The business environment

An insurer’s products and profitability are affected by the environment in which it operates. Regulation, government incentives, economic conditions, publicity, technology and competition all influence demand and the way business is written. Distribution, outsourcing and access to capital also affect the insurer’s costs and risks.

Competition and other new business considerations

The factors that may impact an insurer writing new business in a particular jurisdiction are described in the following sections.

Regulation and government influence

Local regulation, which can significantly impact the business written by an insurer, can vary in its extent and form depending on the jurisdiction.

Examples of areas where regulation can be applied include the following:

• Consumer protection.

• The extent to which a market is open to external competition.

• Potential movement from public to private sector.

• How advice may be provided and paid for.

• Global mis-selling issues.

• Charge caps.

• Gender pricing.

• Product distribution.

• Product approval.

• Regulatory capital requirements.

Mis-selling

Consumer protection is a key focus for regulators around the world and, in particular, protecting consumers from poor sales tactics (e.g. inappropriate advice being given to consumers or products being sold to consumers that were not appropriate for their needs) by insurers in their jurisdiction.

Examples of mis-selling include the following:

• In the UK, mis-selling of personal pensions whereby many policyholders were advised to switch out of more valuable occupational pensions schemes (wherein the individual’s employer would also contribute) to personal pensions (where the employer would not contribute).

• In India, evidence of advisers selling unsuitable life insurance products which pay high commissions.

Mis-selling could also arise from advertisements or marketing material that don’t adequately highlight the financial risks of investing in a product. Examples of this include the following:

• Mortgage endowments, where policyholders were not always made fully aware that the proceeds of the contract may not be sufficient to repay the related mortgage.

• High income bonds, where policyholders were not always made sufficiently aware that the benefit paid may be very low if the underlying index performs poorly.

Poor practice by an insurer may lead to fines for the insurer and the regulator may also require the insurer to pay compensation to affected policyholders. The insurer may also face substantial operational costs in rectifying such issues.

Poor practice by insurers can also lead regulators to proactively change regulation to provide greater protection to consumers. For example:

• UK: Concerns were raised about distribution methods for investment products to retail customers in the UK, and the quality of advice given to consumers, leading to poor customer outcomes.

  These concerns led to a new set of regulations (introduced on 1 Jan 2013) which significantly impacted the following:

  • The life insurance investment products sold.

  • The requirement for financial advisers to be established (including a required level of qualification) and remunerated appropriately.

  The aims of the above changes were the following:

  • To improve levels of professionalism amongst advisers.

  • To provide greater clarity to consumers.

  • To change remuneration arrangements of advisers to better align their interests with consumers’.

• Hong Kong: The insurance regulator in Hong Kong issued new guidelines regarding investment-linked policies following concerns about the realism of some projections given to clients. As a consequence, the regulator required that new products had to be designed and presented in a way that was fair to customers. The requirement was also introduced for advisers to ensure that potential customers understood the risks involved and the realism of any projections provided.

• Europe: New standards were introduced in 2018 to improve the quality and transparency of information provided by insurers to consumers throughout the distribution process.

Global influence

An increasing trend of regulators’ decisions in one jurisdiction influencing regulators in another jurisdiction is being seen. For example, development of the Solvency II regime in the EU to ensure adequate capitalisation of insurers in their jurisdiction has led to development of similar regimes in Latin America, Asia, and Africa.

Technology

A considerable challenge for regulators is keeping up with the use of technology (e.g. the use of data analytics and cyber security) in the insurance sector.

Political changes

Insurers may also be impacted by political changes (e.g. changes in government policy or a change in government signalling a sharp shift in the economic or regulatory direction of the country). In some cases, political change could have a positive impact on insurers (e.g. higher new business volumes due to higher economic growth driven by changes in taxation or infrastructure investment). In other cases, political changes could have a negative impact on insurers (e.g. lower new business volumes and worse persistency due to lower economic growth arising from increased political uncertainty).

Political changes in one country may also impact economic growth in another (e.g. the introduction of tariffs by one country on another country). A particular challenge faced by insurers is the risk of regulatory change encompassing various aspects of an insurers’ operations (e.g. capital rules, reporting standards, consumer protection rules, etc) all at the same time.

