The Ernst & Young (E&Y) consulting firm says that risks due to low interest rates and poor equity market returns remain major challenges for Canadian life insurance companies. In a recently-released report, E&Y suggests that life insurers, therefore, have every reason to focus on products that reduce volatility for customers.“Life insurance companies must ensure that their products compensate for poor performance, while meeting customer expectations and offering them dynamic growth at the same time. During the recession, most insurers reviewed their existing product portfolios to set new pricing or eliminate products that were high risk and capital intensive, but only offered low margins. Even today, despite signs of recovery, they continue to focus on the growth of non-traditional sectors which are lower risk and not as capital intensive, such as products oriented towards saving and investing,” says Michel Bergeron, partner and leader of E&Y’s financial services section for Quebec.
In its 2014 outlook report for the Canadian life insurance industry E&Y noted that, in order to improve their profitability, life insurers will have to keep their focus on asset and wealth management while also developing innovative products that appeal to customers. “Using technology oriented towards products will help to reduce the risks that the insurer faces in terms of capital and the economic situation. This is a winning solution because it allows for a better delivery of services, which customers expect,” comments Bergeron.
He adds that the insurers with increasing sales results are the ones that are placing the marketing emphasis on flexible and simplified products with more clear and complete value propositions. “Whole and term life insurance remain popular with consumers because they are products that are easy enough to understand,” he says.
Bergeron recommends that companies channel their creativity into increasing their profitability, for example through better tax strategies and better sales force management. Besides maximizing returns on market improvement, the E&Y report proposes a number of solutions for life insurers.
First, E&Y says insurers should use the power of digital technology and “big data” analysis to improve underwriting, reduce costs, and analyze consumer behavior. Insurers would also be well advised to pay attention to changes in the consumer demographic landscape in order to take advantage of market opportunities. Finally, E&Y recommends life insurers prepare for the regulatory and accounting developments that have been announced, and take advantage of the opportunity to improve areas such as their modelling capabilities, data quality, and data governance.
“Canadian life insurance companies had a relatively strong performance throughout the economic downturn by focusing on fundamental operational data. Today, as global economic conditions improve, the ones who enjoy a comfortable and solid capital position and who demonstrate an innovative approach focused on products will be well-positioned for a return to growth,” says Bergeron.