Major macroeconomic, regulatory, and demographic trends are causing customers to question health and life insurers’ traditional value propositions. As a result, insurers are having to rethink their roles and their products. McKinsey spoke with Marion Hämmerli, an associate partner in the Zurich office, to understand more about product innovation in health and life insurance.
McKinsey: Why is product innovation an important conversation in health and life insurance today?
Marion Hämmerli: Product innovation hasn’t always been front and center for health and life insurers. For a long time, their value propositions for customers were straightforward: protect them against financial risk in case of illness, disability, or death, and assure savings for retirement. This has changed over the past decade following major macroeconomic and demographic, and in some instances regulatory, trends.
In the life savings space, longevity and ultralow interest rates have led to reduced investment returns and guarantee levels, which puts the value of life insurance as a pillar for retirement savings into question. We’ve therefore seen sluggish growth in the life space in Europe at 2 percent growth annually over the past five years. This is in contrast with demand in the market for private retirement solutions, which has been growing as the share of salary guaranteed by public pension schemes has started to fall in most countries—as measured, for example, by decreasing replacement rates.
In health insurance, the situation differs by geography. In countries such as Italy and Spain, the effective coverage from publicly financed healthcare systems is shrinking, leading to increased demand for private solutions. However, in Switzerland, the share of mandatory and state-financed healthcare expenditures has continued to increase over the past ten years, which, coupled with increased service levels in public hospitals, has put the value of private nonmandatory insurance solutions into question.
McKinsey: How will product innovation influence the future of the insurance industry?
Marion Hämmerli: Product innovation is one core lever, among others, that insurers need to pull to address their eroding traditional value propositions.
In the life savings space, many insurers have done the obvious—reduced guarantees and shifted the investment risk to customers, preferring pure protection products, which protect from disability or death, over retirement products. This will not be enough in the long term to protect revenues and profits, as it exposes life insurers to increased competition from asset managers and thus reduces their market. Real product innovation will be needed to come up with a convincing future value proposition for customers.
The same is true for private health insurance. To ensure that private health insurance is not solely reserved for affluent populations, and to satisfy the increasing demand in the broader mass market, insurers need to come up with new propositions that are affordable. At the same time, they need to respond to increasing customer needs for flexibility, convenience, transparency, and access to the best possible care. They also need to do so in partnership with healthcare providers, since all coverages sold in a health insurance product need to be offered by providers for the next few decades.
McKinsey: That would make a difference that investors might notice. What are leading insurance carriers doing to be successful?
Marion Hämmerli: Leading insurers are open to fundamentally rethinking their value propositions with customer needs in mind, and they’re deploying the right teams with the right skill sets—such as actuarial, customer experience, and digital—to work on product innovation. We’re seeing a few product innovation trends emerging from this work in the broader life and health space.
- Integrated service offerings, or ecosystems: Insurers have expanded vertically along the value chain—through partnerships, joint ventures, or vertical integration. This expansion has enabled them to offer integrated services, such as medical and nonmedical support to people with dependencies, as well as improve digital capabilities to reduce costs and improve customer experience and outcomes.
- Product bundling across health, protection, retirement, and wealth management: Insurers have started offering customers flexibility across different types of health and life coverages—for example, expanding protection coverage against severe health risks such as death and disability or offering flexibility to adjust their premium to protect against different risks as they age.
- Access to upside potential through mutualization: Some insurers have started deploying, or redeploying, mutualization concepts for retirement savings to grant their customers access to potential upside from investments in riskier asset classes than traditional low-risk, fixed-income assets. Mutualization means that policyholders—potentially together with the insurer through excess capital—build a fund reserve as a smoothing mechanism to protect them from bad year results on maturing contracts. These contracts typically come with strict cancellation rules and long contract duration but can generate significant upside potential.
- Enhanced life and health coverages: Insurers have started offering health and life protection coverage to customers formerly excluded because of preexisting conditions such as diabetes. This coverage is possible due to enhanced pricing capabilities, which take into account finer-grained risk parameters, and usually comes with a rewards system for good control, supported through digital-assistance solutions.
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Marion Hämmerli is an associate partner in McKinsey’s Zurich office.