research on insurance sector

(1) Establishments primarily engaged in initially underwriting insurance policies. (2) Includes establishments engaged in underwriting annuities, life insurance and health and medical insurance policies. (3) Includes claims adjusters, third-party administrators of insurance funds and other service personnel such as advisory and insurance ratemaking services. (4) Preliminary.

Source: U.S. Department of Labor, Bureau of Labor Statistics.

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How Insurance Companies Work

Main types of insurance companies, other types of insurance companies.

• Mutual vs. Stock Companies
• Pros and Cons

Insurance Sector Regulation

• Insurance & Financial Products
• Insurance Sector FAQs

The Bottom Line

• Business Insurance
• Corporate Insurance

A Brief Overview of the Insurance Sector

The insurance sector is made up of companies that offer risk management in the form of insurance contracts. The basic concept of insurance is that one party, the insurer, will guarantee payment for an uncertain future event. Meanwhile, another party, the insured or the policyholder, pays a smaller premium to the insurer in exchange for that protection on that uncertain future occurrence.

As an industry, insurance is regarded as a slow-growing, safe sector for investors. This perception is not as strong as it was in the 1970s and 1980s, but it is still generally true when compared to other financial sectors.

Key Takeaways

• The insurance industry is made up of different types of players operating in different spaces.
• Life insurance companies focus on legacy planning and replacing human capital value, health insurers cover medical costs, and property, casualty, or accident insurance is aimed at replacing the value of homes, cars, or valuables.
• Insurance companies can be structured either as a traditional stock company with outside investors, or mutual companies where policyholders are the owners.
• Owning equity in an insurance company may lead to dividends, inflation protection, and stable company revenue.
• The industry sector is highly regulated which may protect investors while also creating compliance barriers that may limit growth opportunities.

The insurance sector is fundamentally rooted in risk management. All policies written are analyzed with various risks considered, and actuarial analysis is performed to understand the statistical likelihood of certain outcomes better. Based on variances between statistical data and projections, policyholder premiums are adjusted, or benefits are reevaluated. Generally, premium amounts paid within the insurance sector are a function of the risk associated with the related individual, property, or item being insured.

In some cases, insurance companies will partner with banks to market their products to the bank's customers. This practice, known as " bancasurance " is more common in Europe, but is finding a foothold in the United States.

One of the more interesting features of insurance companies is that they are essentially allowed to use their customers' money to invest for themselves. This makes them similar to banks, but investing happens to an even greater extent. This is sometimes referred to as "the float."

Float occurs when one party extends money to another party and does not expect repayment until after a circumstantial event. This mechanism essentially means insurance companies have a positive cost of capital . This distinguishes them from private equity funds, banks, and mutual funds. For investors in stock insurance companies (or policyholders in mutual companies), this means the potential for lower-risk, stable returns.

Insurance plans are the principal product of the sector. However, recent decades have brought a number of  corporate pension plans  to businesses and annuities to retirees. This places insurance companies in direct competition with other financial asset providers on these types of products. Many insurance companies now have their own broker-dealer either in-house or in partnership.

Not all insurance companies offer the same products or cater to the same customer base. Among the largest categories of insurance companies are accident and health insurers; property and casualty insurers; and financial guarantors. The most common types of personal insurance policies are auto, health, homeowners, and life. Most individuals in the United States have at least one of these types of insurance, and car insurance is required by law.

Accident and health companies are probably the most well-known. These include companies such as UnitedHealth Group, Anthem, Aetna and AFLAC, which are designed to help people who have been physically harmed.

Life insurance companies mainly issue policies that pay a death benefit as a lump sum upon the death of the insured to their beneficiaries. Life insurance policies may be sold as term life, which is less expensive and expires at the end of the term or permanent (typically whole life or universal life), which is more expensive but lasts a lifetime and carries a cash accumulation component. Life insurers may also sell long-term disability policies that replace the insured's income if they become sick or disabled. Well-known life insurers include Northwestern Mutual, Guardian, Prudential, and William Penn.

Property  and casualty companies insure against accidents of non-physical harm. This can include lawsuits, damage to personal assets, car crashes and more. Large property and casualty insurers include State Farm, Nationwide and Allstate.

Businesses require special types of insurance policies that insure against specific types of risks faced by a particular business. For example, a fast-food restaurant needs a policy that covers damage or injury that occurs as a result of cooking with a deep fryer. An auto dealer is not subject to this type of risk but does require coverage for damage or injury that could occur during test drives.

There are also insurance policies available for very specific needs, such as kidnap and ransom (K&R), medical malpractice, and professional liability insurance, also known as  errors and omissions insurance .

Some companies engage in  reinsurance  to reduce risk. Reinsurance is insurance that insurance companies buy to protect themselves from excessive losses due to high exposure. Reinsurance is an integral component of insurance companies' efforts to keep themselves  solvent  and to avoid  default  due to payouts, and regulators mandate it for companies of a certain size and type.

