Enterprise risk management continues to be a major focus
in many industries and the life insurance sector is no
exception. In fact, an insurance company’s future survival
is highly dependent upon the ability to successfully manage
its various risks. However, to thrive and not just survive,
an insurance company must take advantage of its exper-
tise in risk management by also addressing the risks faced
by its individual customers in a much better and more
comprehensive way than is done today. This can be
accomplished through the development of a single product
that will allow individuals and families to simultaneously
identify and manage the risks encountered over a lifetime.
Companies that can successfully develop such a product will
see profitable growth and become the dominant force in the
life insurance sector of the future.
The value derived from human capital allows individu-
als to meet basic needs such as food, clothing, housing,
education and health care, both during the working years
and in retirement. The three primary risks in attempting to
meet these needs are:
• Mortality (premature death and longer than expected
lifespan),
• Morbidity (disability, extended later life health issues
requiring assisted living and long-term care and
conditions currently covered by comprehensive health
benefit plans), and
• Investment risk (the risk of loss to retirement and
personal investments).
Although these risks are well known, for a variety
of reasons individuals often do not or cannot protect
themselves. For example, assuming one saves enough of
current earnings for retirement, investment risk is still a
large obstacle in achieving a desired retirement income.
This risk has increased recently by the rapid decline of
defined benefit pension plans. Most participants in defined
contribution plans have limited investment knowledge
and often make unwise choices when investing large sums
of money. Even those who receive investment advice
or choose life-cycle funds have no guarantee that future
required returns will be achieved. Although certain com-
plex and costly option strategies could be employed, there
is no product that currently offers an easy-to-understand
and affordable way for the average person to purchase
insurance protecting the value of retirement or personal
investments.
Furthermore, even though the insurance sector
currently does offer a vast array of products to mitigate
mortality and morbidity, separate policies must be
researched and purchased to cover the variety of risks
that exist. For example, to protect against the morbidity
risk one would need medical insurance, disability
insurance and long-term care. Consumers and their agents
spend valuable time trying to understand and compare
features and costs from a laundry list of products rather
than making optimal risk-based decisions that maximize
insurance protection and minimize cost. This is due to
both tradition and regulation, but it results in many
consumers feeling frustrated with the process and pur-
chasing products they may not fully understand
and that do not efficiently cover all the primary risks.
Without any significant industry change, as technology
improves the ability to compare costs and product
features, the insurance products as offered in today’s
market will become commodities, limiting opportunities
for future growth.
To grow in the year 2020 and beyond, life insurers will
need to become personal risk managers for their customers
rather than just a place where insurance policies are sold.
Successful companies will offer a policy that provides
comprehensive risk management services for individuals
and families. The product will offer lifetime protection
risk Management for The Individual: The Key To Life Insurer Success In 2020 And Beyond by Ken Beckman
from all the primary risks in a single insurance policy using
the following coverages:
• Life insurance,
• Longevity insurance (i.e., guaranteed lifetime retire-
ment income payments),
• Disability insurance,
• Long-term care insurance,
• Investment insurance, and
• Medical insurance (contingent upon the outcome of
national health reform).
An interactive system, using the latest technology, will
be used to obtain demographic, financial, health and other
information. The system will then use this information to
explain to applicants the implications of the primary risks
they face, both at present and in the future. Next, customers
will be provided with a menu of several possible insurance
policies to choose from, with each policy offering protec-
tion from all the primary risks, but differing in cost and the
amount of coverage provided. All the policies on the menu
would be optimized, based on the applicant’s risk tolerance
and other variables, so that regardless of the policy selected
it will provide the best possible coverage at the lowest pos-
sible cost. To achieve optimal protection, the coverages
contained in each policy would be expressed in flexible
terms. For example, the amount of life insurance would
vary over time (possibly reaching zero coverage at some
point) and correlate with specific factors such as income,
family status, other assets and tax considerations.
For each policy being considered, the system will
illustrate the impact on an applicant’s projected future net
income and net worth under a variety of scenarios. These
scenarios would be designed to show prospective insureds
that insuring for more risks (rather than fewer) and insur-
ing for these risks sooner (rather than later) provide the
maximum protection at the lowest cost. For example, the
scenarios would demonstrate the advantages of funding
long-term care throughout an entire lifetime, increasing the
proportion of young insureds that currently have long-term
care coverage. If this strategy is successful, it will provide
a company the opportunity to expand the size and diversity
of its risk pool, reducing the average cost of coverage for
all consumers.
Even after the policy is issued, the risk management
system will allow the insured to view updated illustrations
as circumstances and risk tolerances change. The system
would continuously monitor changes in the family’s risk
exposure and notify the insured of coverage adjustments
that might be needed. Selected coverages could be modi-
fied at any time. The actual product details may vary from
company to company, but the main objective is to enable
individuals to fully understand the risks they face and pro-
vide an efficient and effective way to protect them from as
much or as little of that risk as desired.
In order to create a risk management product for the
individual and make sure it is financially sound, many
issues must be addressed. First, companies need to dramati-
cally improve existing enterprise risk management practices.
Regulators, the public, and company management must
all be confident that companies will be able to handle the
additional risks they are accepting. Companies that are
successful should benefit from a larger pool of offsetting
and uncorrelated risks, providing a reduced net risk
exposure and an improved ability to absorb future extreme
unexpected events.
Pricing for morbidity and mortality risk can continue
to rely on actuarial principles, but must go further by
considering the combination and interaction of risks at the
individual and family level. Pricing at this level will make
coverage less expensive compared to insuring each risk
individually with a separate product. In addition to pricing
traditional risks in this new framework, actuaries and other
insurance professionals must also evaluate and profitably
price risks that are very prominent, but have not commonly
been insured. Specifically, the risk of decline in retirement
investments will need to be addressed with investment
insurance using both existing and new techniques. This
coverage might guarantee a minimum return over specified
intervals, such as a 3 percent return on a stock mutual fund
at the end of 20 years. Risk-based pricing would be used so
that insuring riskier investments and having more generous
guarantees would cost more.
Marketing must be modified to better educate the public
about these risks that imperil the financial health of individuals
and families. For this product to work, the public must under-
stand it is more effective and less costly to address these risks
at the household or individual level rather than in piecemeal
fashion through a variety of separate policies. Underwriting
must be flexible and timely, while avoiding anti-selection.
By 2020, technology and electronic commerce will have
advanced rapidly, and companies must fully utilize these
new technologies in all aspects of the marketing and admin-
istration of this new product. Finally, the costs for improved
risk management, pricing, underwriting, marketing and
administration all must be kept low in order to provide
greater insurance coverage at a lower cost.
Companies, regulators and other interested parties have
all recognized the need for insurers to manage their own
enterprise risk, but the industry now needs to focus its ef-
forts on managing the risks of individual customers. As
the leading experts on risk and insurance, actuaries must
take the lead in promoting this concept to company man-
agement and employees as well as with regulators and the
public. If companies can begin to demonstrate they are
helping manage the risks faced by individuals and families
in a comprehensive manner while remaining financially
sound, the existing regulatory and other barriers to change
will dissipate. A successful implementation of an individual
risk management product will give the actuarial profession
a great opportunity to fulfill its responsibility to the public
and provide a solid foundation for a thriving life insurance
sector of the future.
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