The Promise and Challenges Facing Global Life Insurance Markets Trends That Are Shaping the Demand for Insurance By Marcela Abraham, Nancy Kenneally, Henning Maass and Pritesh Modi Globally, life insurers are now challenged to introduce relevant products that reflect the needs and conditions of targeted global regions, and also to maintain financial strength, as detailed by Towers Watson consultants covering four continents. Marcela Abraham Specializes in life insurance risk consulting and software. Mexico City Nancy Kenneally Specializes in life insurance and annuity product development and strategy, and financial modeling. New York These are both promising and challenging times for life insurers. Booming Asian economies and an expanding middle class offer tremendous potential. And yet, low interest rate yields, turmoil in Europe, a slowly improving U.S. economy, BRICs that are not living up to their potential and aging populations highlight existing challenges. Participants in mature life insurance markets have hailed the economic promise that emerging regions of the world offer. But the anticipation of new markets, new customers seeking insurance, respectable market share and more robust return on equity is tempered by the reality that entry is not easy, and success even less so. That is not to say that economically vibrant emerging global regions aren t accessible to innovative companies with the right products and approach. They are. But companies that want to participate in this economic unfurling need to be able to weather some daunting economic realities. Globally, insurers face different demographics that require different marketing and financial strategies as well as a different stable of products. Those strategies and products also need to reflect consumer sophistication in a country or region. As our review of the four major world regions indicates, those life insurers that are able to identify and manage these economic forces stand to grow and diversify their businesses. Asia Differing Fortunes Some regions of the world enjoy homogeneous development of life insurance markets, given how well aligned some of the countries are economically, politically and demographically. In the case of Asia, homogeneity is hard to come by. The key drivers of insurance growth in a country are typically macroeconomic factors, regulatory factors and demographics, as well as the current maturity of the country s insurance sector. From the economic successes that Indonesia has been experiencing, to the stagnation that has become the norm in Japan; from the free markets of Hong Kong and Singapore, to the heavily regulated economies of China and India; from the youthful nations of Southeast Asia, to the aging population facing South Korea; from the high life insurance penetration rates found in Taiwan (approximately 14%), to the approximately 1% penetration rate of the Philippines, Asia is anything but homogeneous. It therefore becomes a challenge to identify product trends that would apply to the region as a whole. Hence, for this article, we have identified some of the key economic, demographic and political changes that are shaping the life insurance sector in various Asian economies, and the implications for products. To that effect, we believe that low interest rates, aging populations and rising middle-class populations are among the three main drivers of product trends in Asia. 2 towerswatson.com
Low Interest Rates Some markets in Asia (Hong Kong, Japan, Singapore, South Korea and Taiwan) are experiencing historically low interest rates, making it difficult to provide longduration insurance products with attractive yields. In some of these countries (e.g., China, Malaysia and Thailand), bancassurance has increasingly gained in significance as a distribution channel for life insurance, and this has led to many of the products being savings-oriented. Hence, protracted low yields have been especially damaging to the competitiveness of life insurance savings products when compared with some competing bank products. Low interest rates also make offering guarantees more expensive. This has therefore led many companies to de-risk their products by stripping away interest-rate-related guarantees and increasing the protection element of the products. Aging Populations Asia has the distinction of being home to some of the most aged and youthful populations in the world. Japan has the second-highest median age, outranked only by Monaco. On the other hand, more than half of India s population is below the age of 25 with the number of four-year-olds almost double that of France. In economies with aging populations (e.g., Hong Kong, Japan and Singapore), there is a growing demand for postretirement income and health insurance products, especially those that provide some form of income guarantees that would give retirees comfort that their savings will be adequate to fund their retirement. On the other hand, the youthful nations in Asia (e.g., Cambodia, India, the Philippines and Vietnam) have an increasing demand for savings and investment products. Investment-linked products as well as endowment products to fund education, weddings or home purchases are typically most prevalent in these economies. The Growth of the Middle Class A rising middle-class population in various Asian markets (i.e., Indonesia, Malaysia, the Philippines, Thailand and Vietnam) is shaping life insurance product trends. For example, even after acknowledging that the definition of middle-class income levels can differ markedly by region, the growth of Indonesia s middle class has been nothing short of stunning 1.4 million in 2004, growing to 50 million by 2009, and expected to further triple to 150 million by 2014, according to a Nomura study. This has spurred the growth of life insurance penetration rates in these markets across the board and for investment-linked products in particular. A population optimistic about the economic future of their economy is eager to participate in equity markets, resulting in the portfolios of some insurance companies being largely driven by the sales of investment-linked products. Similarly, increasing wealth levels have increased demand for better education as well as health care both areas that translate to evolving insurance needs, and hence, products. What s Next? With strong economic growth being forecast in parts of Asia over the foreseeable future, the expectation is that the life insurance industry will continue to develop. A recent Towers Watson study forecasts gross written premiums for life insurance in Asia to double to $2 trillion by 2025. Hence, while there might be some economies in Asia where the life insurance industry could struggle to grow, many parts of Asia are promising exciting growth, ensuring that many companies strategic growth (and fortunes) are increasingly pointing to the East. Henning Maass Specializes in corporate, sales and product strategy consulting, and in business and product development for insurance companies. Cologne Pritesh Modi Specializes in insurance management consulting, mergers and acquisitions, product strategy, bancassurance and microinsurance. Hong Kong Emphasis 2013/2 3