Policyholder incentives

A consumer’s inclination to purchase life insurance products depends on their incentives to do so.

Governments will often offer incentives on life insurance products to meet specific aims. For example, the Chinese government offers a number of incentives to boost insurance coverage with the aim of increasing demand for these products.

Government incentives to purchase life insurance products are often in the form of tax advantages for the policyholder, for example:

• Tax relief on premiums paid (by the policyholder and/or a third-party such as an employer) for the products.

• A tax free environment for investment income or capital gains earned during the lifetime of the policy.

• Tax advantaged withdrawals of gains from insurance products.

Governments may also use incentives to make insurance products more or less attractive relative to other equivalent financial services products (e.g. how the tax environment compares for life insurers relative to banks, building societies, and investment management companies). To ensure that policy meets their aims, governments may only allow any incentives (e.g. tax advantages) to apply to products which meet some minimum characteristics. For example, if the government’s aim is to increase adoption of life insurance protection, then they may wish to ensure that a material level of cover is provided by products which qualify for tax-advantaged status.

Economic conditions

Economic conditions have a significant impact on the attractiveness of insurance products. The health of the economy and consumers’ disposable incomes are key drivers of demand for life insurance – countries with healthy economic growth and consumers with rising disposable incomes will often see the greatest demand for life insurance products. Similarly, the sales of products where benefits are linked to the performance of a stock market are likely to be heavily impacted by the performance of that market. For example: Periods of strong stock market growth could potentially lead to significant sales of unit-linked bonds.

Periods of high stock market volatility could increase demand for products with investment guarantees (though high market volatility will also increase the cost of these guarantees). Due to greater integration of economies around the world, economic developments in one jurisdiction can increasingly impact economic conditions in another jurisdiction. In particular, movements in stock markets or interest rates in one jurisdiction can often impact stock markets or interest rates in another jurisdiction. Unpredictable macro shocks pose a particular risk to insurers. For example:

The market crash in 2000 resulted in a fall in demand for investment-linked life insurance products (including pension products). As the UK stock market recovered in the period up to 2007 an increase in sales for such products was observed. The credit crunch in 2008 led to a fall in sales of investment and pension products.

Publicity

Public perception and understanding of life insurance products are important drivers of demand for those products. In developed economies, public understanding of life insurance products is quite often (though not always) quite good. In developing economies, public understanding of such products may be limited. This may require improved public awareness to ensure that the private sector’s own incentives (e.g. high business volumes and profits) do not compromise the quality of the financial decisions made by individuals.

The influence of the media has increased over time. Adverse publicity in the media may damage not only individual insurers, but also the public’s perception of the life insurance industry in general. In some jurisdictions, life insurers have faced severe criticism for a range of issues (e.g. for a lack of transparency in the charging structures for conventional with-profits policies in the UK).

Technology

Changes in technology are impacting the insurance industry in ways such as the products that are sold, how business is distributed, underwriting, and back office operations of businesses.

Benefits for life insurers

Many life insurers are increasingly using technology to improve their efficiency and cut costs.

Key areas in which technology may benefit insurers include the following:

• New business acquisition. Artificial intelligence can be used to qualify leads (e.g. ensuring that the prospect meets the required criteria set out by the insurer) and identify prospects who may wish to purchase products from the insurer. Some insurers are increasingly targeting customers with simple on-demand products online. Mobile phone technology may be used to streamline acquisition of microinsurance products and reduce the paperwork involved to make selling products to lower income consumers more profitable.

• Underwriting. Some insurers are now considering alternative data sources for use in the underwriting process. For example, insurers may use data from third parties to assess health risks (e.g. data collected through supermarket loyalty cards to assess drinking and eating habits). Additionally, Artificial intelligence has been introduced by some insurers in recent years to help streamline underwriting processes and price products more accurately through better assessment of risk factors and predictions from large data sets.

• Claims. Though paper forms may still be used, technology may be used to read handwriting and thus increase the efficiency of claims handling processes (with automated checks and humans validating the results of any such data extraction).

• Data collection. Insurers may be able to collect data on the physical activity of policyholders through existing monitors on mobile devices or wearable technology.

