Profitable Growth for Life Insurers

From Cash to Capabilities

By Achim SchwetlickChristopher Kaye, and Miguel Ortiz

The life insurance industry faces a wave of structural change generated by long-term disruptions. These include less favorable macroeconomic and demographic conditions, weakening demand for traditional products and services, and increasing regulatory pressure. At the same time, insurers face growing competition from alternative providers.

Given the challenging outlook, life insurers are asking themselves fundamental questions about the future of their industry: Is there a structural decline in its attractiveness and profitability? Where should they place their bets, given the disruptive changes to existing markets and business models? Will demand in new growth markets offset weakening demand for traditional products and services?

Despite these concerns, many life insurers Lean That Lasts: Embarking on the Journey. They continue to fund new business that has weak potential for long-term growth or value creation, while paying limited attention to the returns from their existing managed assets. We believe that these insurers, unless they make fundamental changes, will see ever-diminishing returns on new business and will eventually be forced to seek radical cost reduction and consolidation.

In contrast, a small number of leading insurers have embarked on successful efforts to build competitive advantage. They have done so by reallocating capital to new areas of long-term growth. These leaders have achieved such success through an underlying, shared capability: maximizing cash generation from their existing business. By improving returns in low-growth markets and redeploying capital, they are funding business model transformation and future growth.

Insurers that have not yet done this still have the opportunity if they can succeed in maximizing the value of the cash generated by their in-force books.

In addition to their cash-generation capability, leading insurers have adopted one or more of the following four winning business models. Each model is based on a core capability sufficient to enable large, established life insurers to grow and create long-term value.

  • Low-Cost Savings Provider. This model addresses the global savings gap that we believe will continue to widen as populations age and as governments and private employers reduce the scale of social security and retirement benefits.
  • Next-Generation Risk Manager. These insurers address consumer demands for long-term security and peace of mind.
  • Customer and Segment Specialist. This offering taps into the more complex needs of today’s retirees and other growth segments, using both traditional and emerging channels.
  • Captive Distributor. These players focus on reaching new customers and building stronger customer franchises, particularly in developing markets, by developing new captive-distribution channels, including direct and digital.

The key to the potency of these four business models is that they tap into specific, significant opportunities for growth and value creation that arise from macro-economic and demographic trends. Our assessment indicates that these opportunities include the widening retirement-savings gap in the developed world; the growing demand for advanced retirement-age financial solutions, also in the developed world; and the huge new market for life insurance in the developing world—the next-billion customers—which is being driven by rapidly growing personal savings.

In the discussion that follows, we will detail how life insurers can evaluate their portfolios in the framework of these four winning models and the macro opportunities that support them.

But regardless of business model, all life insurers should focus acutely on cash generation. Where winning growth models exist and are succeeding, they should increase investment in them at the expense of other, more established areas. And where winning models are not apparent, they must decide whether to try to transform the business or, alternatively, to excel at generating cash for shareholders at a slower rate of growth.

To be sure, mature markets will continue to offer attractive growth opportunities. However, we expect smaller, specialist players to be strong competitors for these profits. Traditional life insurers have little certainty of dominating this terrain, even as it continues to diminish.