a man on a precipice

The Covid-19 pandemic, unprecedented market volatility and record low interest rates have created many challenges for the global life insurance sector.

Insurance advisors, for their part, will have to become more digitally engaged to meet evolving client expectations in rapidly changing technology and distribution environments.

While some life insurance companies have focused on enhancing their legacy systems to address changing client dynamics and the demand for personalized products and services, others are collaborating with or acquiring innovative technology-based companies (a.k.a. insurtechs) that threaten to disrupt the status quo.

As life insurance companies grapple with the challenges of these changing sector dynamics, they have been blindsided by a market crash.

Assessing the impact of the Covid-19 pandemic is premature at this point, but the crisis is most likely to have a negative effect on the life insurance sector, particularly as the crisis drags on, says Manoj Jethani, vice president and senior analyst, financial institutions group, with Moody’s Investors Service Inc. in New York.

In a December 2019 report, Moody’s rated the global insurance sector as stable in its 2020 outlook based on insurers’ efforts to adapt to low interest rates, the companies’ solid regulatory capital and their relatively conservative investment portfolios. These factors, the report stated, “offset the adverse impact of low rates on profitability and economic solvency.”

The rating agency changed that outlook to negative in an April 1 report because of “the unprecedented economic disruption from the coronavirus pandemic.” But while Moody’s changed its rating of the U.S. industry only, Jethani contends that the outlook can be applied globally. “This is not a U.S. problem; obviously, this is an international issue,” Jethani says. “There’s so much uncertainty coming from all directions.”

According to Moody’s, a prolonged low-rate environment will reduce net interest income for life insurance companies and further reduce earnings for interest-sensitive products, weakening the sector’s profitability. In addition, given the largest share of life insurers’ invested assets is held in corporate bonds, the economic damage caused by Covid-19, combined with the shock of lower oil prices, will strain insurers’ capital due to future bond ratings downgrades and defaults. As a result, life insurance companies’ ratings could be downgraded too.

Declines in the equities markets may require insurers to bolster their capital reserves to meet obligations on products with guarantees, adding to the pressure.

Moody’s notes that the insurance sector began the year with a strategic emphasis on risk management and strong capital adequacy, putting the sector overall in a good position to withstand the crisis.

Chris Cornell, partner, audit, and sector leader, national insurance, with KPMG LLP in Toronto, anticipates that “life insurers and the reinsurers will be the hardest hit” by current events. “You’re going to end up having higher claims activity at a time when financial market volatility is really having an impact on insurers,” he says.

Regarding low interest rates and volatility, Cornell contends that “a lot of insurers” responded to similar conditions during the 2008-09 global financial crisis. Now, “they’re better capitalized, and better able to withstand what we’re seeing in the market. That being said, it will still have a significant impact on their results,” he says.

Rowena Chan, president, Sun Life Financial Distributors (Canada) Inc. and senior vice president, distribution, in Toronto, also foresees challenges. “Economic disruptions like the one we are currently experiencing can lead to temporary slowdowns in demand as clients ‘reprioritize’ their use of disposable income,” she says. “While the second-order impacts of Covid-19 are still unknown, we would expect that slowing economic growth will result in lower and more challenging investment returns across the global life and health [sectors].” Still, she adds, the sector is well-positioned: “[It] has been operating in a low interest rate environment for many years, and while certain products could become less attractive, insurers have historically adapted products accordingly.”

Furthermore, Chan says, the pandemic “could lead people to seek more life and health coverage — as we saw after [the] SARS [outbreak of 2002] — as well as shore up their wealth products.” She contends that “the pivot to health will probably be more prevalent, which will drive growth in new product innovation as well as the use of digital tools [and] solutions such as virtual care.”

Like Chan, Aly Dhalla, CEO and co-founder of Finaeo Inc., an insurtech firm in Toronto, believes clients may become more inclined to buy insurance. “Consumer sentiment around risk, morbidity and mortality is going to be higher than ever,” he says. “Advisors are actually in a very strong position to engage customers in a conversation about insurance.”