The increased use of technology within the insurance industry may also be of benefit to consumers. For example, information on insurers, their products, and the products held by an individual may be accessed more easily through the internet. Additional sources of information have also been made available through technology such as website self-service, email, live chat, text messaging, and social media. Examples of website self-service facilities include the ability to log into a pension providers website and obtain benefit projections, current and past policy values, and unit price history. Policyholders may also have the ability to amend their investment directions, premiums, retirement date, and personal details online.

Many consumers have had access to online valuations for a while. Insurers in many markets are now looking to add additional interactive tools for customers, such as the ability to make product amendments online, the ability to switch between funds, and the ability to apply for and monitor life insurance products through smartphones and tablets. There is evidence of increasing demands for access to information from consumers. Technology has also been developed to enable financial advisers to view all of a client’s policies from different providers in one place to make it easier for them to assess the overall picture.

Any improvement in policyholder experience should also benefit the insurer through improved retention levels and increased marketability of their products. Price comparison websites are also increasingly enabling consumers to compare the products of different insurers. The level of success of these websites varies by country. They are most popular in the UK, but are also used in parts of Europe, Asia, and Latin America.

Through allowing an insurer to access data on physical activity collected by wearable technology, policyholders may be able to benefit from reduced premiums. This may increase consumer engagement and possibly also improve the health of the policyholders of the insurer’s products. However, it is not clear whether such devices improve policyholders’ health, or simply attract policyholders who are already healthy. It has not always been clear how scientific the data and pricing models that underlie these discount schemes have been.

Data science

Opportunities

Technological advancements have given rise to an exponential increase in the volumes of data that insurers have access to. Due to new ways of recording big data, it can be stored and analysed increasingly quickly. This potentially gives insurers the ability to draw useful conclusions from larger quantities of data (from various sources) much more quickly than was previously possible. Data science has significant potential to promote innovation in the insurance industry by making it possible to monitor risks in much more detail and on a continuous basis.

Data science offers the potential to benefit both insurers and policyholders. It gives rise to increased scope for product innovation, including in the way that products are offered and priced, and in the way that claims are managed. However, consumer expectations of the insurance industry are also likely to increase as consumers begin to understand the benefits offered by technology.

Potential concerns

Data science raises questions concerning ethics and the public interest. As insurers are able to see risks in finer detail, the level of cross-subsidy between policyholders could decline. Similarly, policyholders may find insurance harder or more expensive to obtain as risk classification improves.

Data access, consent to use it, and data security are also key concerns. With personal data being gathered in increasing volumes, there is also the risk that insurers could be seen as overly intrusive. The costs associated with a cyber-attack, such as lost or corrupted data, reputational damage, and business interruption, are also increasingly of concern to insurers. The cost to insurers of building up their cyber protection capabilities is also likely to be significant (particularly for insurers with large legacy books of business and legacy systems).

Target market

The demand for life insurance is often driven by environmental and demographic factors such as the following:

• A growing middle class in some jurisdictions.

• Increased longevity. This has been seen in many countries. There have, however, been some indications of reversals in this trend in some countries.

• The level of interest rates.

• Reductions in the level of State support.

• Changing population mix. For example, many developed countries have seen a general increase in the proportion of pensioners to workers and this trend is projected to continue (though this experience is not necessarily reflected in less developed countries).

• Low levels of existing funding (the ‘savings gap’). The ‘savings gap’ refers to the difference between the amount an individual is projected to accumulate for retirement and the amount they would actually need to accumulate to achieve their desired lifestyle. In some cases, the savings gap can be attributed to lack of funds. However, there is also an element of individuals not knowing how much saving is needed to provide a decent income in retirement.

  Savings gaps are projected to grow significantly over the coming decades in most developed economies. In the UK, for example, this is due to pressures on government spending (and thus the possibility of reduced State support), the rising cost of long-term care, and the decline of the defined benefit pension scheme.

• The existence of a viable base of consumers for insurance products. Such a consumer base often does not exist in developing economies.

