Life insurance managers are expected to achieve premium growth, in particular within their own market – but what if their own market seems close to saturation point and external factors are limiting the potential to innovate and win new clients? Market experiences highlight important focus areas, such as close industry involvement in regulation, the identification of gaps in cover and improving consumer trust in a product.
 
Offering more attractive products

In a saturated market, new clients can be won from competitors by offering a better product or service. This is often achieved by added product features, which are in turn copied by competitors, ending in a spiral of product improvements. If feature adding is exhausted or impossible in the first place due to external constraints, innovation cannot play ball, so price competition generally takes over. This is particularly dangerous if the cover has become very broad.

Filling gaps and expanding the market

An approach to premium growth that avoids such spirals is to widen the market by selling to people who previously would not have bought insurance or a particular type of insurance, in this case competing against other products or services that the client could have bought for his or her money. Essentially, market saturation can be an illusion. Solutions include targeted marketing and new life products that fill gaps in cover. Building trust in a product can, for example, also expand the market beyond its perceived boundaries.

Focus on market experience

However, it is not just a case of choice. External factors, including tax treatment (deductibility of life premiums), local regulatory factors, product rating agencies and industry associations, often have a major influence on growth options and their potential.
 
Critical illness insurance (U.K.) and disability income insurance (Germany) are the most important “living benefit” protection products in their respective markets. These examples show just how limiting external factors can be and highlight how self-regulation by the life insurance industry and building client trust in a product can improve the possibilities to grow business.

Disability income insurance in Germany

Over the last decade, disability income insurance was a major contributor to the success of life insurance in the German market. Since deregulation of the life market in 1994, product standards increased dramatically, mostly due to the attention of product rating agencies. Disability income insurance had previously been homogeneous across the market; product rating agencies then looked closely at product features and made them more explicit and easier to compare, rewarding certain features and adding a rating scale. Strong provider competition took hold. This led to the current situation, where all disability income products are at a high quality level for the client; benefit triggers are clear and lower than ever and many exclusions clauses have been removed. Not surprisingly, the product features have become essentially the same for all providers; the definition of “disability” has been re-regulated by insurers in response to the actions of the product rating agencies.
 
In order to obtain a good rating for their product, life offices must now discuss definitions of the events triggering a benefit with the product rating agencies, and are thus not able to independently shape this core aspect of their product.
 
In addition, in 2007 the German legislator set a definition of disability in the reform of the law of contract in insurance (Versicherungsvertragsgesetz, VVG). This definition set a minimum definition standard; covers deviating from the definition can be launched, but differences must be properly labeled. In this case, the understanding of one of the Commission members ensured that the standard was not set overly high, limiting the impact and allowing a more sustainable product to develop.
 
Although the high-standard products across the German market today are beneficial to clients, the current situation has a downside; products are expensive and can be out of reach for clients, particularly for those on lower incomes (who tend to have higher occupational risk profiles). Also, competition of course goes on, and with competition on product features exhausted and constrained, providers have turned to price competition, improving the situation again for clients but putting considerable pressure on provider profitability, even though the product is in fact still perceived as expensive by most clients.

Critical illness insurance in the U.K.

In contrast, the U.K. insurance industry association (Association of British Insurers, ABI) developed Statements of Best Practice for critical illness insurance. Providers must adhere to these standards. Again, the product definition is essentially regulated, but this time by the industry itself rather than primarily by external product rating agencies. The ABI standards have a threefold aim: to provide security to clients by ensuring a minimum standard across the industry, to improve comparability between different products, and to improve the clarity of the cover to reduce the number of claims disputes and to thus build consumer trust. For example, total and permanent disability (TPD) claims have historically been more often rejected than accepted; among the many other modifications, the ABI tested and proposed the clearer name of “Irreversible Life-changing Disability.” With improved trust in the product, the potential to reach new clients is increased and the market essentially widened.
 
With the ABI shaping benefit triggers, the industry has given itself relatively more room to maneuver compared to Germany as regards definitions. There are also a number of exclusions still present in U.K. critical illness products that have been removed from the equivalent German products. In addition, consumer trust in the critical illness product in the U.K. did indeed show signs of improvement, as indicated by market statistics from the latter half of the 1990s¹. Even so, in a similar vein to the situation in Germany, comparison websites in the U.K. represent an external factor that is shaping the product itself (feature adding) and influencing price.
 
Where next?

Both examples have, to varying degrees, led to similar, wider covers and ultimately to price competition among capacity providers. They show us how self-regulation can reduce the likelihood of unrealistically high standards being externally imposed. They also show that beyond legislation and regulation, there are other external factors at play, predominantly that aim to promote clarity and product quality. Such factors are commendable and likely to have an increasingly influential role in future growth options and potential. However, appropriate risk management and pricing are essential for a healthy, sustainable market – an environment that indirectly encourages these aspects to be compromised is also ultimately not a good thing. The right balance needs to be achieved.

When setting long-term strategic directions for growth in a competitive market in particular, it is worth considering the future influencing factors on market development, such as changing client expectations, interests of product rating agencies, trends in legislation, taxation and behavior of the industry. A look to experiences in other markets can then help with decisions on suitable courses of action.

¹For example, “Report of the Critical Illness Healthcare Study Group,” A. Dinani et al. Paper presented to the Staple Inn Actuarial Society, 2000.