The life insurance industry is poised to generate $1,600 billion in shareholder value over the next ten years according to a new study by Mercer Oliver Wyman. This growth rate outpaces global GDP expectations by 50%, and is greater than for other sub-sectors of the insurance industry.
Mercer Oliver Wyman also sees competition for shareholder value splitting the life industry into three sectors: a handful of global behemoths or OEglobal-balance sheet factories who will dominate the market and increase their share of value creation from 20% today to 35% in ten years; those regional retailer-wholesalers who survive a wave of restructuring and consolidation that will see the overall market share of life insurers fall from 50% today to 35%; and a rising number of specialists, who will see their market share growing, focused on particular product niches, on tapping into growth in outsourcing, or on distribution and building close relationships with customers across multiple product needs.
“Life insurance companies need to move away from the defensive strategies they employed during the four-year downturn a period which saw the diminution of the sectors market capitalization to a more offensive position,” says Henry Essert, Director at Mercer Oliver Wyman.
“This will involve re-igniting investment in growth opportunities, in both domestic and international markets. The return to offensive, growth-oriented strategies is essential if life insurers are to regain market share as other financial services companies step up their assault in the battle for customer assets.”
Other key findings from the study include:
North America is the largest life insurance market, expected to account for 42% of the overall $1,600 billion of potential shareholder value – Life insurers suffer, however, from a declining share in overall personal financial assets – having dropped from 11% in 1991 to 8% in 2003 and from a relatively weak position in the long-term savings market. Some newly developed product lines are expected to grow significantly, such as post-retirement products and living benefits.
Only the U.S. market is big enough to support insurers who can focus on a specific niche which makes the U.S. an attractive, but cautious, investment opportunity. Regional insurers in Canada need to be broad-based players as they are small by comparison. Consequently, Canada is not an attractive market for global insurers.
Europe will account for about 38% of the $1,600 billion value over the next decade – European life insurers have a stronger position in the long-term savings market, which is in many countries driven by a guarantee-based value proposition and supported by favorable tax incentives.
There is pressure on this value proposition because of a stricter solvency-focus and capital constraints as well as from a OEleveling of the playing field in the regulation and taxation of financial services offerings.
Across Europe, there is significant diversity in market development. Countries like Turkey have almost no life insurance market in existence, while many other European markets are in the process of transforming and maturing. Some markets, such as the UK, are already super-mature. Opportunities differ even among countries at a similar stage of market development. Each country has its own tax and regulation system, channel structure, products, asset allocation, wealth and wealth inequality. All of these are important factors affecting investment decisions. Japan accounts for 12% of total global value due to its current size, but growth prospects are limited Financial reform in Japan is creating new markets and expanding the size of existing ones.
The creation of a DC market has enabled US 401(k) players such as Principal to enter the market through joint ventures. The partial deregulation of banc assurance for annuity sales has prompted rapid growth in the variable annuity market, where foreign companies are gaining share.
The Rest of the World accounts for just 8% of total global value, despite some significant relative growth numbers Most markets are extremely small, but have major potential. There is huge disparity between markets, such as mega-developers like China; large and almost developed, as in Korea; rich developing, such as Singapore; super-growers like Indonesia; and virtually non-existent markets, as in sub-Saharan Africa.
“We believe that the life insurance sector has an opportunity to seize back from asset managers and banks the growth agenda in the management of personal financial assets, by returning to and building on its core strengths in financial protection, customer capture and risk management,” Harvey Weinberg, Managing Director at Mercer Oliver Wyman said. “However, there will be continued turbulence over the next few years, as some institutions are able to meet the agenda of offense successfully, and some are not.” Mercer Oliver Wyman was formed in April 2003 from a merger of Oliver, Wyman & Company (founded in 1984) and the financial services strategy and actuarial consulting practices of Mercer Inc., and is now a division with Marsh & McLennan Companies, Inc. The firm currently employs more than 650 staff working out of 25 offices in 12 countries throughout North America, Europe, and Asia.