For example, an insurance company may write too much hurricane insurance, based on models that show low chances of a hurricane inflicting a geographic area. If the inconceivable did happen with a hurricane hitting that region, considerable losses for the insurance company could ensue. Without reinsurance taking some of the risks off the table, insurance companies could go out of business whenever a natural disaster hits.

Investopedia / Hilary Allison

Mutual vs. Stock Insurance Companies

Insurance companies are classified as either stock or mutual depending on the ownership structure of the organization. There are also some exceptions, such as Blue Cross Blue Shield and fraternal groups which have yet a different structure. Still, stock and mutual companies are by far the most prevalent ways that insurance companies organize themselves.

A  stock insurance company  is a corporation owned by its stockholders or shareholders, and its objective is to make a profit for them. Policyholders do not directly share in the profits or losses of the company. To operate as a stock corporation, an insurer must have a minimum of capital and surplus on hand before receiving approval from state regulators. Other requirements must also be met if the company's shares are publicly traded. Some well-known American stock insurers include Allstate, MetLife, and Prudential.

A mutual insurance company is a corporation owned exclusively by the policyholders who are "contractual creditors" with a right to vote on the board of directors. Generally, companies are managed and assets (insurance reserves, surplus, contingency funds, dividends) are held for the benefit and protection of the policyholders and their beneficiaries.

Management and the board of directors determine what amount of operating income is paid out each year as a dividend to the policyholders. While not guaranteed, there are companies that have paid a  dividend  every year, even in difficult economic times. Large mutual insurers in the U.S. include Northwestern Mutual, Guardian, Penn Mutual, and Mutual of Omaha.

As of March 2023, the latest information assembled from the Insurance Information Institute stated the U.S. insurance industry wrote a total of $1.4 trillion net premiums in 2021.

Advantages and Disadvantages of Investing in Insurance Companies

Pros of equity ownership in insurance company.

Purchasing stock in insurance businesses can provide a number of benefits. Insurance firms receive money from the premiums that policyholders pay. Investors may benefit from the dependability and stability this steady source of income can offer, as this cash flow stream is often fixed and potentially locked into long-term agreements.

As their clientele and portfolio of insurance products grow, insurance businesses may see long-term growth. The demand for insurance protection often rises as populations and economies expand while becoming more complex. Plus, compared to other industries, the insurance sector is typically less vulnerable to recessions. People and organizations frequently place a high priority on keeping their insurance coverage in place to guard against potential risks and losses, even in difficult economic circumstances.

The practice of distributing dividends to shareholders is common among insurance businesses. Insurance stocks appeal to income-oriented investors since dividends can offer a continuous revenue stream to investors. In addition, insurance firms can change the cost of their premiums to reflect inflation, helping safeguard the value of investments against inflation.

Last, there are legal ramifications that may be favorable. Mergers and acquisitions are a common method of industry consolidation in the insurance sector. As businesses join forces and realize possible synergies, this may result in higher shareholder value. The industry is also somewhat safer in regards to potentially more robust regulations in place to safeguard policyholders, companies, and investors.

Cons of Equity Ownership in Insurance Company

Despite its strengths, the insurance sector does have some downsides in regards to holding an equity position. Insurance companies face the risk of significant losses due to natural disasters, large-scale accidents, or widespread claims. Such events can negatively impact their financial performance, especially when unpredictable or black swan events occur.

Because insurance companies operate in a highly regulated industry, changes in regulations, compliance failures, or legal issues can result in financial penalties. It may also cause reputational damage. One such example may be insurance regulators imposing capital requirements to ensure solvency and stability. An insurance company may be forced to slash dividends to ensure sufficient cash is kept on hand to meet such a requirement.

Insurance companies generate income by investing the premiums they receive. Fluctuations in interest rates or poor investment performance can affect their profitability resources on hand. Alternatively, insurance companies may be negatively impacted by unfavorable economic conditions. Consider how companies that go out of business will no longer need coverage and may cancel their premium.

May provide stable and predictable earnings due to long-term, fixed contracts

May be resilient to many market cycle stages

May result in dividend income

May protect against inflation

Often protects investors more heavily due to higher regulatory oversight

May be vulnerable to unpredictable, catastrophic events

May face headwinds regarding regulatory and compliance risks

May experience losses due to investment portfolio or fluctuations in interest rates

May lose contracts due to economic downturns if businesses shutter

A crucial component of ensuring consumer safety, financial stability, and ethical practices in the insurance sector is regulation. Insurance firms are required to abide by the laws and regulations that are set forth by regulatory and governmental bodies. Here is a summary of the laws governing the insurance sector.