The various needs of consumers pose an opportunity for insurers to design products to meet these needs. However, this must be done with the needs of the consumer in-mind, ensuring the products are easy to understand and are only sold where they meet consumers’ requirements. For competitive reasons, such products also need to provide good value-for-money. Insurers are increasingly segmenting their customer base with the aim of putting more resources into attracting and retaining the most profitable policyholders. Whilst products may still be provided to lower-value customers, this may be done in the most cost-effective manner for the insurer (e.g. by only servicing such policies online to avoid high staff costs).

Competition

The level of competition in a country can significantly impact insurers’ ability to attract new business. Various factors will determine the attractiveness of insurers’ products, including how competitive they are on price and features. In many developed markets, there will often be a number of large existing players, which will mean that competition is often strong in these markets as these players will all be competing to attract the same customers.

In developed markets, insurers may face competition not only from other insurers, but also from other financial services companies. A customer looking to invest a lump sum or save regularly may have alternatives offered by banks, building societies, fund management companies and investment platforms, such as wraps or fund supermarkets.

These alternatives include deposit accounts, structured products, unit trusts and open-ended investment companies. Structured products are non-standardised products whose returns are linked in some way to the performance of an index.

Competition may even extend beyond traditional financial services companies. For example, supermarkets may offer products which take advantage of customers’ brand loyalty. In less developed countries, there may be fewer large players and therefore less competition for customers.

The level of competition in a jurisdiction may also be influenced by local legislation. In some countries, there may be limitations on overseas insurers entering the domestic market. For example, legislation may require insurers based in an outside market to partner with a local insurer if it wishes to sell business in a particular jurisdiction. Such partnering may be beneficial to the overseas insurer in some cases (e.g. when selling microinsurance in a developing country where distribution is one of the most difficult aspects of contract design and trust of overseas insurers is limited amongst the target market).

Countries may also liberalise rules which previously limited foreign insurers’ access to their markets.

Access and information on all of the products available to consumers has improved over time. This is partly due to increased use of the internet, but also due to non-insurance companies effectively targeting customers and distributors.

Industry bodies

In certain jurisdictions, firms may have joined together to form industry bodies. These bodies can help the individual firms to ensure best practice across the industry, greater lobbying power with governments, and increased public confidence.

Examples of industry bodies include the following:

• In the UK, the ABI (Association of British Insurers) produces a wide range of codes of practice, statements of best practice (ranging in classification from voluntary to compulsory for ABI members). These codes, statements, and guidance primarily cover aspects relating to product design and distribution. The Equity Release Council is another industry body in the UK, aiming to give confidence in the equity release products offered by its members.

• In Australia, the Financial Services Council promotes best practice for the financial services industry by setting mandatory standards for its members and providing guidance to assist in operational efficiency.

Climate change

Whilst the scientific consensus is that climate change is in progress, the scale and timing of its impacts are uncertain. These impacts could potentially have wide-ranging implications for health and mortality, physical assets, and financial markets. The future actions of society in response to climate change, and the effectiveness of these actions in mitigating its impacts, are also uncertain. The overall understanding of climate change is changing rapidly, including in modelling, regulating, and imposing best practice governance for financial institutions.

Climate change could have significant implications for life insurers. It may impact many areas of actuarial work, including the following:

• Product design.

• Pricing.

• Reserving.

• Capital management.

• Risk management.

• Investment.

The impacts of climate change on insurers are driven by potential changes in the following:

• Mortality and morbidity rates (e.g. due to implications for food and water availability and the spread of diseases).

• Asset values (e.g. poor performance of equity holdings in companies that have a reliance on fossil fuels).

• Economic growth rates, which may impact demand and pricing for insurance products.

• The level of uncertainty about future trends and outcomes.

• Regulation.

Various major actuarial associations have produced practical guidance for members on the potential considerations relating to climate change. For example, the Institute and Faculty of Actuaries’ Risk Alert on Climate-Related Risks (2017) states the following:

“Actuaries should ensure that they understand, and are clear in communicating, the extent to which they have taken account of climate-related risks in any relevant decisions, calculations, or advice.”

Pandemics

Pandemics pose a huge threat to global health. The COVID-19 pandemic, for example, had a material impact on the health of the population in many countries and more widely on the global economy. Understanding a pandemic’s longer-term impacts, and the reasons for differences in experience between countries and population sub-groups, can take time. Many populations experienced excess mortality as a result of the COVID-19 pandemic, with the additional impact on morbidity likely to represent a long-tail event.

