From RGA’s perspective, the group life insurance market remains highly competitive. As the graph below illustrates, top-line growth since 2012 has been essentially flat, by carrier and in total.
When carriers do experience significant growth, it usually coincides with (or comes at the expense of) other life insurers who are shedding businesses and/or remediating their own blocks. In other words, “growth” is largely a zero-sum game.
Source: RGA Quarterly Earnings Summary: 2015Q4
While the large-case market remains highly competitive – cases won or lost by differences as small as 1/10th of one cent – it is actually the small- to midsize case market that is right now the most competitive.
Indeed, attendees at a recent RGA-sponsored regional group underwriting seminar agreed with this sentiment. When polled about their views of the group life market, underwriters were much more pessimistic about the small to midsize market than the large-case market, which they believed had started to turn the corner, with prices firming up.
Small to Midsize vs. Large Case - Market Perceptions
Additionally, RGA’s latest research shows that approximately 10% to 12% of life insurance groups with less than 1,000 lives are lapsing during their rate guarantee period to obtain a better rate.
Clearly, these are challenging times for group life insurers.
Guided Panel Discussion
To gain a broader perspective, two panelists – Mike Bailey, Senior Vice President, AonHewitt, and Mark Cornish, Practice Leader, Trion Group (a Marsh & McLennan Agency, LLC Company) – joined me for a Q&A session. Portions of the discussion are excerpted below.
Q: Is the group life market becoming more commoditized?
Mark Cornish: Absolutely. Several factors are driving this commoditization: the maturity of these markets, soft pricing, margin erosion every time a case changes hands, lack of product innovation, and capacity vs. demand.
Mike Bailey: I agree that the market is becoming more commoditized, and it’s even more pronounced in the small and midsize case market. Another factor that contributes to the commoditization is that group life insurance is really a low-frequency or “low touch” product. When you consider that there is often just one claim incurred for every 1,000 lives exposed, the tendency is to focus on price.
Q: What about the perception that brokers drive a lot of this commoditization?
Mark Cornish: I think we all have some role in the commoditization: brokers, insurers and employers. Brokers have various criteria for evaluating insurance proposals, and while price isn’t the only thing, it is often the most important. However, if a carrier is reasonably competitive on pricing, it will have a chance to pitch its features and capabilities to bridge the gap by some means other than price. We don’t want employers, particularly large ones, to make decisions based solely on rates. A major cause of commoditization is the pricing destabilization that occurs when insurers take turns going after market share. Building top-line growth with irrational pricing isn’t sustainable when the results hit the bottom line. I understand approximately 20% of group volume is traded each year. Absent growth, margin decreases as turnover occurs.
Mike Bailey: Brokers do more than solicit proposals and summarize the results. We do our own underwriting analysis and so can spot irrational pricing. We typically toss out unusually low quotes unless they are from a reputable carrier. Even then, the lowest price doesn’t always win the day. Looking back over the last two years of our own portfolio, we noticed that roughly 25% of the time the lowest proposal did not win. All things being equal, brokers and employers generally prefer to keep the business with the incumbent. The winning price, however, was usually within 5% of the lowest bid. As Mark alluded to, insurers still need to be in the ballpark.
Q: How can technology help de-commoditize group life insurance?
Mike Bailey: Technology is playing a sizable role in de-commoditizing group life insurance. It may very well be the biggest differentiator. We’ve seen several carriers step up their game in this area. The best example that comes to kind is online, real-time Evidence of Insurability (EOI) processing. Employers and employees are beginning to expect this level of capability, which is a big plus in a finalist meeting.
Mark Cornish: I completely agree. Technology is key to setting yourself apart from other group life competitors. Other examples include better needs analysis and decision-making tools, better systems for beneficiary recordkeeping, and leveraging technology for targeted campaigns aimed at younger-age employees. I should mention that at some point these technology differentiators eventually will become table stakes, so it is best to become an early adopter.
Q: Can customer service be used as a differentiator?
Mike Bailey: Online reporting of EOI status really resonates with employers. If an employer is receiving repeated inquiries from employees on the status of their EOI application, the ability to provide instant answers is highly valued. What I can tell you is that poor customer service is also big differentiator – one that you do not want. Customer service and administration issues are leading reasons for an insurer to lose a case. The fear of poor customer service can be self-fulfilling. Insurers want to avoid any self-inflicted problems with current customers, so they may try to shield them from any changes in technology or administrative platforms. But if in-force clients are not migrated to new platforms because the insurer fears disruption, the groups may feel ignored and seek more attention elsewhere. A hands-off approach can be just as counterproductive if it gives a group a reason to move.
Mark Cornish: For many plan sponsors, tolerance for rates above the market floor increases in direct proportion to the feeling that service is effective, responsive and aligned with needs.
Q: What about all those extra services and benefits (EAP, ID theft, etc.)? Do they even matter?
Mike Bailey: The way they are currently marketed? No, although it definitely gets noticed if they are not offered. These services are largely underutilized, yet our experience shows that customers are happier if they actually interact with these services. Thus, the more an insurer can do to raise awareness and increase utilization of these services to employees, the more important they become to the employer. In fact, funeral concierge and will preparation services are two recent examples of value-added services that actually did become relevant during recent finalist meetings.
Mark Cornish: I would add that Millennials want financial products that extend beyond risk transfer and that can evolve with them as they progress through different life stages. This requires product innovation and effective technology. Value-added benefits and services can help provide some of that flexibility.
The insurance industry is not unique in dealing with the challenge of escaping the commodity mindset. An article last year from the Kini Group, a business analytics company focused on margin growth, outlined three key principles employed by best-in-class companies to break free of commodity pricing. The three rules are paraphrased below:
- Don’t lower the price without changing the offering.
This is obviously much easier said than done, but the idea conveyed to the customer here is that something must be exchanged to get the lower price.
- Identify and communicate every element of value delivered to the customer.
Sales representatives often don’t fully understand the value being delivered. If they can’t communicate the value, they will resort to competing on price.
- Deliver options, not ultimatums.
Responding with options (e.g., Good / Better / Best) not only conveys flexibility, but gives customers a feeling of some control over the process. They choose a level of value that best suits them, and you have priced the options appropriately so as to protect your margin.
To answer the question: Yes, the group life insurance market today is highly commoditized. However, it’s not “all about that price, ‘bout that price. No profit!” (Apologies to Meghan Trainor.) Price may be the most important thing, but by no means is it the only thing. Finding the right balance of technology, customer service and value-added services can be the tipping point and may help win the day in a competitive situation, without the need to adjust price.