• Insurance firms are frequently obliged to seek a license or registration from the regulatory body in the country where they conduct business. This makes sure that only reputable and solidly-capitalized businesses may provide insurance goods.
• Insurance regulators often set financial solvency criteria to make sure that businesses have enough cash and reserves to cover any claims. Depending on the jurisdiction and the type of insurance, these regulations change. To ensure adherence to solvency norms, routine financial reporting and auditing are carried out.
• Regulations often require the insurance sector to provide plain and understandable disclosures of policy terms, conditions, and exclusions. Regulations may also forbid unfair acts like deceptive advertising, biased underwriting , or unfair claims handling.
• To avoid unjust discrimination and advance affordability, regulators may keep an eye on insurance companies' pricing and underwriting procedures. They might demand actuarial support for premium rates and keep a close eye on pricing procedures to make sure they adhere to reliable statistical principles and are sufficiently and quantifiably supported.
• Regulations frequently establish rules for quick and equitable claims management . The appropriate handling of claims, prompt contact with policyholders, and fair settlement processes are all requirements for insurance firms. In situations where claims are denied or processed slowly, regulatory agencies may step in. For instance, the state of Washington requires notice of receipt of a claim within 15 working days of receipt of a claim.
• To prevent anti-competitive activity and maintain fair competition, insurance regulators keep an eye on insurance businesses conduct in the market. They may look into complaints, carry out market research, and enforce laws pertaining to advertising, sales tactics, and conduct of agents and brokers. The National Association of Insurance Commissioners encourages those who are dissatisfied with the actions of their insurance provider to file a complaint with your state's department of insurance.

Insurance and Selling Financial Products

How many sectors are there in insurance.

The insurance sector is sometime broken into three smaller sectors. The first focuses on property/casualty insurance such as auto, home, and commercial insurance. The second focuses on life and annuity insurance. The third is public and/or private health insurance.

What Is the Primary Function of the Insurance Sector?

The insurance sector is intended to provide protection against future risks, accidents, and uncertainty. It provides opportunities for those who wish to hedge against the unknown by entering into contracts to share in the risk of unfavorable outcomes. From the perspective of the insurance sector, the function of the business is to assess premiums to generate income that exceed claim payouts.

What Is the Difference Between Insurance and Assurance?

Insurance often refers to the general process of compensating a party for a loss. It involves the umbrella term for entering into a policy to share risk with another party. The term assurance is often used within the insurance sector, and it is a statement that guarantees certain benefits will be distributed at certain times. For example, a policyholder often receives assurance that their life insurance compensation will be distributed upon death.

What Does the Future of the Insurance Sector Look Like?

Very broadly speaking, some believe emerging technology sometimes increases risk. For example, the introduction of the Internet brought about entirely new commercial markets to insurance as cybercrime, identify theft, and new forms of risk and loss emerged. As the world continues to evolve and become even more interconnected, some argue the centralization of information and speed at which data is transmit increases general business and personal risk. As researched by McKinsey, the way insurance is calculated, purchased, issued, and paid out may dramatically change over the next decade.

By providing both individuals and businesses with a variety of insurance products, the insurance industry offers financial protection against potential risks and losses. Insurance companies evaluate risks, gather premiums, and draft policies that specify the details of coverage. Policyholders may submit claims for compensation when they suffer covered losses. The industry is governed to guarantee consumer safety, monetary stability, ethical business practices, and adherence to solvency criteria.

Insurance Information Institute. " Insurance Industry at a Glance. "

International Cooperative and Mutual Insurance Federation. " Global Mutual Market Share 10 ," Pages 3-4. Download "English Version."

National Association of Insurance Commissioners. " How to File a Complaint and Research Complaints Against Insurance Carriers. "

McKinsey & Company. " Insurance 2030 - The Impact of AI on the Future of Insurance. "

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The relationship between activities of the insurance industry and economic growth: the case of g-20 economies.

1. Introduction

2. literature survey, 3. materials and methods, 4. empirical findings, 5. conclusions and implications, author contributions, institutional review board statement, informed consent statement, data availability statement, conflicts of interest.

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Share and Cite

Tasdemir, A.; Alsu, E. The Relationship between Activities of the Insurance Industry and Economic Growth: The Case of G-20 Economies. Sustainability 2024 , 16 , 7634. https://doi.org/10.3390/su16177634

Tasdemir A, Alsu E. The Relationship between Activities of the Insurance Industry and Economic Growth: The Case of G-20 Economies. Sustainability . 2024; 16(17):7634. https://doi.org/10.3390/su16177634

Tasdemir, Ahmet, and Erkan Alsu. 2024. "The Relationship between Activities of the Insurance Industry and Economic Growth: The Case of G-20 Economies" Sustainability 16, no. 17: 7634. https://doi.org/10.3390/su16177634

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Heritage Insurance Stock Near 52-Week High: Time to Buy?