A further complication posed by potential future pandemics is the uncertainty surrounding their likely timing and severity. The risk of future infectious diseases has increased due to human impact on the environment (e.g. increased demand for meat due to a rising global population and deforestation have both put humans and animals in closer contact).

Pandemics have the potential to materially impact all aspects of a life insurer’s business.

In addition to their link with mortality and morbidity rates, there could also be significant impacts on the following:

• Economic growth and thus related factors such as asset values and demand for insurance products.

• Operational interruption, including staff sickness.

The potential impacts of pandemics on life insurance companies is likely to be an important consideration for insurance regulators and, in particular, insurers’ operational and financial resilience to such events. For example, insurers may be required to conduct stress tests to demonstrate that they have sufficient capital to withstand such events occurring in the future. Regulators may also wish to see that insurers have adequate risk management and governance frameworks in-place to cope with a future pandemic. A pandemic may also increase public awareness of the need for life insurance.

Mental health

Shifting attitudes towards mental health in recent years have implications for life insurers. It is estimated that, each year, one in four adults experiences a mental health problem (ranging from common problems, such as anxiety and depression, to rarer problems, such as schizophrenia and bipolar disorder). Understanding of the causes and treatment of mental health conditions has developed radically over the past century.

People with mental health conditions can experience barriers in their everyday life, and these can be exacerbated when dealing with complex products such as insurance policies. Life insurers therefore need to consider carefully how they engage with customers (and employees) about their mental health in order to remove barriers and meet their needs.

Mental health conditions can also be directly relevant to underwriting. Insurers need to ensure that all underwriting decisions are based on the best information available. Mental health is also associated with other issues, such as financial stress and comorbidities (where a person suffers from more than one condition at a time, with or without any causal relationship between them). Insurers should also seek to understand any relationship between an individual’s mental health conditions and other factors that are relevant to the individual's morbidity or mortality risk level.

Life insurers should also seek to be as transparent as possible about underwriting decisions and the pricing aspects of mental health.

Distribution of products

Propensity of consumers to purchase products

Life insurance is often thought of as a product that is sold, rather than bought. This is because, though people know that they should take out life insurance policies to protect their dependents or should save regularly to provide an income in retirement, many are reluctant to do this.

Reasons for such reluctance include the following:

• A desire to live for now, rather than to save for the future.

• A feeling that the State will always provide.

• Lack of money.

• Lack of incentives from the government.

• Fear that personal provision may be wasted if state provision is means-tested.

• Lack of trust in the savings/insurance industry.

It may be particularly challenging to sell life insurance products in developing countries, since a significant proportion of the population may have insufficient disposable incomes to purchase them.

Consumers’ inclinations to buy insurance products will be increased if they have an incentive to do so. Such incentives may include the following:

• Tax-related, such as relief on premiums or contributions, or tax-free benefits.

• To protect an inheritance.

• Loan-related, such as to increase the chances of obtaining a loan by taking out life insurance to repay the outstanding loan in the event of the individual’s death during the term of the loan.

• Employer-related, such as matching employer contributions into a pension scheme.

Better education on the need to save may also improve individuals’ inclination to save.

Nonetheless, there are many individuals who will make provision at their own initiative. These are more likely to be those who can afford to do so without making too many significant sacrifices to their current lifestyle.

In many jurisdictions, sales of insurance products have historically been made through the following channels:

• Financial advisers.

• Agents (single or tied).

• Direct sales (own salesforce or direct marketing).

Independent financial advisers

Independent financial advisers are firms or organisations, independent of any life insurance company, which recommend to their clients the best product in the marketplace to suit their needs. This means that they are required to invest significant time in both researching the product offerings of a vast number of product providers and staying up-to-date with new product launches.

The requirements to be a financial adviser, and the rules applying to the financial adviser, will depend on the jurisdiction. For example:

• In the UK, financial advisers need to be qualified and there are strict rules on the type of advice they may provide and the ways in which they may be compensated for that advice. They may operate from offices on a high street, or sometimes as part of a large financial business such as a bank or building society (which are not tied to any insurer).

