuity and gave retirees freedom on how to invest and to spend their retirement pot. This was initially greeted with a healthy sense of caution by both the industry and customers: retirees would enjoy greater freedom to choose how and where to invest their retirement savings. However, making the wrong decision could have a significant impact on retirees’ financial wellbeing, with many individuals potentially outliving their money. The need for sound retirement planning has increased, but most pensioners do not have access to an independent adviser (or are unable to afford one).
This is where the more visionary insurance players could raise the industry bar; by helping clients to develop a broader life plan for their retirement and draw up a financial plan to help them to achieve this. After retirement, clients will need to manage their resources against this plan, and over time this will enable insurers to develop the relationship into a broad retirement franchise. This concept has meeting clients’ financial needs at its core, but broadens the relationship into other aspects of helping clients to prepare for, and enjoy, their retirement.
For life insurers, this represents a major shift and the scale of transformation is potentially daunting. This new breed of life insurer must evolve their core business models to extend way beyond the traditional sources of revenue they currently capture and adopt a customer-centric, rather than product-centric, value proposition. In short, insurers can become a “Financial Home” for the over 50s, moving beyond pension and retirement products to provide a broad range of services across all the needs of the mature customer-of-the-future.
The Financial Home for the 50+ Generation
Like any new home, considerable investment is a pre-requisite. Fortunately, advances in digital channels, data analytics, and robo-advisory services have dramatically reduced life insurers’ cost of serving clients. Future success may depend on how well insurers can use technology to broaden and deepen their client relationships. This will have a favourable impact on their bottom line. If successfully executed, the scale of the opportunity would be large enough to not only reverse the declining fortunes of the UK’s life insurers, but also potentially add £100 billion of shareholder value by 2021. This prize will only be shared by the small number of companies that are successful in making this transformation.
By taking a customer-centric approach, life insurers will not just offer life insurance products to clients, but would also up their status to become the main financial partner of the over 50s. Becoming a financial home will require insurers to build and nurture stronger relationship with clients as they approach and enter retirement. Far from being limited to life insurance, products and services propositions would include other financial services (such as banking and general insurance) as well as non-financial services products (such as recreation and long-term care). Although this is a radical leap of faith for an industry not necessarily synonymous with making bold changes, the rewards are by no means meagre.
As described in our report “The Retirement Franchise Opportunity”, customers’ needs evolve in the lead up to, and after, retirement. How to attract and retain clients over this period is an interesting challenge. This broader model raises interesting questions. For example, aside from some functional value to clients, how can insurers offer experiential value? The customer journey would require interpersonal, emotive, sensory, and social touch points if it is to be convincing, with customer satisfaction and emotional fulfilment contributing towards long-term loyalty. To create and maintain a customer’s new Financial Home, insurers must use sophisticated analytics to pre-empt needs and provide bespoke offerings.
The Path to Change
Innovation, evolution, and competitive differentiation will no doubt be central themes for the future of the UK life industry. Technology will help life insurers embrace future challenges, but responding to the needs of the retired customer-of-the-future will require considerable investment of time and resources. Life insurers will be venturing into areas which take them way out of their comfort zone and which do not play to their current natural strengths. Tactically, this transformation should be undertaken through long-term programmes consisting of carefully costed steps, executed in an agile environment. Such change initiatives will require a process of experimentation, piloting, and scaling. Not every initiative from the experimentation stage will be implemented, and insurers will need to maintain an agile attitude towards change. It is also important to avoid making big bets in the early days of development while still in the learning phase.
Bringing Financial Homes into reality may seem like a futuristic idea today, but the reality is some start-up technology businesses are already offering early stage versions of it. The insurance industry is protected a little by regulations and customer inertia, but these are not long-term barriers. Those insurers who take meaningful steps towards creating a Financial Home today will be the leading retail financial services business of the future. Those who do not will, at best, become utility platforms servicing other more profitable businesses.