Shares of Heritage Insurance Holdings, Inc . ( HRTG Quick Quote HRTG - Free Report ) closed at $16.24 on Tuesday, near its 52-week high of $16.55, after having gained 149.2% year to date. Shares outperformed the industry , the Finance sector as well as the Zacks S&P 500 composite index in the same time frame.  This super-regional U.S. property and casualty insurance holding company delivered an earnings surprise in three of the last four quarters, while missed in one. Prudent underwriting execution and rate adequacy initiatives pursued over the last three years are expected to drive its earnings ahead. 

Heritage Insurance Outperforms Industry, Sector & S&P YTD

HRTG Trading Above 50-Day Moving Average

HRTG shares are trading well above the 50-day moving average, indicating a bullish trend. Shares are trading near the high end of its 52-week range.  

HRTG Price Movement vs. 50-Day Moving Average

Optimistic Analyst Sentiment for HRTG

Two analysts covering the stock have raised estimates for 2024 and 2025 over the past 30 days. The consensus estimate for 2024 and 2025 has moved 33.1% and 26.7% north, respectively, in the past 30 days. The Zacks Consensus Estimate for 2024 implies a 10.3% year-over-year increase, while the same for 2025 suggests an 18.0% increase.

Heritage Insurance’s Growth Strategy

HRTG’s growth strategy involves a focus on rate adequacy and selective profit-oriented underwriting criteria. Restricting new business in over-concentrated markets or products should drive profitability. It has stopped writing new personal lines policies in Florida and the Northeast, given the waning profitability of the book of business, coupled with tightening reinsurance markets in December 2022.  No single state accounts for more than 27.3% of HRTG’s total insured value. The insurer believes this selective diversification helps in managing volatility and ensures long-term stability. However, as the company focuses on selective underwriting, there has been a decline in policy count, though average premiums per policy increased. HRTG expects the headwind from declining policies to begin to moderate over the next few quarters. The excess and supply (E&S) business is another growth lever for Heritage. Premiums in the second quarter of 2024 skyrocketed 177% year over year banking on business strength in California, Florida and South Carolina. HRTG stated that it will consider and evaluate growth opportunities in a greater number of states.  Heritage Insurance has a solid reinsurance program in place that shields the balance sheet from erosion, particularly given coastal exposure to hurricanes and other severe weather events. The insurer expects a substantial reduction in in ceded premium ratio given a combination of improvements in the reinsurance program from a cost and structure standpoint and growing gross premiums earned. Heritage Insurance’s capital management seems prudent. While the insurer suspended dividend payments to strengthen its financial position and support long-term growth initiatives, it also diverted capital toward technology and to the segments that have the potential to yield more profits.  

HRTG’s Return on Capital

Return on equity in the trailing 12 months was 26.3%, higher than the industry average of 8%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders.

Its return on invested capital (ROIC) has been increasing for quite some time. This reflects RGA’s efficiency in utilizing funds to generate income. ROIC in the trailing 12 months was 17.2%, higher than the industry average of 6.1%.

HRTG Shares Are Expensive

The stock is overvalued compared to its industry. It is currently trading at a price-to-book multiple of 1.94, higher than the industry average of 1.60. It has a Value Score of A. Back-tested results have shown that stocks with a solid Value Score and a favorable Zacks Rank are the most attractive and their returns are better.

Shares of other insurers like NMI Holdings ( NMIH Quick Quote NMIH - Free Report ) , MGIC Investment Corporation ( MTG Quick Quote MTG - Free Report ) and Radian Group ( RDN Quick Quote RDN - Free Report ) are also trading at a multiple higher than the industry average.

HRTG’s focus on growing its commercial residential business organically, ramping up E&S business, improving pricing, increasing top line, expanding margins and delivering strong earnings bodes well for growth.  Despite its expensive valuation, given the positive analyst sentiment and its growth prospects, the time appears right for potential investors to bet on this Zacks Rank #1 (Strong Buy) insurer. You can see the complete list of today’s Zacks #1 Rank stocks here .

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An empirical investigation of corporate governance attributes and firm performance: evidence from the ethiopian insurance industry

• Original Article
• Published: 03 September 2024
• Volume 4 , article number  108 , ( 2024 )

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• Nebyu Adamu Abebe   ORCID: orcid.org/0000-0002-4121-5345 1 &
• Navkiranjit Kaur Dhaliwal 1  

This study investigates the relationship between CG attributes and the financial performance of Ethiopian insurance companies. This study used quantitative methodologies and an explanatory research design. The study used a panel data approach with 17 insurance companies, and the timeline for the study was 2015/16–2022/23. The secondary data were obtained from various sources, including yearly reports, the National Bank of Ethiopia, published reports, and pertinent websites. This study employs regression techniques, particularly the fixed effects model and random effects model. This study revealed that board size positively correlates with the financial performance of Ethiopian insurance companies (ROA). This finding shows that a larger board size improves insurance financial performance (ROA) more effectively and efficiently. However, a negative association exists between the size of the board of directors and insurance financial performance (ROE). Nonexecutive board members negatively impact financial performance; this may be due to a lack of industry knowledge and prioritizing interests over shareholders. Audit committees significantly improve financial performance, whereas board meetings and board gender diversity do not significantly impact financial performance. However, CEO dualism has a detrimental effect on the financial performance of insurance companies. The study also revealed no significant association between the financial success of government-owned and privately held insurance companies. This study provides useful insights for academics and policymakers (including the National Bank of Ethiopia, insurance companies, and other corporations).