  Many smaller advisers have become members of ‘network’ organisations which support advisers with the following:

  • Technical help.

  • Product comparisons.

  • Technology.

  • Compliance.

  • Administration.

  • Legal matters.

  • Market intelligence.

• In Indonesia, the insurance regulator requires face-to-face discussions between the insurer or intermediary and the insured for certain types of policy.

Tied agents and appointed representatives

Tied agents sell the products of one insurer only. In the UK, an appointed representative is a firm that carries on agreed regulated activities under the responsibility of an authorised principal. Appointed representative status is not simply another name for selling only one insurer’s products. FCA guidance. They are often employees of banks or building societies. In some cases, they may also be part of professional practices such as a firm of solicitors or accountants.

Multi-tied advisers

In some jurisdictions, there is a category of adviser, known as ‘multi-tied advisers’, who can sell products from a limited range of insurers. Some large advisery firms may choose to operate different types of adviser in parallel (e.g. financial advisers, multi-tied agents, and appointed representatives) to enable them to target different customer segments.

Direct salesforce

A direct salesforce operates in a similar way to tied agents, but its members are employed by the insurer themselves, rather than by a third-party.

In some developed countries, salesforces have been closed down due to the cost of recruitment, training, and maintenance. These costs have increased partly due to stringent compliance regimes. The cost of compensation payments for allegations of mis-selling have also caused insurers to incur costs on account of their direct salesforces.

Introducers

Introducers are firms who introduce customers to representatives of an insurance company. Introducers are often banks or building societies, but the insurance sales agent will be employed directly by the insurer.

Direct marketing

Direct marketing may take one of the following forms:

• ‘Off the page’ newspaper advertisements, where the applicant completes a form in a newspaper advert and sends it to the insurer. This form could either be a simple application form or a request for the insurer to send further information.

• Television advertising. This may be general brand advertising or advertising where the applicant is invited to ‘phone in’. The latter has been used for both protection and savings products.

• Customer mailing (also known as ‘mailshots’), where the customers of a selected third-party organisation (e.g. a bank or automobile association) are mailed details of a particular product and are invited to complete and return an enclosed application form. No other, unrelated, material would be sent with the mailing. This is known as ‘affinity marketing’, where an affinity group is identified as offering potential for generating new business for the insurer. Unless provided through other distribution channels used by the insurer (e.g. a banking subsidiary of the insurer), the insurer is likely to be required to pay for the list of suitable customers.

  The demographic profile of policyholders buying through a mailshot will vary significantly depending on the nature of the mailing list and target market. Mailshots may also be sent to an insurer’s existing customers, especially those with savings policies that are about to mature.

• Statement inserts, whereby product information and an application form are sent with a bank statement. Customers receiving statement inserts are not specifically selected, so the response rate for statement inserts is expected to be considerably less than for a mailing. Such inserts may also be sent inside a magazine whose readers are of the insurer’s target demographic (e.g. over the age of 50).

• Internet sales. In addition to selling policies through the internet, insurers may also provide information and facilities such as fund switching to existing savings product customers. In a similar way to mailshots, companies may obtain lists of email addresses and send out bulk mailings to them. These addresses may belong to the company’s own existing customers or those of some other affinity group. If further information has been collected about the owners of the email addresses, then emails could be tailored to suit the individuals’ needs. As with other forms of direct marketing, products sold through the internet will generally need to be kept simple enough to be understood with relatively little information or advice.

Sales via technology

It is increasingly common, in many parts of the world, for consumers to make use of many different sources of information and media available online to research, seek-advice, and ultimately purchase insurance. We may see greater use of e-commerce for life insurance sales in the future. However, some consumers may not feel comfortable doing independent research and may instead prefer to take specialist advice, particularly for more complex products. In some less developed countries, however, access to the internet may be more limited, though there is a trend of increased internet access in such countries.

The growth of insurance technology start-ups provides another route to changing distribution methods. Insurance technology, often called insurtech, refers to the use of technology to improve the way in which the insurance industry operates, for example through more efficient distribution of products or more sophisticated classification of insured risks. These companies may partner with existing insurers to upgrade aspects of the distribution process. Such aspects of the distribution process may include improving the efficiency of claims handling and policy management. For example, a provider of term insurance may introduce computers to make quick automated underwriting decisions (up to a maximum sum assured) through an online questionnaire or other data sources.