Jethani, for his part, does not foresee new product development at this time, although, he says, insurers will eventually evolve their lineups. “I just feel there’s so much happening now, so I don’t necessarily see other products coming out,” he says. “[However], you’ll definitely see the impact of product redesign to reflect the new market environment, which will be reflected in product repricing.”

In terms of the impact of new technologies, Cornell says, the agency or advisor model has worked well for insurance companies in the past, so they will not disrupt their entire model because of the evolution of insurtechs. He says insurers may turn to insurtechs and smaller niche companies to improve elements of their value chain, but not outsource or redesign the entire chain. “[Insurers] will try to transform their organizations to a more digital, agile, savvy corporation while maintain[ing] what’s worked well in the past,” he says.

Dhalla notes that some Canadian life insurers are lagging in going digital. “The reality is that each financial services company in the next decade [will] no longer [be] just a financial services company; it’s going to be a tech company that just so happens to be in financial services,” he says. As well, he adds, the sector must think about risk differently by leveraging tools such as retinal scanning and using data to better understand individual risk at different life stages. This consideration is also necessary for creating personalized policies.

Dhalla suggests one-to-one personalization may not become mainstream, but he also believes “we’re getting closer on segmentation” of risk profiles in issuing policies. “There are great opportunities to create variable, real-time dynamic pricing for consumers based on how they truly age versus how we predict they might age based on a pool,” which, he says, is a variation of personalization.

While there “are some category winners in the digital space right now,” Dhalla says, insurers must address three things: leveraging data and understanding risks better; leveraging their brand to communicate their products and services the right way; and automating the claims process.

Chan recognizes that clients are “becoming increasingly digitally enabled, which is putting pressure on the [insurance sector] to evolve, for example, by adopting chatbots, e-applications and robotic process automation.”

She says the insurance sector will continue to evolve to become more personalized and proactive in meeting client and advisor expectations. Examples include expanded use of “tele-interviews,” leveraging data analytics to accelerate underwriting decisions and developing mobile apps that allow clients to track their investments, submit insurance claims and send documents securely.

When advisors have access to more robust and meaningful data, Chan says, they can meet the needs of clients better. In the future, she says, “the role of the insurance advisor will remain highly relevant to clients, but [insurance advisors] will be able to focus on more holistic advice, planning and working with the clients who want or need a human touch, in addition to or instead of a digital solution.” However, insurance companies will need to work with advisors to help them learn to leverage digital technologies in their workflows.

Deloitte Insights’ 2020 Insurance Outlook notes that “not everyone will innovate in the same way or follow similar paths. However, what’s changing in insurance seems to be the increasing sense of urgency. Few carriers are debating whether they are being disrupted, by forces both within and outside the [sector]. Instead, many are beginning to focus on longer-term responses to avoid irrelevance.”

As the life insurance sector deals with the challenges of the current environment, Dhalla says, “the easiest thing to cut in a lot of executives’ minds are innovation, research and development, and technology budgets.” That, he says, “would be a mistake” and drive the sector backward.

Looking ahead: Trends that will affect the insurance sector

Current trends in the life insurance sector will have a twofold impact on the prices of life insurance and how insurance advisors conduct their business.

Technology. The automation of key processes such as client applications and claims processing will lead to lower costs for insurers. The use of innovative technologies such as artificial intelligence, advanced analytics and risk-management tools will enable further savings, which can be passed on to clients through lower premiums.

Covid-19. The impact of the Covid-19 pandemic will have both negative and positive implications for insurance companies and advisors.

Insurers will face risks resulting from the sudden rise in mortality, which may affect their reinsurance costs and could trigger increases in premiums.

On the the other hand, advisors may have to handle a higher number of calls from clients who are concerned about their mortality, which could lead to increased client/advisor contact overall.

Low interest rates. The low interest rate environment may result in modifications of products, particularly variable annuities, that are sensitive to interest rates. Consequently, insurers will have to adjust their business models and reprice their products.

Market volatility. The decline in the equities markets will negatively affect products with guarantees linked to an equities market. Movements in equities, interest rates and credit spreads create asset liability risks for life insurers. The cost of such risks may be transferred to policyholders.

If clients have participating policies, their insurance companies could adjust the dividend payouts.