sigma 6/2017: Life in-force management: improving consumer value and long-term profitability
Life insurers are facing many challenges, including low interest rates, a difficult pricing environment and the need to adapt to regulatory changes. More broadly, developments in demographics, medicine and technology will change mortality and morbidity rates in many parts of the world, having a fundamental impact on life insurance business.
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Ways to better manage existing books of business
The latest sigma reviews levers life insurers can use to better manage existing books of business, with two ultimate aims: to improve customer experience and to boost long-term profitability. The list of possible actions explained in the report is not exhaustive, and the different actions are very much interconnected. Simultaneous implementation of many of the levers is necessary to fully monetise the value of in-force business.
Improving customer experience
One core area of activity in the management of in-force books of business is liability portfolio steering, which involves the allocation of capital to high-performing business, and retreating from unprofitable areas. Insurers can provide high-value products to consumers by cross- and up-selling, thereby growing valuable business, while unprofitable business can be tackled by changing non-guaranteed contract elements or launching conversion and buyout programs that improve customer satisfaction.
Another lever is putting more focus on improving customer retention. This is important because winning a new customer can be many times more expensive than retaining an existing one. With advances in technology, data analytics and data accessibility, predictive models can provide forecasts of consumer propensity to surrender their policies in response to changes in different variables, such as price changes. These insights can be used to appropriately allocate resources to reduce surrender rates.
A third activity is to improve claims management procedures to build customer engagement. An insurer known to have a consumer-friendly claims department is in a stronger position to retain existing business, and attract new customers. This is especially the case in health insurance, where claims tend to be made more frequently. A robust claims management process is also necessary to reduce the payment of illegitimate claims, the cost of which is ultimately borne by all customers in the form of higher premiums.
It's about profitability too
With interest rates expected to stay low, overall profitability in the life insurance sector is likely remain under pressure for a while yet. Investment income is an important earnings stream for life insurers and in the long-running low interest rate environment, some insurers have directed investments to higher-yielding assets, subject to regulatory constraints and their own risk appetite.
Holding excessive capital increases economic costs, and capital optimization, for example, by transferring risks and freeing up trapped capital for use in more productive ways is another important lever that can be used to improve profitability from existing books of business. And so too is increasing operational efficiency, which reduces the cost of providing insurance, and ultimately benefits the consumer through lower premium rates.