The digital market also enables insurers to bring new technology and products to market more quickly, thus better meeting consumer needs. However, advances in technology are also changing consumers’ expectations of insurance.

Insurers are also developing third-party distribution models to connect with individuals who are neither financially connected to the banking system in their country, nor digitally connected. For example, significant mobile phone coverage in many developing countries means that insurers can use digital technology to reach a broader market at a more affordable cost. Mobile phone technology may be used for microinsurance policies for underwriting, premium collection, and claims processing.

Comparison of methods

Depending on the target market reached by a given distribution channel, the following aspects of an insurance product may vary:

• Product design – the greater the financial sophistication of the target market, the greater can be the complexity of the products sold.

• Product pricing – this will need to reflect competitive pressures and demographic assumptions which may vary by distribution channel.

• Mortality and morbidity experience – these may differ due to the target market reached by different distribution channels and the levels of underwriting associated with them.

• Withdrawal rates – These will depend on the level of financial sophistication of the target market and who initiated the sale.

Relative importance

Some companies may focus their sales efforts on one particular distribution method, but not necessarily to the exclusion of all others. Other companies may make significant use of multiple distribution channels to target different sectors of the market (e.g. using financial advisers specifically to attract wealthier clients).

Sales volumes by distribution channel vary between different countries:

• In the UK, around 70% of life and critical illness insurance sales were attributed to financial advisers and tied agents in 2019.

• Independent financial advisers have historically been an important distribution channel in the USA.

• For many other parts of Europe, bancassurance is the main life insurance distribution channel.

• In China and other Asian countries, bancassurance has also been a major distribution channel for life insurance products, though in recent years mobile technologies and e-commerce have become more popular means of buying insurance.

Online purchasing of life insurance products is likely to have become more popular since the COVID-19 pandemic due to the restrictions on personal contact during this time.

Advice

The advice given to a client before a product is purchased can be broken down into the following components:

• Helping the client understand their needs.

• Matching those needs with a suitable product.

• Recommending a particular provider for that product.

• Motivating the client to act on the recommendation.

A given distribution channel may not be involved in all four stages of this advice (e.g. the client may already have a clear picture of their needs, and a tied agent or direct salesperson will not be able to participate in advising of providers).

For sales made through a financial adviser, the financial adviser is normally responsible for any advice given to the policyholder. This differs from other distribution channels, where the insurer is responsible for any advice given. Nonetheless, insurers may provide help and support to financial advisers faced with accusations of mis-selling to avoid the loss of future new business through either a loss of goodwill with the adviser or the bankruptcy of the adviser.

Remuneration of sales channels

Selling a product is arguably the hardest job for any organisation and salespeople need to be motivated and managed effectively to persevere with their selling efforts. Competitive pressures mean that an insurer may struggle to sell even well-designed affordable products.

Salespeople may receive commissions to encourage new business. These may be structured in the following ways:

• All commission up front.

• Large commission up front, followed by a lower renewal commission.

• Larger initial commissions for a period, followed by a lower renewal commission.

• Level commission throughout the policy term.

• Level commission limited to a fixed term (which is shorter than the policy term).

• Fund based commissions (i.e. commissions expressed as a percentage of the fund).

The amount of commission could depend not only on a policy's size and term, but also on the quality of the adviser (as measured, for example, by the volume or persistency of the business they generate). A clawback provision may also be included in commission structures whereby some amount of commission paid is returned to the insurer if a policy lapses within a specified term.

A large proportion of appointed representatives and people in direct salesforces are paid a mixture of both basic salaries and commissions (in the form of bonuses). Paying only commissions would incentivise sales, but may also lead to high-pressure sales tactics and sales of inappropriate products.

The risk to the insurer, however, is that the presence of a basic salary will make salespeople too comfortable to be motivated to generate sufficient volumes of new business. In practice, however, it is found that many people can be managed satisfactorily within large companies to produce the required new business volumes whilst still paid a basic salary, particularly when other parts of the organisation are incentivised to introduce customers to salespeople.

