Life insurers preparing for the new year would do well to pursue value growth by being nimble in distribution, optimising customer experience and being fully engaged in ecosystems, says McKinsey’s Bernhard Kotanko.
Asia Pacific life insurance, driven by China and some Southeast Asian countries, has been the global growth engine, generating approximately 50% of global growth in gross written premiums (GWP). As a consequence, insurers with dominant, yet diversified exposure in these markets have delivered superior total return to shareholders.
Long-term underlying growth drivers unchanged
Asia Pacific life insurance has been driven by three underlying macroeconomic trends:
- The rise of a middle class with growing income
- High savings ratios
- The associated growing need for protection especially in health and retirement
These trends will remain unchanged in the long-term and will further accelerate. Looking at individual markets, China remains the dominant growth engine. Japan is still a large-scale market with retirement and health needs growing through ageing. India and Indonesia each provide long-term growth at scale. Vietnam and a few other markets are also growth engines, though from low levels.
Short-term external challenges likely
Asia Pacific is exposed to multiple economic and political challenges which may intensify in the next 12 months. Macroeconomic forecasts have worsened for many countries, the geopolitical risks have taken their toll and as a consequence first USD rates and then other currencies have come down, creating pressure in multiple ways, largely unforeseen twelve months ago. Depending on the scenario, we could see reduced business growth rates in several key markets, demanding greater resilience and response in insurers’ 2020 agenda.
Priorities for the 2020 Asia Pacific life and health insurance agenda
Looking into 2020, insurers will need to find the right balance between resilience and strengthening the core, and the pursuit of overall value growth opportunities. Defining this balanced portfolio of actions and executing with resilience will be decisive for winning in Asia’s life and health insurance sector in 2020 and beyond. To achieve this, insurers should focus on:
Strengthening the core
Quest for productivity
The insurance sector has not improved its overall productivity, measured as total cost ratio. And in Asia this has been traditionally achieved by high growth rates and business build. In 2020, insurers need to turn their eye to achieving superior productivity. Rather than plain vanilla cost efficiency measures, this should be driven by simplifying processes as well as operating models, optimising overheads and support function structures and automating and digitising workflows. Our analysis shows that top quartile productivity leaders enjoy a five percentage-point advantage in cost ratios compared to the bottom quartile.
Adapt to low rates
The change in interest rates has caught many insurers off guard. The year 2020 must be the year of elevating resilience and consequences to adapt to a low rate environment in USD and in many other currencies too. In some markets this call for action is also reinforced by changes to accounting and solvency standards, most notably in Japan, Korea and Hong Kong.
This requires efforts in four main areas: Upgrading accounting, risk and solvency models and reinforcing value perspective across KPIs, adapting ALM and investment strategies for the general account, considering capital management and funding measures to lower cost of capital, innovating towards less interest rate sensitive products, which not only includes changes to traditional guarantees, but also to savings elements of many whole life, critical illness and medical products.
Unit-linked products with some guarantees or hybrid products are still in a nascent stage for many large Asian markets, especially in China and Hong Kong.
Establish a resilience mind-set
After many years of growth, leaders now need to sharpen their resilience. This will require leaders to become positive role models, tailor their narratives for internal and external stakeholders and their tact on performance management.
Pursuing value growth
Push quality distribution via digital channels
Distribution has been important for insurance in the region. While there is a lot of talk on quality distribution, 2020 must be the year to up the efforts on delivery, especially in three areas: Improving distributor commitment levels that translate into higher activity ratios, higher share of full-time professionals, higher frequency of customer interactions and better retention; embracing digital, data and analytics to create a more effective and more engaging hybrid experience; becoming nimbler in focusing and tailoring distribution models to specific customer segments and local characteristics. This is not a new aspiration, but the overall adoption rate has been low and often companies fall back to capacity build and lip service on quality.
Be serious about customer experience
Numbers indicate that customer satisfaction in life insurance remains low, with largely negative NPS scores. Some insurers still believe in a product push model but are not serious about truly reinventing customer experiences, even though the evidence shows that insurers who focus on improving customer experiences enjoy up to 75% advantage on growth through much higher cross- and up-selling, more referrals and higher retention.
Being serious about customer experience requires three bold efforts: Bringing customer experience into the centre of the strategic agenda with bold KPIs, creating distinctiveness, adapting operations, technology and capabilities to enable and support customer experience.
Create value through innovation
As an industry dependent on data and analytics, insurance is rattled by the speed of innovation and the new possibilities it creates. Similarly, medical progress and IoT with wearable devices changes the dynamics of what is possible in insurance. At the same time more than 50% of insurers struggle to harvest returns on their major investments and feel sometimes overwhelmed in how to manage and embrace innovation.
Our research on masters of innovation highlights four areas which require bold efforts in 2020: Clarifying the innovation objectives and directions, pruning innovation pipelines, accelerating effective adoption and scale-up and creating a culture for innovation. Our analysis indicates that innovation masters can yield more than 130% advantage in economic profit versus sector average.
Engage in ecosystems
Insurance is connected to customers’ underlying dreams, fears, assets, lifestyle and behaviours. What used to be simple distribution partnerships where there could be a natural link has become an opportunity to participate, orchestrate or even own whole ecosystems where insurance can be a major component.
Some insurers have redefined themselves as ecosystem leaders, others actively engage in new partnerships with digital platforms or more traditional affinity networks. What is clear is that every insurer must find its posture to ecosystems and then execute boldly to have a seat at the table as these ecosystems redefine traditional boundaries. A
Mr Bernhard Kotanko is a senior partner of McKinsey.