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Abebe, N.A., Dhaliwal, N.K. An empirical investigation of corporate governance attributes and firm performance: evidence from the ethiopian insurance industry. SN Bus Econ 4 , 108 (2024). https://doi.org/10.1007/s43546-024-00707-5

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The future of life insurance: Reimagining the industry for the decade ahead

The future of life insurance

The global life insurance industry has seen significant changes over the past decade. Developing economies—predominantly emerging markets in Asia that were formerly small contributors—have become global growth drivers and now account for more than half of global premium growth (Exhibit 1) and 84 percent of individual annuities growth (Exhibit 2). The availability of data has skyrocketed, and insurers have made progress in advanced analytics and artificial intelligence. Digital and mobile advances have raised the bar on transparency and service quality: customers can now file claims and access agents, insurance quotes, and policy information with a few taps on a screen.

The past decade has also introduced new challenges. Life insurers have not benefitted from the bull market (Exhibit 3). Global penetration fell to 3 percent, and premium growth within most developed markets, hovering just below 2 percent per year, struggled to match GDP. Globally depressed interest rates curtailed investment portfolio returns. More recently, the COVID-19 pandemic has depressed global interest rates even lower than those seen in the 2007–08 global financial crisis, leading to disproportional impact on life insurance stock relative to the rest of the market (Exhibit 4).

Meeting the moment across three key areas

Several trends show promise for the life insurance industry in the next decade. Customer demand is at an all-time high. Indeed, the COVID-19 pandemic has only reemphasized the need for mortality protection. Public pension replacement rates are declining and healthcare expenditures are rising—trends also accelerated by the COVID-19 crisis. Economic and demographic trends will also offer tailwinds. The global middle class is rapidly expanding, bringing higher incomes, growing financial wealth, and heightened risks to manage. By 2030, all baby boomers will be age 65 or older, 1 “Older People Projected to Outnumber Children for First Time in U.S. History,” US Census Bureau, March 13, 2018, census.gov. and many are expected to outlive their retirement savings. 2 Johnny Wood, “Retirees will outlive their savings by a decade,” World Economic Forum, June 13, 2019, weforum.org.

We believe the life insurance industry faces a pivotal, dual opportunity: the chance to fulfill growing customer needs while returning to profitability and growth. To achieve these goals, we expect winning life insurance companies to outperform in three areas in the decade ahead:

• personalize every aspect of the customer experience
• develop flexible product solutions suitable for a challenging regulatory and interest-rate environment
• reinvent skills and capabilities

Personalize every aspect of the customer experience

The influence of digital leaders in other industries has raised the bar in insurance as well. Several areas offer opportunities for personalization that can strengthen customer relationships.

A shift to targeted health management. Life insurers have long maintained a focus on mortality protection, but concern over mortality risk has diminished in many markets, which has reduced demand for core products. Despite recent increases in online research for life insurance, spurred by COVID-19, the long-term decline of mortality risk is likely to continue. In the coming decade, insurers will play an increasingly prominent role in the health of their customers as life expectancy increases and health trends change.

By 2030, the number of people aged 60 and older will grow by more than 50 percent, from 900 million in 2015 to 1.4 billion. 3 World Population Ageing 2015: Highlights, United Nations, Department of Economic and Social Affairs, Population Division, 2015, un.org. Further, noncommunicable diseases—those more closely linked to lifestyle and behavior, such as diabetes, heart disease, and lung cancer—will account for 71 percent of all annual deaths globally and represent an increasing proportion of mortality risk. 4 “Noncommunicable diseases,” World Health Organization, June 1, 2018, who.int. We believe these factors will motivate life and annuities manufacturers to engage customers in the shared-value economics of healthy living to increase policyholder longevity.

Technology will play an important part in this transition. The proliferation of data and connected devices, particularly wearables, will continue to make it easier for life insurance companies to play an active role in shaping customer health—to everyone’s benefit. Armed with this information, life insurance companies can provide well-timed, personalized reminders or notifications around diet, disease management, doctor appointments, local health resources, and physical activity. Customers are increasingly willing to share their data in exchange for personalization; today, six in ten consumers globally are comfortable sharing personal details with their insurer in exchange for lower premiums . 5 2020 DXC insurance survey report: The voice of the US customer, dxc.technology.

