U.S. Insurers Must Aim for a Place in the Global Insurance League
16 May 2007
Insurance
Pressure is increasing on insurers to transform their processes and operations in order to meet demands from shareholders to improve profitability, while meeting parallel demands from regulators and customers to reduce risk and improve transparency.
Globalization is changing the face of life insurance, and U.S. life insurers need to ensure that they are equipped to win business abroad as well as in their domestic market. Scale, more sophisticated products and channel excellence are setting the larger U.S. life insurers apart domestically. Also, the ability to move quickly to secure market share ahead of intense global competition is becoming important for long term success globally, especially from European insurers.
The emergence of a global ‘at retirement market’ presents a once in a life time opportunity for life insurers. Across all Western economies, individuals will be looking to life insurers to help them finance an ever longer retirement. Governments do not have the funds available to sustain their pensioner population and so have begun to place the responsibility for financial viability back in the hands of the citizen and the private sector. In the United States alone, 80 million baby boomers have begun a retirement phase that is likely to last 30 years or more – probably as long as their working life.
Are all insurers feasting on this explosion of opportunity in the marketplace or is the advantage being seized by a particular subset of the industry? Within the United States, it is the largest life insurers that are capturing a disproportionate share of the market. For example, current evidence shows that in a period of just four years (from 2001 to 2005) the collective market share of the top six variable annuity players in the United States grew from 40 percent to 49 percent.
The gap between the tier one U.S. players and the rest of the industry is expanding. Competitiveness in this environment requires a new level of product sophistication, distribution excellence and geographic reach.
- Product sophistication and redeployment:
- The launch of income guarantee products has proved enormously popular with consumers. However, only insurers with sophisticated capabilities, such as dynamic hedging and stochastic modeling, can afford to underwrite such a significant and risky commitment.
- Globally, those organizations that are able to move products from one geography to another are seeing the double benefits of higher return on investment for their product development as well as faster entry to new markets.
- Distribution excellence:
- Leading insurers are racing each other to broaden their channel coverage. Maximizing the number of wholesalers, distributors and agents in the distribution network is a key area of focus to capture share of the ‘at retirement’ market in a crowded field.
- Point of sale productivity tools for agents contribute a critical difference to the success of those channel recruitment and retention strategies as well as driving sales growth within the current network. Again, the largest insurers domestically are leading the pack in this area.
- Global reach:
- The ‘at retirement’ market is a global phenomena. As a result, the top tier global players are aggressively entering new markets and establishing distribution to extend their global presence. While the United States is a formidable market, more growth will occur internationally, and it is important to be positioned to take advantage of the explosive global market. This view is echoed by the stock market, which is rewarding insurers that have a global footprint and channel breadth with a superior price to earnings ratio. In addition, global insurers are reporting a capital advantage to being in multiple geographies, further expanding returns.
While the largest U.S. insurers are capturing share domestically, it is the European players, like AXA and Aegon, that are more aggressively establishing themselves globally. They are investing in building an international infrastructure that will support their continued growth, with presence in far more countries than their U.S. counterparts. U.S. insurers that want to capitalize on the global opportunity will have to assess whether they have the capabilities in place to match this level of competition. Investing in a global IT platform that can create efficiencies, flexibility and faster speed to market will be essential in driving long-term competitiveness.