To dodge a death sentence, life insurers must evolve

16 March

Australian life insurers need to change the way they view their business or risk losing relevance and sustainability in a world of changing customer behaviour, increasing regulatory complexity, and technology driven disruption from innovative new players, according to a PwC Strategy& report released today.

The analysis shows that the prospects for profitability in the sector are lower than in all other sectors across the Australian financial services industry, with stagnant profit margins forecast for life insurers across the period 2015 to 2020.

PwC Insurance leader, Scott Fergusson, said: “The confluence of challenges facing the sector is frankly unprecedented. Life insurers need to make the hard calls to be sustainable and successful over the long-term; simply tinkering at the edges will lead to an orderly but inevitable decline.”

The report crystallises the headwinds facing the sector, including a decline of public trust, changing customer demographics, increased regulatory intervention, technological disruption and rising interest from foreign players in the Australian market.

The analysis suggests that the current return on capital of circa 13 per cent across the sector is likely to rebase to around 10 per cent as a result of competitive dynamics alone.

Simpler, leaner and more innovative

The report sets out the ways life insurers can plot a path to future success, with a baseline that they will need to be a lot simpler, leaner and more innovative.

“Ongoing development in technology and through innovation will mean that life insurers simply can’t continue to be all things to all people. The players that will win in the future will be really clear about where in the market they play, and how they differentiate from competitors,” Mr Fergusson said.

“In addition to working hard on their strategic positioning and how they communicate that to the market, life insurers need to push harder in developing their digital and data analytics capabilities.”

The analysis provides seven examples of the ways life insurers can ‘play’ in the future in order to be successful. One of these is becoming a ‘solutions innovator’ who focuses purely on product innovation for distribution via intermediaries, for example, a life and health insurer working together to develop a solution to encourage and reward a healthy lifestyle. Another option could be to specialise in a discrete segment, for example, working with the government to develop income-orientated solutions for an ageing population. Each of the seven ‘ways to play’ suggest that the drivers of success in the past will be much different from the drivers of success in the future.

“I’m convinced that there is a bright future for incumbents who challenge long held beliefs and focus on their best way to deliver on their ‘noble purpose’ for customers,” Mr Fergusson said.

 

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