Retirement Market is the Growth Engine of the Future for Life Insurers
Life insurers face numerous challenges including low sustained interest rates, increased regulation and capital requirements, growing cost pressures, a weak economic recovery and changing consumer behaviours and expectations. There is, however, one elemen
Our research – a survey of more than 8,000 people from 15 countries – indicates that, around the world, more than four out of five people are worried about their own retirement, and only about one in six is confident their current level of savings is sufficient to cover their financial needs after retirement.
The survey also reveals that more than half of the respondents believe they lack the necessary information to prepare for retirement and the financial capacity to invest in private pension. While a large majority (93 percent) recognise that they will need to rely partly or wholly on their personal savings to cover their post-retirement financial needs, more than two-thirds (67 percent) don’t know how much they would need to save to guarantee their standard of living in retirement.
In short, there is a huge, unmet demand for retirement planning that the life insurance industry can help address.
To accomplish this, however, life insurers will have to do a better job of capturing asset share in the retirement income market. Our survey indicates that people are more likely to ask independent financial advisors (mentioned by 51 percent of respondents) and friends and family (44 percent) for advice on the best retirement options, than to rely on life insurers (41 percent).
Life insurers, however, did outrank their competitors for their wide range of retirement products, the sophistication and innovativeness of these products, and for having a solid brand reputation in the retirement market. Brand reputation is important, as 82 percent of respondents who had purchased a retirement product said they were influenced by the brand strength of the financial institution.
Capturing a bigger share of retirement assets will require life insurers to recognise that customers’ requirements, preferences and behaviours have changed radically over the past few years. Old, proven strategies and business models are rapidly becoming obsolete. In particular, the notion that a single set of back-end operations is sufficient to address the entire market is a fallacy.
Life insurers will need to use different sales channels and provide the products, services and advice according to the complexity of customers’ needs to reach various segments of the retirement market.
Segmentation: The Key to Effective Engagement
They must implement a more sophisticated segmentation strategy based on many criteria, including customers’ wealth, source of wealth, lifestyle and behaviour, life stage, investment style, etc. When all of the relevant attributes and their values are factored in, it is likely that well over 50 distinct segments will emerge, which will enable insurers to gain a much better understanding of what each specific customer segment prefers. Then, they will have to treat these multiple customer segments differently, measure the effectiveness of each treatment, and continuously adapt them to build on past success.
While customer wealth defines two broad sectors (those who have ample means to provide for their retirement, and to pay for advice, and those for whom affordability is a constraint), when other factors are considered, it is useful to divide this analysis into three basic market segments:
Capturing a bigger share of retirement assets will require life insurers to recognise that customers’ requirements, preferences and behaviors have changed radically over the past few years.
Those with complex needs who require customised advice: these are affluent customers who need advice on investing and are willing to pay for it. They are looking for sophisticated and personalised products.
Those with more common needs who require scaled advice: these are customers who can afford to invest and recognise the need to, but are restrained by the “advice gap.” They are generally unwilling to pay for advice, have weak relationships with insurance agents and a poor understanding of retirement options and insurers’ products.
And those with simple needs who require advice on how to save their money.
Simple Needs, Advice on Saving
To address the needs of these customers who are willing to save, but struggle to afford it, insurers will have to create simple, cost-effective products which are easy to explain and sell. Ideally, these products should include some form of protection against market volatility and “no-regrets” features (i.e. the ability to switch without being penalised should their circumstances change or they discover they have bought the wrong product). Basic selection advice must be built into the product options, simplifying choice and enabling masscustomisation on the basis of a few key parameters. Advice should be on what this market segment ultimately needs: how to arrange their finances to make these products affordable. One possible solution could be to create an ecosystem of noncompeting retailers and other providers, all of whom would offer the customer discounts for sales
volumes or share of wallet. Instead of being reimbursed, these discounts – together with, potentially, the rounded-up balance on all purchases – would be consolidated in a retirement account which would reward customer loyalty, and would benefit from the enhanced returns of a group investment.
Complex Needs, Customised Advice
For complex needs, insurers will have to provide customised advice. This is for affluent customers who need advice on investing and are willing to pay for it. They are looking for sophisticated and personalised products. This market segment is pretty mature and intensely competitive, so insurance agents will have to strive to strengthen customer relationships to become favoured advisors. Innovation will play a key role in empowering advisors, thereby raising both the efficiency and effectiveness of advice-led distribution in this market segment:
We believe that face-to-face sales models will increasingly be replaced or complemented by the latest collaborative and other technologies such as online, mobile, social, chat, tablets and call centre video, all designed to help the advisor be where the customer is.
Tools such as “find the expert” locator can help advisors find and communicate with the appropriate specialists, irrespective of where they are based.
A variety of other technologies can be used to bring specific expertise to the sales situation earlier, provide instant answers to customer concerns, overcome objections on the spot, and advance the opportunity to a quicker decision.
Insurers’ marketing teams will need to be reinforced with analytics specialists who can analyse the segmentation and treatment data, recommend refinements and track their impact.
Diverse Needs, Scaled Advice
For diverse needs, insurers will have to provide scaled advice. This is for customers who can afford to invest and recognise the need to, but are restrained by the “advice gap.” They are generally unwilling to pay for advice, have weak relationships with insurance agents and a poor understanding of retirement options and insurers’ products. The challenge for insurers is to find cost-effective ways of closing this “advice gap.” Insurers will need to collect and leverage the adequate customer data that will give them the insights into individual customers, enabling them to develop meaningful recommendations. New approaches to product development should also help unlock the potential in this market segment: for instance, by improving their understanding of risk, insurers can introduce products such as impaired life annuities for customers with chronic illness or disabilities. They should also pay increased attention to social media, as it can have a powerful influence on their brand reputations and customer selections. They urgently need to develop the ability to track and manage exchanges which affect their brand, and explore new ways of engaging consumers in a discussion about the impact of the pension crisis on the individual. Their ability to package and present advice which incorporates both the wisdom of their experts and the wisdom of the crowd will be key to the reach, the on-going credibility, and ultimately the success of their agents. After social networking, gaming is the most popular online activity. By leveraging gaming to allow customers to create and develop needs scenarios is a powerful educational tool, and an effective way to establish strong customer bonds which are both rational and emotional. Games or life simulations can capture the imagination of consumers, allowing them to enact highly personalised scenarios that provide fun over an extended period, and at the same time compile the data needed to calculate their retirement needs and to explore options for addressing them.
A great burden of responsibility lies with the life insurance industry to step up and fill this advice gap as it has the experience, size and scale to make a real impact on the retirement problem. Industry leadership needs to confront this critical issue and take action to address it. It is an opportunity not only for life insurers to grow their business but also to help avert what could potentially become a major social issue on a global scale in the next 10 to 20 years.
A great burden of responsibility lies with the life insurance industry to step up and fill this advice gap as it has the experience, size and scale to make a real impact on the retirement problem.