The year 2020 was already challenging for life insurance carriers. Persistent, low interest rates drove down the investment yields necessary to support an array of product features associated with cash accumulation-based contracts. Then along came COVID-19, which turned these headwinds into a tempest.
As the wind speed rose, companies that had invested in digital capabilities for sales and underwriting found themselves in the enviable position of record sales activity. In some instances, as noted in a CBS MarketWatch report, these insurers began to limit sales based on age bands and risk classes. The limits provided insurers with access to better risks and the ability to increase processing speed dramatically while also minimizing the downsides of quickly developing new pricing for less certain underwriting scenarios.
The above is a form of limiting access to life insurance, of course. The article details other limitations, including the elimination of certain product classes and types. Another change reflects sharp increases in costs to offset the lost opportunity for investment yield as interest rates “tanked,” as well as to cover uncertain mortality/morbidity outcomes.
These actions may make sense when focusing on a specific risk, but they could create new challenges at a macro level. Many life insurers rely on a combination of fixed and variable components to cover overhead costs. The fixed element is tied to policy count; the variable element is linked to premium volume. If increasing premium costs depress policy production even further (a long-term trend before COVID-19 arrived), it could magnify rather than reduce the expense pressure on life insurers. LIMRA’s recent sales results for 2019 highlight the policy count trend: Policy-based results were down a surprising 3% for the year.
None of these issues are technology-based problems per se, but the appropriate use of technology to complement new business models may offer life insurers a silver lining. The pandemic has made clear that life insurance can have great personal and social value, which provides carriers an opportunity to engage an entire cohort of American consumers who have yet to connect with life insurers or their value propositions. However, the products that may most appeal to this market segment are not the same as those that would have interested Baby Boomers and older Gen Xers.
The time to strike could be now. New products and features don’t fit particularly well on old systems designed for another era, and speed to market may be more critical than ever.
The pandemic has been and will continue to be a disruptive force for companies and consumers alike. Finding ways to turn this situation into an economic opportunity could create benefits with a long half-life. When I was the CIO for a bank based in NC, I learned that we’d never foreclosed on farmers during the Great Depression. Today, nearly 90 years later, the bank continues to benefit from a halo-effect that has passed down multiple generations.
After the Second World War, Winston Churchill said one should “never let a good crisis go to waste.” Life insurance carriers have been battling with a series of expense, investment income, and mortality challenges for a while now. Could another silver lining here be that they can put this crisis to good use? Developing an appropriate technology strategy may have never been more important.
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