This trend has accelerated during the pandemic. Evidence shows that a higher proportion of consumers are willing to share data collected on their watches related to heart rate. In recent months, life insurance companies have relied on more detailed questions and medical records instead of in-person physical exams, which have not been possible with physical distancing.

Shared-value life insurance products, such as Vitality, are in the vanguard. Developed by Discovery Group in South Africa, Vitality pioneered the model of shared-value economics in its product design and pricing, leading to the creation of an engaged wellness ecosystem. Now in 22 markets, the program has seen a 35 percent reduction in mortality among highly engaged members and a 15 percent lower policy-lapse rate. 6 Integrated Annual Report 2019, Discovery, 2019, discovery.co.za. In addition, some Japanese life insurance companies are migrating to a “pay as you live” premium schedule with dynamic pricing. For example, customers who exhibit regular healthy behaviors, such as exercising and attending doctor checkups, are rewarded with lower premiums. In the future, we expect to see life insurance transition from the traditional “assess and service” model and shift toward “prescribe and prevent” (Exhibit 5).

Continuous underwriting. The evolution toward continuous underwriting, made possible by increased data and device connectivity, will present further opportunity for personalization. Currently, mortality underwriting suffers from two primary data gaps. First, it is constrained to a single moment in time—the initial sale. The only data available at that point are past morbidity and behavioral data on the customer. Second, it fails to account for a customer’s lifestyle changes, which are significantly more controllable.

We envision underwriting evolving in four phases that will increase personalization and customer engagement (Exhibit 6). Currently, insurers focus on automating the underwriting process to improve efficiency gains and reduce inconsistencies (phase 1). Some insurers have advanced to accelerated underwriting, for which applications are submitted digitally (phase 2). Doing so dramatically reduces the need for invasive fluid and paramedical exams and results in near auto-issuance for the majority of policies. Insurers will then graduate to microsegmentation and personalization, for which individualized offers are generated using comprehensive internal and external data sets with enhanced accuracy (phase 3). Finally, winning companies will provide continuous “one-touch” underwriting, with dynamic adjustment based on customer behavior and suggested personalized actions to significantly drive healthier behavior (phase 4). Together, this four-phase evolution flips the underwriting approach on its head, with environment, health, and lifestyle becoming primary inputs and medical data providing only one part of the picture (Exhibit 7).

Personalized, omnichannel customer journeys. COVID-19 has accelerated many of the digital and omnichannel elements that were in their early stages. According to our research, more than 90 percent of new business in China historically has been generated through face-to-face interactions. Since the onset of the pandemic, insurance companies have been forced to adopt digital-hybrid solutions by incorporating robo-advisors, video conferencing, and web chats. Moreover, a recent McKinsey survey of European consumers found that 54 percent of customers now prefer direct or digital channels, up from 38 percent before the crisis.

Frontline professionals will continue to play a critical role in reaching customers, so insurers must embrace the integration of physical and digital channels once the crisis subsides. Life insurance companies can direct leads to the channel or agent that best serves each customer’s needs. Further, agents will be armed with advanced analytics on their customer base as well as centrally provided digital leads. Throughout the customer life cycle, life insurance companies will engage in multichannel, personalized customer interactions to promote cross-selling (by identifying the most likely “next product to buy”) and proactively reach out to customers who are likely to lapse. Such interactions have the ability to reduce customer acquisition costs by up to 50 percent, generate 5 to 10 percent of new premiums, and reduce customer churn by up to 30 percent.

Upgrading agent capabilities to more effectively use digital tools will be critical to the pending distribution shift. Indeed, a recent McKinsey survey found that “generating leads” and “building initial client relationships remotely” were the two biggest challenges faced by agents. At the same time, these agents were spending disproportionately more time on customer service and administration than before. Life insurance companies will have to significantly invest in digital infrastructure and place analytics at the core of distribution.

Develop flexible product solutions suitable for a challenging regulatory and interest-rate environment

Interest rates have been globally depressed for a decade—and even longer for some economies, such as Germany and Japan. Interest-rate pressure has increased further due to COVID-19, with few signs of abating. At the same time, changing regulations have limited traditional methods of doing business. The most successful life insurers will redouble their focus on innovation and flexibility.

A paradigm shift of the guaranteed product. Over the past five to seven years, some countries (such as France, Germany, the Netherlands, and Switzerland) saw new government bonds issued at negative yields. Meanwhile, others (such as the United States and Japan) continue to combat near zero interest rates. Indeed, according to the European Insurance and Occupational Pensions Authority, more than half of European life policies guarantee an investment return to policyholders that exceeds the yield on the local ten-year government bond. 7 IMF Blog, “European Life Insurers: Unsustainable Business Model,” blog entry by Reinout De Bock, Andrea Maechler, and Nobuyasu Sugimoto, May 5, 2015, blogs.imf.org.

