What strategic strengths can insurers depend on to generate growth in thecoming turbulence?
On the horizon: Fundamental reimagination of life insurance business model
Insurers will have a dizzying number of options available to them in the coming years—as will investors. In the balance of this report, we detail how insurance companies will shift their priorities in the near future and how different types of insurance models can help determine how best to meet the objectives of their investors.
The question is clear: what strategic strengths can insurers depend on to generate growth in the coming turbulence?
Four ‘unbundled’ business models to drive value creation
Traditionally, insurers have achieved profit and growth by identifying attractive products and markets, such as individual protection and annuities, and structuring their end-to-end value chain to support these products and markets. Ownership of most of the value chain was important to simplify operations and maintain control over the end-customer experience. Today, the industry is reconsidering this approach to the value chain in two notable ways: product bundling and functional unbundling.
When it comes to products, those that meet the needs of the same customer segments—such as retirement and wealth and asset management services or group and retail sales—are converging, which is pushing insurers into new territory. Some insurers will even go so far as to branch into the health and protection ecosystems if there is demand from their customers. Insurers are also expanding and evolving their product shelf, shifting the mix away from traditional and balance sheet–heavy products to capital-light products and combining distribution points to create a simpler, more integrated customer experience.
Looking ahead, insurers will increasingly “unbundle” their value chain and focus on sources of distinctive value creation while seeking partnerships or leaving the other parts of the value chain to those who are advantaged. Unbundling helps uncover value within the integrated business model and focuses on distinctiveness while creating new sources of growth and value.
Four insurance functions will take centre stage during this change: product design and underwriting, balance sheet management, distribution, and technology and administration. Insurers can start by determining how the strengths of their business model map to these four functions (Exhibit 7). Balance sheet specialists, for example, might consider finding a distribution partner, while distribution specialists tend to be best served by partners in product design and underwriting or balance sheet management. Those insurers can then use those strengths to differentiate themselves, achieve profitable growth, and appeal to investors.
Distribution specialists.
Insurers that pursue this model will have distinctive distribution capabilities and privileged customer access and insights. They will focus on advice and distribution of a broad range of insurance, wealth management, and other financial products taking a client-centric, technology-enabled approach. They will have a capital-light model with little to no product manufacturing and work with a broad range of partners for access to products. This model will be attractive to public and privately owned insurers given the capitallight and fee-income-based earnings streams, which are typically more highly valued by investors.
Product manufacturing and origination specialists.
Insurers that pursue this model will have privileged distribution access (proprietary or third-party), strong product development driven by customer insights, and distinctive underwriting capabilities. While they may develop several products of varying capital efficiency, they will retain only the most capital-efficient products, such as simple protection, on their own balance sheets. For more capital-intensive products, they can work with capacity providers via coinsurance, reinsurance, or white-labelling arrangements. Pursuing this model will help convert earnings streams that are more capital intensive to recurring fee-income earnings streams that are more capital efficient. These insurers could also predominantly seek strong partnerships in investment management while selectively building capabilities in some asset classes. We anticipate many public insurers will gravitate toward this model given investor expectations of simpler business models and more stable, predictable, and capital-light earnings streams.
Balance sheet specialists.
Insurers who pursue this business model will have distinctive risk assessment capabilities and will marry this expertise with their strong balance sheet capacity to absorb various risk types. They will have the leading investment management talent in the insurance industry, with distinctive asset origination capabilities—either in-house or via relationships with specialist asset managers, at times even acquiring stakes in such managers, as well. Additionally, they will make deliberate choices about their risk tolerances and marry their investment expertise with leading risk management capabilities. Their distribution— where they source products and assets—will primarily come from institutional partnerships (such as funding agreements, pension risk transfer, and flow reinsurance) or inorganic sourcing (such as the acquisition and divestiture of legacy blocks). These insurers will also likely fully unbundle their operations and technology functions. This model will largely be relevant for privately held insurers (for example, mutual insurers or private capital–backed platforms) with access to longdated, permanent capital sources.
Full-service, integrated insurers.
Insurers pursuing this model will be few and far between; they will represent the high-water mark in terms of distinctive capabilities across the insurance value chain. They may be characterised by strong capital positions, either through scale or through structural capital advantages, and have select sources of distinctiveness across investment management and distribution— though they may still look to unbundle operations and technology.
Many insurers that have the capabilities to be fullservice and integrated might consider evaluating each of their business units independently and identifying the models most appropriate for some of their businesses while retaining a full-service or integrated model for others.
Imperatives and priorities for life insurers
This shifting industry structure will create new opportunities for where and how life insurers create value, elevating the industry’s relevance to consumers and its attractiveness to investors. Insurers will have to chart a course through these shifts and choose their mode of value creation, which will be partly informed by their organisational goals and investor expectations. In the life and retirement industry, six themes dominate the investment attraction agenda: topline or market share growth, diversification (via geographies and products), societal and customer impact, low volatility of results and dividends, ROE, and capital generation.
Insurance companies are likely to focus on some combination of these themes based on their ownership type and specific owners. Even within the broader classifications of insurers, however, individual insurers will have unique situations— and thus unique expectations. Below, we offer a simplified overview of how four broad insurance models could respond to organisational goals and investor expectations by using their strengths to differentiate themselves in the industry.
Insurers backed by private capital and alternativeasset-management players.
These players’ strengths lie in their asset management and liability-restructuring capabilities. These strengths enable them to act as secure providers of capital for insurers divesting their closed books, as well as to expand and diversify their portfolios in a way that takes strategic advantage of their asset management capabilities. To fulfil their owners’ expectations, these insurers typically aim for a high ROE (typically in the high teens), combined with consistent growth trajectory.
As they look to the future, these insurers will want to proactively develop new growth vectors, such as more flow-based business beyond pure legacy M&A and international or geographic expansion. They may also continue to strengthen risk management capabilities (given the relatively higher-risk profile of their investment portfolio), further enhance their investment management capabilities through more dynamic portfolio rebalancing, and develop additional sources of value creation beyond pure investment alpha (for example, by becoming more ingrained in operations and technology to find value).
Mutuals.
Mutuals’ strengths lie in their reputation, high customer loyalty, strong captive distribution networks, low cost of capital, and potential for operational efficiencies at scale. Mutuals typically take a holistic approach to customer needs and aim to create a consistent, high quality experience. Mutuals’ stakeholders can have a range of expectations but could typically prioritise customer and societal impacts and topline and market share growth.
As they look toward the future, mutuals may want to innovate more in their product offerings to capture growth through distinctive product specialisation that better matches customer needs, as well as to transform their distribution and customer en