Figure 1. Existing accumulation and decumulation products Accumulation/decumulation products Based on traditional investments (general account) Index-linked Completely unit-linked Traditional for profit/ nonprofit Hybrid Tranche-based Open ended Unit-linked with guarantees Unit-linked without guarantees Bonus in fund or options Dynamic hybrid Static hybrid Micro-CPPI VA (GMxB) Unit-linked with guaranteed funds CPPI-based Source: Towers Watson Europe An Industry in Change Traditional participating life insurance and longterm investment guarantees are still, especially in the current uncertain times, generating the most consumer demand. This appetite is accompanied by an equally strong need for flexibility and, to a lesser extent, stock market participation. Life insurers are increasingly challenged to offer products that meet these needs while providing stable profits and using capital efficiently, and to do so in unsettled economic times and in a future regulatory environment that threatens existing business models. Companies Seek Solutions The search for alternatives to guarantees generated by general account products initially led companies to include mutual funds with guaranteed prices at certain future dates in their linked/variable products. But previously, a deteriorating stock market discouraged clients from investing new money in these constant proportion portfolio insurance (CPPI) funds. In addition, these funds Globally, insurers face different demographics that require different marketing and financial strategies as well as a different stable of products. were not suitable to provide gross premium guarantees a requirement to qualify as taxprivileged retirement products in many countries. Other players have used CPPI to combine a traditional product (serving as the safe asset) with equity funds (serving as the risky asset) to create dynamic hybrid products with monthly rebalancing between the two asset classes. Hybrids benefit insurers because they can use an existing product with a reduced guarantee that also provides potential upside. But they also come with a rebalancing risk when monies are shifted in and out of a general account. Traditional insurance is also used as the chassis for open-ended (as opposed to already-existing tranchebased) index-linked products that allow regular contributions. Total premiums are guaranteed, and clients can decide annually where the accrued bonus is invested: in the traditional product at the then-current total rate or in a structured note that provides stock market participation. (Caps and floor usually apply.) Derivative-based variable annuities (VAs), however, have not succeeded. Instead, some companies have turned to micro-cppi products, linked/ variable products with guarantees that allow regular contributions and offer the policyholder a personalized CPPI-managed portfolio of riskaverse and risky funds. Many companies consider these products a viable way to balance client and shareowner needs (Figure 1). 4 towerswatson.com
What s Next? The search for products that clients want but that also use less capital is ongoing. Some participants have announced product launches that provide temporary, renewable guarantees. Another model being discussed includes dynamic or variable (e.g., linked to bond or inflation indices) guarantees. Latin America Latin America s life insurance market is young. The average Latin American is 29 years old, compared to an average age of 40 in the U.S. and U.K., and has financial responsibilities and priorities other than insurance. So insurance penetration is very low, ranging from 1% to 4% of GDP (with an average of below 3%). The market potential is huge, but the insurance culture and purchasing power are currently lacking. Voluntary individual insurance has historically focused on the upper- and middle-income markets, comprised of affluent savers who are usually better educated about finances. Any insurance growth was fueled by mandatory insurance, credit-related coverages, tax-advantaged retirement plans, and the introduction of private, specialized companies covering the death, disability and retirement benefits associated with social security. This differs from developed insurance markets, where new and more sophisticated products are introduced. What s Next? Insurers that want to participate in the growing Latin American market must consider: Mass marketing, alternative distribution channels and microinsurance (simple products with small premiums) to target new markets Working with governments in the region to ensure the right tax incentives are in place and the growing retirement needs for the region s citizens are met How mandatory insurance such as social security or credit insurance might encourage other insurance purchases by growing the potential client base United States A Downward Trajectory The U.S. life insurance market is a mature market. Life insurance ownership in the U.S. for both individuals and households has declined over the last few decades. In 2010, only one-third of the U.S. population owned individual life insurance, and only 70% of households owned any kind of life insurance, according to a 2011 LIMRA survey. This is down from 84% of households in 1984. What s more, the survey found that 50% of households need more insurance. In general, more work is needed to improve financial education in the region. Only simple insurance products have been successful so far, particularly using mass market distribution channels. Finally, low interest rates, the main driver of stable economies and profit driver of long-term products, and the lack of deep and developed financial markets to back up guarantees will impose great challenges to companies looking to design and market new products. It is hard to say whether interest rate guarantees will be completely overlooked, but the lack of a financial culture and the need for simple products for the population are unlikely to foster the shift to flexible, unit-linked, universal products, among others, since they are complex and difficult to explain. Emphasis 2013/2 5
