Life Insurance Industry Outlook: Am Best's Perspective

AM Best is a global credit rating agency that assesses the financial strength of insurance companies. It is the only rating agency that specializes solely in the insurance industry. AM Best's ratings provide valuable insights into a company's ability to meet its obligations to policyholders, with a focus on claims-paying ability and the credit quality of its obligations. The company's ratings are trusted by consumers and designated by the U.S. Securities and Exchange Commission (SEC) and the National Association of Insurance Commissioners (NAIC) as a nationally recognized rating company.

AM Best's rating system uses a letter grading scale to indicate a company's financial strength and future outlook. The highest ratings are A++ and A+, indicating a superior ability to meet obligations to policyholders. The lowest ratings indicate a company that may not be able to meet its obligations and is financially vulnerable.

In its 2024 outlook, AM Best maintained a stable outlook on Japan's non-life insurance industry, citing profitable and stable underwriting and a solid capital base. The company also noted that most major domestic non-life insurers have addressed the sustainability of their fire insurance products, which have been impacted by large-scale historical catastrophe events.

When choosing a life insurance company, it is important to consider financial stability and customer satisfaction ratings from trusted sources like AM Best and J.D. Power. Other factors to consider include policy types, coverage limits, and price.

Life insurance companies are increasingly acting as sustainability ambassadors, influencing clients' decisions and strategies to create a better workplace, marketplace, and society

Life insurance companies are increasingly acting as sustainability ambassadors, influencing their clients' decisions and strategies to create a better workplace, marketplace, and society. This trend is driven by a growing awareness of the impact of the insurance sector on society and the environment, as well as evolving customer preferences and technological advancements.

Life insurance providers are recognizing the importance of sustainability and are taking steps to integrate it into their business models and product offerings. For example, some companies are offering incentives for clients to adopt more sustainable practices, such as providing discounts on insurance policies for homeowners who follow specific standards for construction or retrofits to make their homes more resilient to severe weather. Additionally, life insurance companies are also investing in digital advancements and analytics to better assess and manage risks, which can help create more sustainable outcomes.

The shift towards sustainability is also evident in the products and services offered by life insurance companies. For instance, some providers are expanding their product portfolios to include insurance policies that specifically address emerging risks like renewable energy technology. By underwriting certain risks associated with renewable energy projects, life insurers can play a crucial role in promoting the transition to cleaner energy sources while also benefiting from potential lower risk profiles.

Furthermore, life insurance companies are leveraging their influence to drive sustainable changes in the marketplace. They are increasingly collaborating with vendors and partners to develop new products and capabilities that meet the evolving needs and preferences of their customers. This includes partnering with real estate companies to offer homeowner's insurance directly through sales platforms, making it easier for customers to access insurance and broadening distribution options for insurers.

Life insurance companies are also focusing on their workplace practices to create a more sustainable and inclusive environment. This includes investing in talent development and promoting diverse and inclusive talent strategies to attract and retain a skilled workforce. By embracing agility, innovation, and a customer-centric approach, life insurance companies are not only adapting to the changing landscape but also actively contributing to a more sustainable future.

Overall, life insurance companies are increasingly embracing their role as sustainability ambassadors by influencing clients' decisions, developing sustainable products and services, and creating positive societal impact through their business practices. This shift towards sustainability is not only beneficial for the environment and society but also helps build long-term value and resilience for the insurance industry.

The rise of embedded insurance: the concept of built-in loss-avoidance and detection capabilities in third-party transactions, bypassing traditional insurance sellers

The concept of embedded insurance is not new, but it is evolving rapidly and is expected to grow exponentially. Embedded insurance involves integrating insurance coverage into non-insurance products, platforms, and services, such as travel, real estate, or automotive purchases. This shift is driven by changing consumer preferences, with an increasing number of customers preferring to engage with companies through digital channels and expecting tailored engagement.

Embedded insurance offers several benefits, including increased efficiency, improved customer retention, higher customer lifetime value, and enhanced data generation. By 2030, embedded insurance is projected to generate over $70 billion in premiums in the United States alone, with the potential to reach $700 billion globally. This growth will likely disrupt traditional insurance distribution channels and lead to the formation of new alliances with non-financial services partners.

Insurers need to act now to stay competitive in the embedded insurance landscape. This involves addressing various challenges, such as undifferentiated products, high costs, manual processing, and limited adoption of advanced technologies. To succeed, insurers should focus on developing innovative products, forming strategic partnerships, leveraging advanced analytics, owning the platform, and fostering customer-centricity.

One of the critical aspects of embedded insurance is the integration of loss-avoidance and detection capabilities into third-party transactions. For example, in the automotive industry, Tesla and Ford have launched their own insurance offerings, with policies priced according to driving performance monitored by vehicle sensors. This type of embedded insurance has the potential to bypass traditional insurance sellers, such as agents or direct-to-consumer sales from insurers.

In conclusion, the rise of embedded insurance presents a significant growth opportunity for insurers, but it also poses a competitive threat. Insurers need to adapt their business models, form strategic alliances, and leverage technology to stay relevant in this evolving market.

The use of AI to enhance the customer experience and help clients reduce or mitigate risks

AI is set to play a significant role in the life insurance industry, enhancing the customer experience and helping clients reduce or mitigate risks.

