Life insurance companies are under pressure. Their traditional business model is stagnating. Since 2014, premiums for US 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 (see Figure 1).

Insurers have been slow to adjust to these new realities. Despite their efforts to trim expenses, many are still suffering from bloated costs. Operating expense ratios, which measure noncommission operating expenses as a percentage of direct revenue, have deteriorated at leading US life insurers for the past five years.

Distribution costs have grown at an average annual rate of 5% since 2010. Life insurers rely on agents for more than 90% of their policy sales. All told, agent commissions and distribution expenses account for about 60% of a typical insurer’s operating expenses, and a lack of growth in agent productivity has contributed to a rise in overall costs (see Figure 2).

Life insurers have tried for years to contain costs, but they have little to show for it. By stinting on investments in operational improvements, they may have actually hindered their ability to do things more effectively. Meanwhile, costs in areas such as oversight and compliance have continued to creep up.

To make matters worse, life insurers aren’t pleasing their customers. The average Net Promoter Score®for US life insurers is 4.5%, according to Bain & Company’s survey of insurance customers in 20 countries (seeCustomer Behavior and Loyalty in Insurance: Global Edition 2017). Life insurers rely on a sales-led, agent-based approach to marketing, resulting in limited knowledge of their customers. Their customers, in turn, can display minimal connections, or loyalty, to the brand.

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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. Some 70% of life insurance executives surveyed by Willis Towers Watson believe they lag behind other financial services sectors in the adoption of digital technologies.

When it comes to technology, insurers are running to catch up with their customers. They’re also trying to fend off challenges from insurtech upstarts that aren’t encumbered by outmoded systems. Insurance customers, particularly those under the age of 35, are increasingly turning to mobile apps to research policies, get advice and buy products.

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. Their tardiness in digital is symptomatic of a larger problem. They are steeped in organizational cultures that have been slow to embrace change.

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 overly cautious and internally focused organizations. Insurance executives surveyed by Bain & Company give their companies relatively low grades for creating an environment that sets high expectations, holds people accountable and rewards innovation (see Figure 3).

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Start with a bold vision


Leading life insurers recognize that organizational and cultural issues are at the heart of their lingering cost problems, distribution challenges and uneven customer experiences. They know that lasting transformation will be possible only if they overcome inertia and fundamentally change behavior. These companies approach transformation as a multipronged process:

  • They begin bylaying out a bold visionto shake up the organization and the way it operates. Many set an ambitious goal to cut costs by as much as 25% within two to three years. They plan to use the savings to invest in the technologies and talent that will enhance the customer experience, lift productivity and improve profit margins.
  • Once they have articulated their goals, companiesconstruct an operating modelthat instills accountability, weeds out underperformers and rewards initiative. They create new, customer-facing positions and fill them with high achievers. They reorganize their go-to-market capabilities around customer segments instead of functions. They also overhaul their technology operations—shifting centralized resources closer to actual business owners.
  • As their new operating framework takes shape, insurers begin toattack their legacy cost basein earnest. They use technology to simplify and streamline entrenched processes, from sales to underwriting to fulfillment. 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 company’s transformation experience

For one leading life insurer, the first step in the transformation process was to candidly assess its position. It faced slowing top-line growth, stagnant productivity, a major technology deficit—and a lack of progress in areas it had already established as priorities, including digitalization and the customer experience.

The company was encumbered with legacy technology, and it didn’t set clear performance expectations for employees. That resulted in limited accountability for underachievers and insufficient incentives for those who excelled.

The company began its transformation by laying down a marker. It aimed to increase earnings by about 40% in five years. The company knew that it wouldn’t be able to meet its earnings targets from the projected growth in its core market. It would have to cut operating costs by 20%. Achieving these ambitious objectives 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 defined a set of guiding principles that were critical to ensuring that the transformation aligned with its long-term goals:

  • put the customer first (easier said than done);
  • reduce complexity throughout the organization;
  • accelerate digitalization and automation;
  • stop doing activities that no longer add value, and invest in those that do; and
  • make tough decisions and hold people accountable for performance.

These principles gave the leadership team license to think broadly as it transformed the business.

The company then set about building an organization that would focus on serving the customer and would encourage agility and innovation. It 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, including retail and corporate. It moved the IT development staff from the corporate level into the business units—fostering much closer collaboration on technology. The central IT group, meanwhile, narrowed its focus to infrastructure management, software development standards, and tools and training.

The company conducted a broad review of its talent and developed a robust performance management system. It raised productivity expectations and enriched its talent pool with internal transfers and external hires. The company successfully managed this process, so that by the end, close to 40% of roles were filled with new talent—both internally and externally sourced.

As the company tackled its operating model, it also accelerated changes in marketing and distribution. Over the years, complexity and inefficiency had crept into the distribution system, with overlapping sales organizations supporting multiple brands and channels. The company followed a traditional sales-led model, where agents bore the primary responsibility for interacting with customers. The company, which had a large sales management organization, was expending significant resources to recruit, train and support these agents.

When the company conducted a zero-based review of the outlays to agents, it found that its support model no longer aligned with the agents’ needs. Agents wanted more sales and technical training, as well as technology, to help them become more productive in an increasingly digital world. Having a state-of-the art customer relationship management (CRM) system meant more to the agents than attending company-sponsored sales conferences in exotic locales.

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