“Over the last several weeks I’ve read several morose articles about the life insurance industry. Reports of companies “halting sales” and reporting “dim profits” make for sensational headlines but also paint a limited picture of an industry that is on the cusp of revitalization and is essential to the financial well-being of families, businesses, and charities.”
Make no mistake about it, record low interest rates, the specter of significant bond defaults and ratings downgrades, and potentially increased mortality do present challenges for the insurance industry.
But what’s missing in this message is the industry’s positive response, healthy balance sheets, and the core demand for its products.
While some companies have declined to make offers on older-age or risk-impaired insureds, virtually every company has found ways to approve more applicants with fewer underwriting requirements. Referred to as “accelerated underwriting,” insurance companies have programs that allow them to make competitive offers without a medical exam, and these programs have been dramatically expanded over the last 10 weeks. Furthermore, insurance companies are pushing the envelope by coming to market with instant-decision platforms where customers can get underwriting decisions within minutes of applying rather than waiting for an underwriting process that can take weeks or even months.
This crisis has become a catalyst to push this industry to a more digital and consumer-friendly acquisition process. To be clear, this change is sorely needed and long overdue. If you had asked a life insurance veteran six months ago what it might take to get the industry into the twenty-first century, I can envision a tongue-in-cheek response of, “a global pandemic.” But here we are, and necessity is the mother of invention. As a distributor of life insurance products, we’ve already made dramatic shifts in how we approach our business and the digital solutions we’re using. It’s time to change, and we’re not missing it.
Insurance companies, all of which have substantial exposure to “investment-grade” corporate bonds, will be financially impacted by downgrades and defaults in this sector. However, one of the silver linings of the “Great Recession” of 2008 to 2009 was that it stress-tested nearly every insurance company. Companies came out of that crisis stronger and better capitalized. Regulators and ratings agencies were forced to be more rigid and, as a result, risk-based capital ratios (a common measure of the capital strength of an insurance company) have gone from an industry average of 328% in 2008 to 424% at the end of 20181. With the minimum threshold for regulatory action set at 100%, the insurance industry is well-positioned for this crisis.
Unfortunately, this has been a business historically focused on growth in “premiums,” or the annual dollar amount collected by the insurance companies. The true significance of the life insurance business should be measured on lives insured and claims paid, not premiums collected. I don’t need data to prove that a tragic passing can have significant economic consequences for a family. No statistic demonstrates the impact to a small business of losing a key employee or shareholder. Nearly everyone insures their homes, automobiles, and valuable assets based on a small probability of a substantial economic loss. So, too, should individuals insure their lives and their ability to earn income from a tragic death, disability, or long-term care event.
The industry needs better processes, more consumer-focused products, and an energized distribution system that is focused on education. From 2011 to 2019, life insurance ownership declined from 63% to 57%, despite 66% identifying a personal need for coverage2. The percentages of ownership compared to those identifying a need are even more disparate for long-term care, disability income, and annuities (see chart below). The key to fixing this imbalance is consumer education and making our products more accessible. Insurance companies and distributors who adapt to this new paradigm will thrive.
To risk using a cliché, this crisis is the inflection point for a “new normal” in the insurance business. Over the next five years, the industry will completely digitize their processes, reduce time to approval from weeks to days, and get more people covered than ever. The process has started and will continue, and that is why I’m bullish on our future.