Major macroeconomic, regulatory and demographic trends are causing customers to question the traditional value propositions of health and life insurers. As a result, insurers need to rethink their roles and their products. McKinsey spoke with Marion Hämmerli, associate partner in the Zurich office, to learn more about product innovation in health and life insurance.
McKinsey: Why is product innovation an important conversation in health and life insurance today?
Marion Hammerli: Product innovation has not always been the focus of health and life insurers. For a long time, their value propositions for customers were simple: protect them against financial risk in the event of illness, disability or death, and provide savings for retirement. This has changed over the past decade as a result of major macroeconomic and demographic trends, and in some cases regulatory.
In life savings, longevity and extremely low interest rates have led to lower investment returns and collateral levels, calling into question the value of life insurance as a mainstay of retirement savings. So we’ve seen a slow growth in living space in Europe, growing at 2% per year over the last five years. This contrasts with market demand for private pension solutions, which has increased as the share of wages guaranteed by public pension schemes has started to decline in most countries, measured, for example, by falling replacement rate.
Product innovation has not always been at the center of the concerns of health and life insurers… This has changed over the last decade following major macroeconomic and demographic trends.
In health insurance, the situation differs according to geography. In countries like Italy and Spain, the effective coverage of publicly funded healthcare systems is decreasing, leading to increased demand for private solutions. However, in Switzerland, the share of compulsory and state-funded health expenditure has steadily increased over the past ten years, which, coupled with rising service levels in public hospitals, has questioned the value of voluntary private insurance solutions.
McKinsey: How will product innovation influence the future of the insurance industry?
Marion Hammerli: Product innovation is one key lever, among others, that insurers must leverage to deal with the erosion of their traditional value propositions.
In the field of life savings, many insurers have made the obvious: reduce guarantees and transfer the investment risk to customers, preferring pure protection products, which protect against disability or death, to retirement products. This will not be enough in the long run to protect revenues and profits, as it exposes life insurers to increased competition from asset managers and thus shrinks their market. True product innovation will be required to deliver a compelling future value proposition to customers.
The same is true for private health insurance. To ensure that private health insurance is not restricted to the affluent and to meet growing mass market demand, insurers need to provide new affordable offerings. At the same time, they must meet growing customer needs for flexibility, convenience, transparency, and access to the best possible care. They must also do this in partnership with health care providers, as all coverage sold in a health insurance product must be offered by providers for decades to come.
Leading insurers are open to fundamentally rethinking their value propositions with customer needs in mind.
McKinsey: It would make a difference that investors could notice. What are the major insurers doing to succeed?
Marion Hammerli: Leading insurers are open to fundamentally rethinking their value propositions with customer needs in mind, and they are deploying the right teams with the right skills, such as actuarial, customer experience and digital, to work on the product innovation. We see a few product innovation trends emerging from this work in the broader area of life and health.
- Integrated service offers, or ecosystems: Insurers have grown vertically along the value chain, through partnerships, joint ventures or vertical integration. This expansion has allowed them to offer integrated services, such as medical and non-medical support for dependent people, as well as enhance digital capabilities to reduce costs and improve customer experience and outcomes.
- Grouping of products in the fields of health, provident insurance, retirement and wealth management: Insurers have started to offer customers flexibility on different types of health and life cover, for example by expanding cover for protection against serious health risks such as death and disability or by offering the flexibility to adjust their premium to protect against different risks as they age.
- Access to growth potential through pooling: Some insurers have started to deploy, or redeploy, mutualisation concepts for retirement savings in order to offer their clients access to the upside potential of investments in riskier asset classes than traditional assets at low risk and fixed income. Pooling means that policyholders, possibly together with the insurer through excess capital, build up a pool of funds as a smoothing mechanism to protect them from poor annual performance on expiring contracts. These contracts usually come with strict cancellation rules and a long contract duration, but can generate significant upside potential.
- Improved life and health coverage: Insurers have started offering health and life coverage to customers who were previously excluded due to pre-existing conditions such as diabetes. This coverage is possible through enhanced pricing capabilities, which take into account finer risk parameters, and usually comes with a rewards system for good control, supported by digital assistance solutions.
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Marion Hammerli is a partner in the Zurich office of McKinsey.
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