Restoring profitability in life insurance
Profitability within the life insurance sector has been weakening for several years. A three-fold hit – first the financial crisis, then dropping interest rates and now sovereign debt unrest – has made it difficult for life insurance companies to turn a profit.
For now at least, as high-value old contracts lapse and low-value new contracts join the portfolio, insurers are pressed for profit. But there is no need to pronounce the life insur-ance market dead yet. The situation may be difficult, but it is by no means desperate. Profitability and value creation in the life insurance sector mainly come from the in-force, where old contracts generate most of the margins, not from new accounts where initial margins are low. With EUR 5000 bn in reserves in play, and in this difficult economic landscape, more value can be created by optimizing them than by acquiring new contracts.
This figure alone demonstrates why insurers should place more and more attention on the profitability of their Portfolio policies. Strategies should be consistent with the market context, which is currently seeing low margins in a low return environment. As such, insurers should focus less on shuffling investments and resources (HR, sales and finance) towards new product and client development and more on working on their in-force. Accelerating and refocusing their attention on the in-force will not only rejuvenate in-force margins, it will also improve them: a 10 bp increase means EUR 5 bn in additional margins.