Figure 2. U.S. industry average annual growth rate based on premiums $15,000 Compound annual growth rate (CAGR): 1995 2005 2.7% CAGR: 2005 2007 6.9% CAGR: 2007 2009 9.9% 4.0% $12,000 Industry sales in millions $9,000 $6,000 $3,000 $0 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 UL VUL Term WL Source: LIMRA, Individual Life Insurance Sales Survey, 2012 Ultimately, a strong life insurer with attractive products can succeed in any market. But there are steps that any new market entrant or current market participant can take to become more competitive. Figure 3. 2012 U.S. market share by product Source: LIMRA, Individual Life Insurance Sales Survey, 2012 Even so, life insurance sales did enjoy a period of steady, low-single-digit growth from 1995 through 2005 (Figure 2). The global financial crisis caused sales to drop significantly in 2008 and 2009, driven in part by a decline in consumers purchasing power and a lack of access to premium financing, which had previously driven institutional sales. A Gradual Recovery Since 2010, individual life sales have begun to recover. Overall, individual life premium sales grew 4% in both 2010 and 2011, and an additional 6% in 2012, driven primarily by sales of universal life (UL) and traditional whole life (WL) products, according 28% 12% 32% 21% 7% UL Indexed UL WL Term VUL to LIMRA. In 2012, UL new premiums grew 8% to achieve an overall market share of 40% of individual life new premium. Traditional WL followed closely behind with a 7% increase in premium sales compared to 2011 and an overall market share of 32%, the highest since 1998 (Figure 3). Term and variable universal life (VUL) new premium sales remained flat as compared to 2011. However, VUL market share slipped to just 7% in 2012, half of 2007 levels. On a positive note, indexed UL new premium climbed a record 36% to achieve a 12% market share (accounting for 30% of all UL sales). What Consumers Want The recent improvement in sales reflects consumers desire for low-cost life protection such as term or protection-oriented UL (also referred to as UL with secondary guarantees, or ULSG) and a reduced interest in accumulation life insurance products. Guaranteed premium rates, no-lapse guarantees and guaranteed minimum interest rates are important to today s life insurance sales. The Annuity Market According to Towers Watson s VALUE survey, VA sales achieved an all-time $186 billion market high in 2007 but quickly plummeted to $127 billion by 2009, directly impacted by the financial crisis. Sales rebounded in 2010 and 2011, experiencing doubledigit growth and driven mainly by living benefit guarantees, but then decreased 8% in 2012 to end the year at $147 billion. 6 towerswatson.com
While the relatively new deferred-income or longevity annuities that begin payments 10 or 20 years after purchase began to gain traction, fixed annuity sales overall were down in 2012 compared to 2011 (11%), with one exception: Fixed indexed annuity sales were up 5% in 2012, reaching record levels. The VA landscape has changed dramatically over the last 24 months as several major players pulled back on living benefit guarantees or exited the market altogether. Insurers continue to embed risk management features such as target volatility and CPPI techniques in their VAs, and feature indexing to reduce risk so they can continue to offer reasonably attractive guarantees. What s Next? Life insurers face a number of challenges. Protracted low interest rates are placing downward pressure on product profitability, particularly for UL. This market pressure and recent regulatory changes are prompting insurers to increase premiums at the expense of competitiveness, provide less generous guarantees, withdraw unprofitable products or unprofitable sales (such as sales to older issue ages), or even accept lower profitability. The problem is compounded by the fact that many popular, low-cost term and ULSG products sold over the last several years reflect the impact of excess statutory reserve financing transactions, such as reinsurance and securitizations, in their pricing. Financing, if available, is much more expensive today by comparison. Insurers selling annuities are in similar straits: Sustained low interest rates and equity market volatility have strained the market. U.S. life insurers will continue to be challenged to offer attractive guarantees and products while maintaining acceptable profitability in a sustained low interest rate environment. Steps to Become More Competitive Ultimately, a strong life insurer with attractive products can succeed in any market. But there are steps that any new market entrant or current market participant can take to become more competitive. A careful evaluation of products that are offered can ensure they perform well under adverse conditions, providing policyholder value while balancing the risks to and the profitability expectations of the insurer. A thorough understanding of a country or region that includes an analysis of demographics, current or proposed regulations, and experiences of previous entrants is imperative for any serious market participant. And a commitment to corporate talent management programs that seek and retain local talent who truly understand a country or region will go a long way to ensure an insurer s efforts take root. For questions or comments, call or e-mail Marcela Abraham at +52 55 5201 4611, marcela.abraham@towerswatson.com; Nancy Kenneally at +1 212 309 3953, nancy.kenneally@towerswatson.com; Henning Maass at +49 221 8000 3201, henning.maass@towerswatson.com; or Pritesh Modi at +852 2593 4587, pritesh.modi@towerswatson.com. U.S. life insurers will continue to be challenged to offer attractive guarantees and products while maintaining acceptable profitability. Emphasis 2013/2 7