New capital regulations accompanied the globally depressed rates. For example, the introduction of Solvency II in 2016 in the European Union increased capital requirements for traditional life and annuity products, putting further pressure on profitability. Consumers will continue to seek out guaranteed returns, which means many insurers will face challenges in offering guarantees in a capital-efficient, profitable manner. Collectively, traditional long-term, fixed-rate guaranteed products will undergo a paradigm shift in structure, from being rooted in guaranteed returns to offering upside potential with guaranteed downside protection.

Several life insurance companies have already begun moving their portfolios toward a wide variety of capital-markets products, specifically hybrids and unit-linked products, that are more capital efficient and perform well in a low-rate environment. From 2015 to 2019, unit-linked premiums rose $76 billion globally, with European life insurance companies accounting for two-thirds of global growth (Exhibit 8). Such products may offer customers upside potential coupled with downside protection (as high as 100 percent). That said, capital preservation is not free; whether in commissions, expense ratios, or yield, customers pay for it.

Regardless of interest-rate movement, previous fixed-rate guarantees, coupled with new regulations and customer education around alternatives, will likely keep life insurance companies focused on capital-light products in the decade ahead.

Tailor new solutions for different life stages. In the coming decade, the industry will see the emergence of new types of coverage, as well as increasing flexibility in product coverage and payment. Household debt is still more than 100 percent of net disposable income in most OECD countries, 8 “Household debt,” Organisation for Economic Co-operation and Development, 2020, data.oecd.org. divorce rates continue to rise, and job insecurity, spurred by technological advancements, can create uncertainty for consumers. Indeed, despite a decade of global economic growth, nearly 50 percent of consumers are somewhat or very concerned about job loss for themselves or a member of their household . New products that help allay those concerns, as well as increase coverage and premium flexibility, will likely prove increasingly popular with consumers.

Flexible offerings, which allow the consumer to adjust coverage throughout the life of the policy, have been met with favor in Japan. For example, a leading Japanese insurer offers medical, asset accumulation, and protection against dread disease and mortality wrapped into a single product, enabling the customer to add or reduce coverage as their circumstances change.

Value-added services and nonmonetary benefits. Over the next decade, product innovation will likely expand to adjacent services. Life insurance companies, which are competing with not only their peers but also industry alternatives such as pure wealth and asset managers, will increasingly seek to differentiate themselves through value-added services and nonmonetary benefits, particularly as life and health coverage continue to converge.

In Asia and Europe, life insurance companies are already offering administrative support for medical visits, health management, and telemedicine. Going forward, these companies could also partner with ridesharing companies and hotels to provide transportation to doctor visits or accommodations for loved ones in times of need.

Nonmonetary benefits can also address the risk needs of policyholders. For customers concerned with the cost of living in retirement, life insurance companies in Asia and the United Kingdom are replacing financial payouts with guaranteed placement in senior living communities.

Such services give insurers access to fee-based earnings, an alternative revenue stream that could be rewarded by investors. At the same time, fee-based earnings introduce more complexity vis- à -vis sales and after-sales support. Ultimately, earnings potential will be shaped by not only customer demand but also companies’ abilities to upskill distribution talent and develop unique economic solutions for distributors.

Reinvent skills and capabilities

The path to growth in the next decade will require new talent and bolder strategies. Life insurers must respond by capturing more value from existing assets and pursuing targeted M&A.

A radically different workforce, underpinned by skills of the future. By 2030, 44 percent of insurance work activities have the potential to be automated (Exhibit 9). Roles that focus on repetitive work and manual processes will cease to exist in their present form, while technology and digitally savvy workers will increase in value. Emotional, interpersonal, and social skills will also become more critical, especially for customer-facing agents who can help consumers address their changing financial and coverage needs. However, these workforce shifts will not eliminate jobs—our research indicates net new jobs will be created due to advances in automation—but instead change the nature of the work. The COVID-19 pandemic has only accelerated such trends.

In the war for digital talent, life insurance companies are at a disadvantage. The financial-services industry trails other sectors in volume of digital and tech talent. In fact, 80 percent of millennials say they have limited knowledge of the insurance industry, 9 Millennial generation attitudes about work and the insurance industry, a joint paper from The Institutes and Griffith Insurance Education Foundation, 2012, theinstitutes.org. a troubling sign for an industry in which 25 percent of employees believe themselves to be within five to ten years of retirement . However, COVID-19 and recent social unrest present an opportunity for life insurers to reframe their societal purpose, which may help recruit and retain exceptional talent.

Seventy-five percent of global executives agree that upskilling and reskilling employees  must account for at least half of their skills gap solution. Life insurance companies that prioritize those efforts and develop operating models capable of responding to changing demands will distinguish themselves from peers and position themselves at the forefront of “future-proofing” their workforces.

