Disintermediation: Life Insurance's Future?

Disintermediation is a financial term that refers to the process of removing intermediaries from transactions, supply chains, or decision-making processes. In the context of life insurance, disintermediation refers specifically to the potential impact of rising interest rates on policyholders' behaviour, which may lead them to relinquish policies. This can result in cash flow obligations exceeding returns on investment assets for insurance companies. Technology has also played a role in the discussion of disintermediation in the insurance industry, with traditional brokers facing competition from insurtech firms and direct-to-consumer solutions. However, some experts argue that the role of the broker is evolving rather than becoming obsolete, as customers seek a more direct interaction model.

Characteristics and Values of Disintermediation in Life Insurance

Disintermediation in life insurance: definition

Disintermediation is a financial term that refers to the process of removing intermediaries from transactions, resulting in direct interactions between two parties. In the context of life insurance, disintermediation refers to the idea of cutting out the middlemen, such as brokers or agents, and allowing individuals to purchase insurance directly from the insurance provider.

Traditionally, the process of buying life insurance involves intermediaries like brokers, who facilitate the transaction between the customer and the insurance company. However, with the advent of technology and the emergence of insurtech firms, there has been a growing trend towards disintermediation in the insurance industry. This means that customers can now bypass brokers and purchase insurance policies directly from insurance providers through online platforms and digital channels.

The primary goal of disintermediation is often to reduce costs and increase efficiency. By eliminating the intermediary, customers can avoid paying additional fees or commissions that are typically associated with the involvement of a broker. Additionally, disintermediation can streamline the process, making it faster and more convenient for customers to purchase insurance.

However, it is important to note that disintermediation in the insurance industry also presents certain challenges. Brokers and agents often play a crucial role in providing guidance, expertise, and personalised advice to customers. They help customers navigate the complex world of insurance, ensuring they find the most suitable policies for their needs. With disintermediation, customers may need to invest more time and effort into understanding insurance products and making informed decisions on their own.

Furthermore, disintermediation in life insurance can also impact the level of service and support provided to customers. Brokers and agents typically offer ongoing assistance throughout the duration of the policy, helping customers with claims, renewals, and any changes to their coverage. Without these intermediaries, customers may need to rely more on the insurance provider's customer service channels, which may vary in terms of responsiveness and quality.

In conclusion, disintermediation in life insurance refers to the removal of intermediaries, such as brokers, from the process of purchasing insurance. It enables customers to transact directly with insurance providers, potentially reducing costs and increasing speed and efficiency. However, it also presents challenges in terms of guidance, expertise, and the overall customer experience. As the insurance industry evolves, finding the right balance between disintermediation and the value provided by traditional intermediaries will be essential to meeting the diverse needs and preferences of customers.

Reasons for disintermediation

Disintermediation is a financial term that refers to the process of removing intermediaries from a transaction, supply chain, or decision-making process. In the context of life insurance, disintermediation occurs when policyholders choose to deal directly with the insurance provider instead of going through a broker or agent. Here are some reasons why disintermediation may occur in the life insurance industry:

• Cost Reduction: One of the primary reasons for disintermediation is to reduce costs. By cutting out the middleman, such as a broker or agent, policyholders can avoid additional fees or commissions, resulting in lower prices for the consumer. This cost reduction can be significant, especially when purchasing large or long-term policies.
• Convenience and Speed: Disintermediation can also increase the convenience and speed of transactions. With the advent of technology and online platforms, policyholders may prefer to manage their insurance policies directly with the provider, eliminating the need for scheduling appointments or relying on intermediaries' availability. This can lead to faster decision-making and policy issuance.
• Technological Advancements: The rise of technology and insurtech firms has played a significant role in disintermediation. Online platforms and mobile apps offered by insurance providers allow policyholders to access their policies, make changes, and file claims with ease. This direct access to information and services reduces the need for intermediaries.
• Customer Experience: In some cases, policyholders may prefer to have more control over their insurance journey and interact directly with the insurance provider. Disintermediation can improve the overall customer experience by providing a more streamlined and personalised process.
• Interest Rate Changes: Changes in interest rates can also lead to disintermediation. As mentioned in the example, rising interest rates may prompt policyholders to surrender their policies, especially if they can find better returns elsewhere. This can result in a higher turnover of policies and a shift towards direct interactions with insurance providers.
• Industry Competition: A highly competitive insurance market can also contribute to disintermediation. With the entry of new insurance providers, backed by private equities and asset management firms, policyholders may have more options to choose from. This increased competition may encourage providers to offer more direct and personalised services to attract and retain customers.

While disintermediation can have benefits, it is important to note that intermediaries, such as brokers and agents, also play a valuable role in providing expertise, guidance, and personalised services to policyholders. As Mark Purowitz from Deloitte Consulting LLP suggests, the industry is evolving towards a multi-channel, multi-touchpoint environment, where policyholders have the option to choose between self-directed and guided journeys, depending on their preferences and the complexity of their insurance needs.

Impact of disintermediation on the insurance industry

Disintermediation is a financial term that describes a transaction between two parties with no intermediaries. In the context of life insurance, disintermediation involves removing middlemen like brokers or financial institutions from the process of purchasing insurance. This can be achieved by allowing consumers to buy insurance directly from the insurer, cutting costs and speeding up delivery.