Enhancing the Customer Experience

AI can improve the customer experience by making it more personalised and data-driven. Carriers can use AI to attract and retain customers with new "pay-as-you-live" products and services that reward healthy habits. For example, AI can be used to suggest alternate routes to drivers that have a much lower likelihood of accidents and auto damage, as well as calculate the adjustment to their monthly premium. AI can also be used to detect and prevent fraud, improving the accuracy and efficiency of claims processing.

Reducing and Mitigating Risks

AI can help clients reduce or mitigate risks by providing more accurate risk analysis and more precise underwriting. For instance, AI can be used to detect inconsistencies in applications, claims and premium assessments, as well as identify nuances in claims that could indicate fraud. AI can also help insurers transition from a "detect and repair" to a "predict and prevent" model, transforming the way they do business.

Other Benefits of AI in Life Insurance

• Efficiency: AI can streamline and speed up the claims processing, freeing employees to interact with people instead of paper.
• Cost reduction: AI can help lower costs by automating various tasks and improving productivity.
• Innovation: AI can drive the development of new products and services, such as dynamic underwriting and claims processing models.
• Improved decision-making: AI can enhance decision-making by providing valuable insights and analytics.
• Personalisation: AI can enable more personalised pricing and services, tailoring insurance offerings to individual needs and behaviours.

In conclusion, AI has the potential to revolutionise the life insurance industry, improving the customer experience, reducing risks, and driving innovation. Carriers that successfully embrace AI and create a culture of innovation will be well-positioned to thrive in the years to come.

The impact of inflation on discretionary consumer spending will likely pressure individual life insurance sales in the US and Europe

Inflation has a significant impact on discretionary consumer spending, which in turn is likely to affect individual life insurance sales in the US and Europe. As inflation rises, consumers tend to cut back on their overall expenditure, reduce spending on non-essential items, and switch from premium products to lower-priced alternatives. This behaviour is particularly evident in the current economic climate, where rising inflation is coupled with slow recovery from the Covid-19 pandemic and the impact of the Russia-Ukraine conflict.

In the US, consumers are increasingly choosing to shop less overall, with 56% of respondents in a survey stating that they are willing to reduce their overall expenditure. This trend is also observed in the UK, where 47% of consumers have made or are expecting to make cutbacks in their general expenditure due to inflation. As a result, sales of household essentials are declining, with volume growth at major fast-moving consumer goods (FMCG) companies taking a hit. Data from market researcher NielsenIQ shows that sales volumes at UK supermarkets for meat, fish, poultry, household items, and packaged groceries all plunged in July 2022.

The impact of inflation on consumer spending is also evident in the insurance sector. Life insurance sales are likely to be affected as consumers prioritise essential spending over discretionary purchases. Additionally, high inflation can dent consumers' momentum to spend through three key effects. First, inflation curtails purchasing power by slowing or reversing gains in real wages and wealth. Second, as inflation affects specific spending categories, consumers substitute cheaper items for more expensive ones and rein in spending on discretionary items. Third, persistent high inflation may lead to stronger monetary tightening, further weakening consumers' impetus to spend.

The impact of inflation on consumer spending is particularly pronounced among low- and medium-income households, who spend a larger proportion of their budgets on necessities such as groceries, energy, and housing. As a result, they are more likely to feel the pinch of rising food and energy prices and may struggle to find cheaper alternatives.

In the insurance sector, high inflation, combined with other economic factors, has already led to a mixed performance in different markets. While some insurers have benefited from higher demand for savings-linked products due to rising interest rates, others have experienced a decline in sales as consumers prioritise essential spending. Overall, the impact of inflation on discretionary consumer spending is likely to pressure individual life insurance sales in the US and Europe, particularly among low- and medium-income households.

The growing middle class in emerging markets will likely power the savings and protection business

The growing middle class in emerging markets is expected to fuel the demand for savings and protection products over the next few years. This presents a significant opportunity for life insurance providers.

In the life and annuity sector, persistently elevated interest rates have driven demand for savings-type products. In 2023, total US annuity sales increased by 23% year-over-year to US$385 billion, with a 36% jump in fixed annuities. This demand is expected to continue in the coming years, fuelled by the growing middle class in emerging markets and declines in pension provisions from governments and businesses.

In addition, younger demographics (below 50 years of age) are driving life application growth, and social media is playing a key role in educating and influencing these consumers about life insurance products. As a result, life insurance premiums are projected to increase by 1.5% through 2025 in advanced markets, with strong sales in emerging markets like China, India, and Latin America potentially boosting premiums by 7.2% and 5.7% in 2024 and 2025, respectively.

To meet the evolving needs of consumers and remain competitive, life insurance providers may need to invest in core system modernisation, automation, and process redesign initiatives. This includes enhancing digital capabilities, such as digital distribution and flexible distribution channel interactions, to reach a broader audience and improve the customer experience.

Furthermore, by modernising their operating models and breaking down silos, life insurance providers can improve their ability to respond to market changes and disruptions. This can be achieved by prioritising investments in process redesign, straight-through processing, and outsourcing to improve operational efficiency and reduce costs.

Overall, the growing middle class in emerging markets presents a significant opportunity for life insurance providers to expand their savings and protection business. By adapting to the changing needs and preferences of this consumer segment, providers can drive long-term growth and enhance their market position.

Frequently asked questions