The regulatory regime under which independent financial advisers operate will also have an impact on the way in which they are rewarded. Some independent financial advisers may operate on the basis of receiving only commissions from the insurers whose products they have sold, whereas others may charge their clients a fee. Some financial advisers who receive a high commission for selling a product may choose to refund some of that commission to the client. Alternatively, in some jurisdictions, providers allow financial advisers to forego some of their commission in return for the policyholder receiving enhanced product terms.

The financial services regulators in some countries may have been concerned that the use of commission could result in financial advisers recommending products based on the level of commission they would receive for selling them rather than on which product is most suitable for the client. For this reason, some regulators have looked to ban commission in their markets and may prefer financial advisers to work on a fee basis.

Outsourcing

In many jurisdictions, it is possible for a life insurer to outsource particular functions to a third party.

Such functions might include the following:

• Investment management.

• Policy administration.

• Actuarial services.

It may also be possible for smaller new life insurers to use a large established insurer's existing administrative infrastructure. This is known as reverse outsourcing.

Advantages to an insurer of using outsourcing may include the following:

• Allowing the insurer to focus on their core business.

• Experiencing lower costs in the long term.

• It can be an attractive option where an insurer has difficulty attracting appropriate specialist skills or does not have sufficient scale to perform the function efficiently.

• For a closed fund, outsourcing can be a way of maintaining the levels of unit cost during run-off in situations where, in the absence of outsourcing, the level of fixed expenses would become more onerous as the number of in force policies reduces.

• It can give the insurer more certainty surrounding the future cost of the outsourced function.

• Depending on the jurisdiction, the cost can be much lower when admin is carried out overseas due to lower salary costs.

Disadvantages of outsourcing may include the following:

• Any risks associated with the performance of the outsourced function remain with the insurer (e.g. the risk of poor customer outcomes if policy admin is outsourced) and the control the company has over the performance of the function may be more limited than if it were carried out in-house.

• The savings expected from outsourcing may not materialise.

In some jurisdictions, unit-linked life contracts now offer an open architecture whereby investment funds of a number of specialist investment houses can be chosen in addition to the insurer's own investment funds. This is another form of outsourcing of investment functions (which is slightly different to the insurer outsourcing the investment of its own funds, as it increases the range of choice offered to policyholders and brings an investment manager's brand into the product mix).

Outsourcing in large financial services groups can often be to other companies in the group. Some functions, particularly IT, may also be outsourced to a company outside the core group business.

Corporate finance

Raising capital

Non-traditional sources of finance have been used to fund the purchase of life insurance companies. Examples include private equity (leading to de-listing of the insurer from the stock exchange) and innovative debt instruments.

Insurers have also raised capital through securitisation (of the future profits expected from a block of in force business), financial reinsurance, contingent loans, and subordinated debt. The effectiveness of these methods in improving the regulatory balance sheet depends on the applicable capital rules.

Mergers and acquisitions

The merger and acquisition process will often involve an auction run by investment banks to facilitate the sale of a company.

The seller and potential buyers will normally be advised by external investment bankers, actuaries, accountants, and lawyers.

The drivers in a local market will determine the attractiveness of mergers and acquisitions. Where organic growth potential is limited, an insurer may consider mergers and acquisitions (or a tie-in) with other insurers to build expertise and scale.

For example, the UK life insurance market experienced significant consolidation due to the following:

• Increases in the fixed costs associated with regulation.

• A need to invest in IT systems.

• More focus on efficiency and economies of scale.

Merger and acquisition activity is also heavily influenced by regulation.

Closed funds

When a life insurer decides to stop writing business within one or more of its ring-fenced funds, that fund becomes closed.

For example, many UK with-profits funds are now closed. Closed funds are often created through the transfer of business from one insurer to another.

Some jurisdictions have seen an increase in life insurance consolidation specialists that acquire closed funds of business from other life insurance companies. These consolidation specialists will look to efficiently run off these closed funds in a profitable way (e.g. through economies of scale, improved admin systems, better persistency, and well managed investment strategies). There are risks for the consolidation specialists with respect to integrating closed funds into their own business. The companies that dispose of their legacy closed books of business can potentially release capital from these books that could then be used more productively.