The impact of disintermediation on the insurance industry has been significant. With the rise of technology, traditional brokers are facing competition from insurtech firms and direct-to-consumer solutions. This has led to a shift in the industry's understanding of customer preferences, with policyholders wanting options along the spectrum of 'self-directed to guided' approaches. While some prefer to carry out the entire insurance process online, a significant portion of the market still transacts through intermediated mechanisms.

The hype around disintermediation in insurance revolves around two aspects: improving efficiency and effectiveness. Insurtech firms aim to provide a better customer experience by reducing friction in the insurance environment. However, they may not have the same capabilities as traditional insurance companies, relying on them to fulfil certain promises. For widescale broker disintermediation to occur, there needs to be a significant shift in customer behaviour, which doesn't seem imminent.

Instead, the industry is moving towards 'agent-enabled direct' transactions, where brokerages offer direct capabilities at various stages of the insurance journey. This allows customers to interact with brokers based on their needs, the complexity of the transaction, and their preference for digital or human interaction. Disintermediation in insurance can also impact equity value. If interest rates rise too quickly, policyholders may surrender their policies faster than expected, leading to cash flow obligations exceeding returns on investment assets. On the other hand, persistently low-interest rates can cause investment returns to decline, impacting the insurer's ability to service ongoing liabilities.

Overall, disintermediation has had a mixed impact on the insurance industry. While it has led to increased competition and improved customer experiences, it has also created challenges for traditional brokers and intermediaries. The industry is adapting by offering more direct options while still recognising the value of human interaction and guidance in complex transactions.

Disintermediation risk

Disintermediation is a financial term that describes a transaction between two parties with no intermediaries involved. In the financial industry, this could look like an investor buying stocks directly, instead of through a broker or financial institution. The purpose of disintermediation is usually to cut costs, increase delivery speed, or both.

The life insurance segment is currently facing the prospect of disintermediation risk due to rising interest rates. When interest rates rise, policyholders may relinquish policies, which can result in cash flow obligations that exceed returns on investment assets. This is especially true for maturing companies or those that focus on block acquisitions rather than organic growth.

In the insurance industry, traditional brokers are facing competition from insurtech firms and direct-to-consumer solutions. However, some experts believe that the role of the broker will not be completely replaced. Instead, technology can enable brokers to interact with customers in a more direct manner. This is known as "agent-enabled direct".

Disintermediation can also occur in other industries, such as retail, where consumers can now buy goods directly from the manufacturer through their websites, cutting out the traditional retail store. Another example is the travel industry, where consumers can now book flights and accommodations directly with providers, instead of going through a travel agent.

Overall, disintermediation can lower the cost of a transaction and increase speed, but it also requires additional resources to replace the services provided by intermediaries.

The future of insurance brokers

Disintermediation is a financial term that describes a transaction involving only two parties, with no intermediaries. In the context of life insurance, disintermediation could mean that policyholders may choose to relinquish their policies due to rising interest rates. This can create a situation where the potential gains for both parties are reduced.

Technological Advancements

Insurance brokers will need to embrace digital transformation and invest in technological upgrades. This includes establishing an integrated technology stack, standardizing and centralizing corporate services, and expanding automation and self-service options. By modernizing their technological underpinnings, brokers can improve operational efficiency, enhance data sharing and benchmarking, and better understand coverage needs, pricing trends, and portfolio performance.

Shifting Market Dynamics

The insurance market is witnessing a commoditization of the lower end, with the rise of "bare minimum" buyers who seek simple and cheap options through direct-to-consumer digital channels. This trend is driven by advancements like chatbots, predictive analytics, and the internet of things (IoT). As a result, brokers will likely focus more on serving higher-value customers with complex coverage needs, acting as trusted advisors and risk managers rather than just sales representatives.

Evolving Consumer Expectations

Consumers today demand a seamless experience across digital and physical sales channels. They expect convenience and ease of purchasing straightforward products, as well as real-time interactions with agents for more complex insurance offerings. The COVID-19 pandemic has also accelerated the adoption of digital platforms for routine consultations and account maintenance.

Disintermediation and Changing Roles

With advancements in artificial intelligence (AI) and automation, some tasks traditionally performed by agents are being automated. This includes rate quoting, application processing, risk evaluation, and claims management. As a result, brokers will need to adapt by offering more sophisticated advice and risk management solutions, particularly in areas like climate and sustainability risks.

Strategic Partnerships and Innovation

To remain competitive, brokers will need to establish strategic partnerships with managing general administrators (MGAs), managing general underwriters (MGUs), reinsurers, and third-party service and data providers. By leveraging these partnerships, brokers can develop innovative solutions and expand their offerings in captive services, risk management, and monitoring.

In summary, the future of insurance brokers hinges on their ability to adapt to technological advancements, shifting market dynamics, evolving consumer expectations, and the impact of disintermediation. Brokers who successfully navigate these changes, act as trusted advisors, and develop strategic partnerships will be well-positioned to remain relevant and successful in the years to come.

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