The traditional life insurance model seems to have been discontinued. In the German market, many insurers are clearly engaged in run-off efforts. So, is there a future for life insurance?
A few weeks ago, much attention was paid to the annual report of the Assekurata rating agency. According to this report for Germany, of 46 companies examined, only 21 still offer traditional life and annuity insurance policies. The former favorite child of policyholders and brokers is quite obviously in crisis.
The time of guarantees has come to an end
Low interest rates in the capital markets have been a reality for (institutional) investors for too long now for this to be called a "phase" anymore. It is a well-known fact that the guaranteed interest on old policies that was once offered to policyholders is causing financial difficulties for insurers. In view of the economic environment, insurance companies have had little choice but to reduce the so-called guaranteed interest rate, which has been at 0.25 percent since the beginning of the year. That is more than can be collected from the banks in the form of custodian fees. But this is not very attractive. The era of lavish guaranteed returns and yields, which for decades made life insurance a building block of retirement provision for many people, is over.
Customers are reorienting themselves
However, the CEO of the German Insurance Association Jörg Asmussen does not wish to say that the life insurance model has been discontinued. In an interview with the "Neue Osnabrücker Zeitung," however, he conceded that traditional life insurance with guaranteed benefits is on the decline. Instead, unit-linked or flexible life insurance policies are gaining ground. Life insurance, he said, is a "very stable and consistent pillar in the accumulation of savings in Germany."
The insurance companies that continue to have life insurance policies in their portfolios are advertising the higher returns on their products that are available on the capital market. However, investments in shares, funds and ETFs as elements of wealth creation and retirement planning are dominated by many other players. In addition to the banks as traditional competitors, the so-called fintechs are also looking for a way to reach customers in this area. And they are clearly succeeding, especially with younger target groups.
These start-ups hold a number of trump cards: for example, they rely primarily on the smartphone as a sales and communication tool. With fully digitized processes, an account can be opened in a matter of minutes, simply by installing an app. KYC and AML processes are also digitized, so these customers can be easily onboarded without any hurdles.
Fintechs clearly also benefit from speaking the language of their target groups. They don't even have to use "dusty" terms like "life insurance" or "guaranteed sums." Instead, they focus on the opportunities and emphasize the simplicity of regular investments, such as in the booming ETF segment. And they offer low hurdles for those who wish to make these investments. Classic savings plans are often available from as little as one euro, however economically sensible that may actually be.
Or, the pension component is embedded directly into another product. There are also offers that automatically round up credit card payments and invest the difference in ETFs. Retirement benefits are thus hidden away in another benefits package.
Once again, this is all about customer access.
Insurers must solve two major challenges if they wish to remain successful in the life insurance industry in the future. Costs must continue to fall, especially in sales. A related question is how to get the products to the customers in the most cost-efficient way, i.e., if possible via digital channels.
Many fintechs are obviousy positioning themselves as a central platform for all aspects of users' finances. Apps are becoming the hub of personal finance: an account model for transactions, investment options, and the inclusion of cryptocurrencies and assets. And PSD2 interfaces can be also used to integrate additional bank accounts. The app is now a personal financial planner – however, the retirement planning aspect is often still weak.
An opportunity for insurers. Because of increasing competition from fintechs, banks are realizing that they need to be more active. As a result, the bancassurance model is experiencing a resurgence. However, there is nothing to prevent insurance companies from setting up their own comprehensive platforms to sell products linked to the capital market. Allianz is pursuing a strategy, for example, that is moving in this direction.
The outcome of the battle for (digital) customer access has not yet been decided. A modernized form of life insurance should be successful in the future if it offers products that open up opportunities for returns, has lower distribution costs and is offered via a digital platform or digital distribution channels.
Read another blog post here about the challenges facing life insurance companies.
Would you like to learn more the solutions we offer for modernizing life insurance? Then please contact our expert Karsten Schmitt, Head of Business Development.