Substantial value from in-force and closed blocks. Given global profitability challenges, insurers can increasingly optimize in-force and closed blocks as a source of value creation. Today, the attention given to in-force management is often not commensurate with its potential. Life insurance companies can enhance in-force value creation by executing across four pillars:

• commercial effectiveness, including lapse management and cross-selling to policyholders
• financial efficiencies, such as actuarial optimization and reinsurance
• operational efficiencies, such as reduced administrative costs
• transactions, such as partial or full sales of blocks of business

Companies can also extract value from closed blocks, which sometimes have unattractive product economics and operational difficulties or are misaligned with a company’s strategy. Yet given their cash flow potential, earnings, and embedded value, closed blocks deserve time, attention, and resources. Some insurers have helped fund investment in a digital transformation or an analytics road map by rationalizing their closed blocks of business.

By collaborating with actuaries and understanding the implications on the cost model, life insurance companies can often lock in savings and have a onetime release of reserves that is typically in the ten-to-one range (this ratio differs by company). In other words, for every $1 million saved in long-term in-force servicing costs on the closed block, there could be a $10 million onetime reserve release. Life insurance companies often use these funds to finance the transition of the closed blocks to a target platform, invest in digital and analytics, and wide-scale productivity transformations. The reserve can also be used in other ways to reduce the ongoing unit costs.

The prevalence of closed-block specialists will also spark increased sales by insurance companies beyond US and UK markets, where activity has been high. Specialists, whose scale facilitates lower costs per policy, have proven themselves to be effective operators. Moreover, closed-block sales can provide life insurance companies with immediate access to capital, derisked balance sheets, and a reduction in operational costs, such as legacy IT systems. But life insurance companies must remain open to exploring sales, and they can limit the risk of undervaluing their blocks by keeping an eye on the cost base, considering improvements, and structuring partnerships with potential buyers.

Precision M&A for expansion and capability building. Global M&A remained steady in the 2010s. The Americas accounted for 49 percent of deal volume by the end of the decade, followed by Europe at 32 percent. 10 Navigating a course between uncertainty and opportunity: Insurance growth report 2019, Clyde & Co, 2019, clydeco.com. Effective M&A—specifically as a vehicle for market expansion, capability building, and divesting noncore businesses—can continue to be a core strategy for successful life insurance companies.

Growth within existing markets will be challenging; life insurance companies can use acquisitions to enter new geographies, adjacencies, and products. Cross-border transactions can provide access to faster-growing developing markets, such as those in Latin America, and emerging markets in Asia. Moreover, the global middle class, projected to include six billion people by 2030, 11 Annual disposable income of $3,600 and over; World Population Prospects, United Nations, Department of Economic and Social Affairs, un.org; Cityscope by McKinsey Global Institute. will increasingly depend on robust wealth- and asset-management solutions, particularly in markets such as China, where the industry is evolving rapidly. Several life insurance companies have already expanded into such asset-management adjacencies, which have natural synergies with the industry’s core competencies. Others may find capital-light, fee-based businesses in areas related to other competencies to be more practical. Regardless, given the historically strong correlation between return on equity and price-to-book ratio, such investors reward higher return-on-equity businesses.

Life insurance companies can also rely on acquisitions for tech enablement and capability building. The past decade has witnessed the rise of insurtech, which attracted nearly $4 billion of global venture funding in 2018 alone. 12 Joanna Glasner, “A record $2.5B went to U.S. insurance startup deals last year, and big insurers are in all the way,” Crunchbase, April 4, 2019, crunchbase.com. Partially fueling the segment’s rise are the increasingly popular internal venture-capital funds launched by life insurance companies themselves. Such funds provide access to leading start-ups and serve as a natural “buy” versus “build” entry point for leading technologies. Insurtechs can also help companies increase their pace of innovation. The recent crisis has depressed valuations for start-ups, providing insurers an opportunity to acquire capabilities more cost effectively. As a result, life insurance companies can acquire their way to the forefront of disruptive innovation. If a full acquisition is not an option, hiring talent from insurtechs and other start-ups with greater digital and analytics capabilities is another possibility.

Finally, “shrink to grow” will likely prove a popular way for life insurance companies to launch their next growth S-curves. Divestitures of business lines or books of business, an increasingly popular trend at the end of the 2010s, can unlock capital to focus on new opportunities.

Download The future of life insurance: Reimagining the industry for the decade ahead , the full report on which this article is based (PDF–896KB).

Pierre-Ignace Bernard is a senior partner in McKinsey’s Paris office; Kweilin Ellingrud is a senior partner in the Minneapolis office; Jonathan Godsall is a partner in the New York office, where Andrew Reich is a consultant; and Bernhard Kotanko is a senior partner in the Hong Kong office.

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