Giving New Life to Life Insurance

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Life insurance companies are under pressure. Their traditional business model is stagnating. Since 2014, premiums for U.S. life insurers have fallen at an average annual rate of 4%, the industry's return on equity has been flat, and persistently low interest rates continue to depress returns.


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Financial Services

Insurers have been slow to adjust to these new realities. Despite their efforts to trim expenses, many are still suffering from bloated costs. Agent commissions and distribution costs, which account for about 60% of a typical insurer's overall operating costs, have ratcheted up at an average rate of 5% since 2010. The productivity of agents, who handle more than 90% of all policy sales, has slumped.

To make matters worse, life insurers aren't pleasing their customers. The average Net Promoter Score® for U.S. life insurers is 4.5%, according to Customer Behavior and Loyalty in Insurance: Global Edition 2017, Bain & Company's survey of insurance customers in 20 countries.

One way insurers are trying to address these problems is by expanding their use of digital channels and data analytics. But they are late to the party. Life insurers are saddled with cumbersome and costly processes and legacy systems, and they have long underinvested in IT. In 2016, insurers spent 3.2% of their annual revenue on IT, less than half the 6.8% spent by banks.

Leading insurers have begun to realize that digital is only a piece of the solution. To meet the challenges of the marketplace they need nothing less than a total transformation of the way they do business.

Life insurance is rooted in actuarial science. All insurers have to calculate and manage risk; that's an essential part of what they do. But this risk-containment ethos can permeate the entire company, resulting in slow-moving, overly cautious and internally focused organizations. Insurance executives surveyed by Bain give their companies relatively low grades for creating and sustaining an environment that sets high expectations.

Many companies begin the transformation journey by laying out a bold vision, often setting a goal to cut costs by as much as 25% within three years. They use those savings to invest in technologies and talent that will enhance the customer experience, lift productivity and improve profit margins. They take a hard look at customer transactions that require multiple handoffs from department to department, including some that may still feature handwritten and printed forms that are transported from place to place in manila folders.

One leading life insurer that set out to transform itself started by candidly assessing its challenges: slowing top-line growth, stagnant productivity and a major technology deficit.

The company laid down a marker: It aimed to increase earnings by about 40% in five years. To reach that objective, it would have to cut operating costs by 20%. Achieving these ambitious goals would require something more than business as usual, something more radical and long-lasting than the incremental approaches that emanated from the standard annual budgeting process.

The company shifted from a model that was organized around functions, such as underwriting, marketing and sales, to a structure based on business units that focused on major customer segments. It moved the IT development staff from the corporate level into the business units—fostering much closer collaboration on technology.

The company conducted a broad review of its talent pool and raised productivity expectations. By the end of the process, close to 40% of the positions in the company were filled with new talent—both internally and externally sourced.

The company attacked its marketing and distribution system, which over the years had become complex and inefficient, with overlapping sales organizations supporting multiple brands and channels.

The company discovered it wasn't spending wisely on its agents. It had invested large sums in recruiting, training and supporting agents, including flying them to sales conferences in exotic locales. But it turns out that what the agents wanted more than regular visits from sales managers and trips to Hawaii were tools that would help them become more productive in a digital world.

By consolidating and scaling back on sales management expenditures, the company cut the gross operating costs in distribution by 35%. It invested a significant portion of these savings in an upgraded customer relationship management system and other digital tools.

The strategic business units, focused on customer segments, are now able to more quickly develop and launch new products. For example, the company recently introduced an innovative savings program geared to millennials.

The company has also seen a change in its culture. Decisions are made faster thanks to new ways of working that reduce spin and confusion. While there are many items still on the agenda, the company has shown that life insurers facing significant external and internal challenges can transform themselves into efficient, performance-driven enterprises resolutely focused on improving the customer experience.

Antonio Rodrigues is a partner with the Financial Services practice in Bain & Company's Toronto office. Henrik Naujoks leads Bain's Financial Services practice in Europe, the Middle East and Asia, and is based in Zurich.

Net Promoter®, Net Promoter System®, Net Promoter Score® and NPS® are registered trademarks of Bain & Company, Inc., Fred Reichheld and Satmetrix Systems, Inc.