Life Insurance Views for 2020
Our society has gone through significant changes mainly
due to technological advancements in the past decade. The
Internet has helped insurance companies promote their
products and has made it easier for customers to make more
informed decisions, but has the life insurance industry
fully grasped the available modern technology to become as
efficient as possible? On the other hand, will fundamental
values such as transparency and honesty ever become
obsolete? In the next decade, successful firms will, in the
author’s opinion, have to combine those two forces in order
to do well in the long run.
efficiency And use Of The Internet
Through information availability and education, the author
believes that, as years go by, individuals will become more
aware of their life insurance needs. Also, more insurance
shopping tools should be available to customers. The old
saying, “insurance is sold, not bought” may not be as true
as it has been in the past.
The Internet has revolutionized multiple layers of
modern society. As information becomes more avail-
able and the execution of transactions becomes easier,
the author anticipates an increase in the use of Web sites
for selling insurance. Web sites providing insurance pre-
mium quotes are already abundant, and some Web sites
have already started selling insurance online. A challenge
for those Web sites is to patiently build a strong reputa-
tion, so that individuals will have the confidence to buy
insurance through this distribution channel, the same way
travelers now buy airline tickets through traveling Web
sites, although they may have been less inclined to do so
when online travel Web sites were in their infancy. Also,
commercial life insurance companies would have an
advantage to start selling insurance directly from their
Web site. Life insurance shoppers could get the coverage
they want and the appropriate riders online, similar to the
way customers can customize their purchase when buying
computers online. The need for agents selling insurance
policies would therefore decrease, just like the use of travel
agents has decreased in the past decade. This more effi-
cient way of selling insurance would allow insurers to offer
products at a more competitive price, and the necessary
technology is already available. The one area where the
author does not foresee a decrease in the use of agents is where
the face amount purchased is very high and where there are
estate planning or complex tax issues associated with the
insurance purchase.
Insurance reward System
The idea of an insurance company reward system, simi-
lar to fidelity programs offered by airline companies and
major hotel chains (but hopefully more effective), could
see the day. Points could be earned by policyholders
in proportion to premiums paid and used to buy other
insurance products or to get additional coverage or riders.
From the insurance company’s perspective, such a reward
program would increase persistency, awareness and loyalty
in policyholders. Such a reward system would benefit both
parties and strengthen the relationship between the policy-
holder and the insurance company.
regulatory And Taxation Issues
The individual tax treatments of inside build-up will
play a critical role in the cash-value-oriented products.
Although cash-value-oriented products offer multiple
advantages, one of the most sought-after features of such
products is the very advantageous tax treatment of the
earnings of such products. Some cash value products serve
as a second 401(k) vehicle. Regulators’ views and future
actions are very hard to predict.
Regulators serve and protect individuals by making
sure that insurers have enough funds to meet their obliga-
tions. It is natural for them to impose strict requirements
and use conservative assumptions to evaluate liabilities in
order to protect the public. Having said that, proscribing
unreasonable reserves and capital requirements usually
does not serve the population well. It typically results in
insurers finding ways such as securitization and offshore
reinsurance agreements to get around such requirements.
Principle-based reserving is already at the center of multiple
Society of Actuaries’ task forces, and implementing these
requirements will be a challenge for both carriers and
regulators, but the author believes that this approach will
be beneficial for society in general in the long run, as the
focus will appropriately be on the obligations of the insurer
to meet its contingent liabilities. Currently, a great deal of
effort is put in finding solutions to bypass excessive require-
ments. Those efforts and resources could be used elsewhere
or simply removed to offer a more competitive product.
Shareholders
Shareholders of life insurance companies, just like
shareholders of any other corporation, are in a constant
quest for more and better information. Transparency to
shareholders is definitely a positive aspect for an
organization as a whole because it ultimately enables
the providers of capital to make better investment and risk
choices. This usually translates into more disclosure on a
firm’s activities. This is typically helpful for investors, but
the information disseminated must be done in a manner
that makes the information understood and is of value to
investors and analysts. The successful insurance companies
of the next decade, in the author’s opinion, will disclose
not necessarily more, but more concise and pertinent
information, to the public.
fraternals
In the light of the recent corporate scandals and lack of
transparency, the public, rightfully or not, has a low opinion
of corporate leaders in general. This may be an opportu-
nity for the fraternal industry to surge. Usually challenged
with the lack of economies of scale compared with regular
insurance carriers, fraternals have an unprecedented asset:
an impeccable record of transparency and honesty.
Fraternals provide a valuable service to society through
multiple social programs and charitable sponsorships. If
the movement becomes better known to the public, some
policyholders may be interested to contribute to this if
they pay similar prices, and fraternals have similar ratings
as commercial carriers. Also, fraternals get a special tax
treatment. Can fraternals use their tax advantage and good
reputation to compete with economies of scale of commer-
cial carriers and offer similar prices as well as achieving
good ratings? Can they reach out to a broader public? If
the answer is yes for the two interrelated questions above,
policyholders may turn to fraternals to meet their insurance
needs, which would significantly increase the fraternal
presence in the life insurance industry in the next decade.
Securitization
Securitization in the life insurance industry took many
different shapes and served different purposes in the past.
The author believes in the added value of securitiza-
tion in the life insurance industry in general and sees a
demand from both sides. First, the originator (in this
case the life insurance company) would benefit from re-
moving some mortality risk from their book, forgo some
return in order to write more new business and make a
profit on originating policies. Second, the capital markets
would welcome a way to diversify equity and interest rate
risk, as mortality risk is a random risk that is uncorrelated
to those two risks. Past securitization arrangements have
involved many parties and have been very costly. In
order for securitization deals to be successful in the future,
they will have to be simpler, cheaper to implement and
more transparent, and target a broader market. Securitiza-
tion would ultimately transfer some of the mortality risk of
the insurer to an outside investor. Simplicity and cost are
important because potential investors are attracted to a
new risk, but obviously for a reasonable return. If the cost
of the issuing security reduces the potential to earn this
return, the whole securitization concept is pointless. Also,
insurers always have the reinsurance option to transfer risk
or hedge it one way or another. In order for securitization
to be effective, it has to be done at a comparable cost to
reinsuring mortality risk; otherwise, there is no incentive
for the insurer to securitize. Transparency is another key
element; investors want to be able to evaluate the risk into
which they are getting. A black-box-type security is usually
not attractive for investors. Finally, volume is another key
component of a successful securitization to reduce the cost
per security and add liquidity in the market in which it
is traded. Successful firms of the upcoming decade will
have securitization as an available option. Details and
technicalities of such securitization agreements are beyond
the scope of this essay.
Conclusion
Transparency and efficiency are the common denomina-
tors of this essay. In the end, both firms and customers
will benefit from an alignment of these objectives.
Also, reputation will always remain a crucial ingredient to
the success of a life insurance company. It is not something
that can be coded overnight. Transparent contracts (without
overly complicated details, upfront fee schedules and no
unpleasant surprises) as well as investments in technology
are among matters a life insurance company will have
to put efforts in to establish and sustain a strong reputa-
tion and be successful in the long run. These undertakings
can be costly initially, and it is a challenge to remain com-
petitive while assuming these costs. But these factors will
ultimately draw the line between the key players of 2020
and the life insurance companies of the “past.”
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