Life Insurance Is Sold Not Bought

Conventional wisdom is that insurance is sold, not bought. Many people claim that insurance products, especially life insurance, are complex, easily misunderstood, need detailed medical data to be underwritten, and therefore have to be "sold" to customers.

 

Accordingly, the insurance sector has operated over the past two centuries with a large intermediary agent force (both captive and independent) that carriers have relied on to build trust with consumers, understand their needs and eventually "sell" them insurance products.

This means that the insurance sector has a high cost base (due to commissions to independent agents and/or the cost of acquiring and maintaining a captive agent force), complex processes and rules for underwriting, and opaque pricing.

However, advances in technology, changing consumer behavior, the changing nature of advisors, and regulatory and competitive pressures are forcing the life insurance sector to re-evaluate its fundamental belief that insurance is sold and not bought.

Advances in technology
Mobile devices, social media and networking, cloud computing, 'Big Data' and smart analytics are some of the technologies that are transforming consumers and advisor expectations and how insurance carriers respond to them. Mobile devices, social media, and online networking are enabling consumers to obtain information whenever and wherever they want, often in entertaining and engaging formats (e.g., YouTube video clips and Facebook savings and even investment games). In addition, consumers are increasingly reaching out to their broader, virtual social networks for education and advice.

Moreover, advances in analytical techniques allow insurers to use external behavioral data (e.g., credit score data, prescription data, and transactional purchase data, such as health club membership or food purchase behavior) in addition to internal historical data in order to supplement and in some cases replace the need for detailed individual medical data. As a result, insurers are developing predictive models to auto-underwrite term and even whole life insurance.

Consumer behavior
Technological change accelerating and, as evidenced by the enthusiastic adoption of smartphones and tablets, so is consumer adoption of new technologies. For example, 38% of adults have smartphones and three million iPads were sold within three days of the newest version's release. Consumers, who are now used to price transparency in other sectors (including auto insurance), are demanding the same from life insurers.

Online aggregation and quote comparison, social networking, and the ability to purchase insurance online are changing the buying model. As Gen Y and Millennials enter the life insurance purchasing age, they are demanding greater access to information, better pricing transparency, simplicity of language and products, plus online and social channels to learn about and purchase insurance.

Changing role of advice
In light of changes in consumer behavior the role of insurance advisors (and more broadly, independent financial advisors) is changing. They are no longer the sole authorities on financial matters, and are now one source of information among many within a broader "trust" network of friends, families, and online advisors.

In addition, education and advice is becoming more automated, as well as readily available through multiple alternative channels (e.g., online, social, mobile, physical). As a result, insurance advisors need to adopt new ways to reach out to consumers (e.g., through social media), understand their needs, and identify personalized solutions (e.g., arranging on a mobile device an interactive session with experts to address client situations). Forrester's December 2010 "The US Life Insurance Buyer's Journey" survey estimates that nearly 39% of life insurance shoppers performed online research in 2009.

Insurance advisors will remain an integral part of the sales process, but many consumers will approach them much better informed than they have been in the past. However, consumers who do approach advisors are more likely to purchase policies than those who use only the Internet; LIMRA's November 2011 "US Life Insurance Buyer-Non Buyer Study" estimates that 54% of consumers are likely to make a purchase when they contact an advisor after researching the product online, as opposed to only 36% who do so after using only the Internet.

Advances in healthcare data
Regardless of legislative, legal and political developments, digitization of medical records is inevitable. The Center for Disease Control (CDC) reports that over 48% of physicians reported using complete or partial EMRs in 2009, and those numbers have increased since then. As the adoption of EMRs increase and privacy issues are resolved, we see increases to the currently low adoption rate of personal health records (PHRs).

In addition, advances in medical devices and sensors (including non-invasive devices that measure calorie burn, heart rate, physical activity, etc.) and the growing number of individuals using them are facilitating the capture of huge volumes of real-time data (i.e., "Big Data") that provides the necessary raw material for deep insight into predictive variables that are leading indicators of certain health events (e.g., heart attacks). Unlike medical records, consumers own these "well-being" records and can use them at their own discretion.

While PHR and well-being data may not be directly available to insurers, individual consumers—especially younger ones—might be more willing to share it with life insurers if it helps them get a cheaper, better, and/or faster quote. This will remove one of the biggest barriers to whole life insurance underwriting, namely requiring historical medical records for underwriting. We see this change happening within the next three to five years as digitization of medical records and the use of non-invasive devices becomes more common.

Competitive pressures
Unlike auto insurance, where aggregators were responsible only for 17% of submitted auto quotes in 2009, life insurance aggregators were responsible for over 75% of all submitted quotes in the same year, according to Comscore's February 2010 report "Online Life Insurance Industry." However, while over 73 million auto quotes were initiated in 2009, there were only 13 million initiated life quotes.

This represents a substantial growth opportunity for life insurers, and many of them (and aggregators) are now offering online and/or call center quotes. While most of these tend to be term life products, with coverages of less than $250,000 for age groups between 30-45 a growing number of insurers offer whole life insurance with slightly larger coverages (i.e., $500,000).

We have seen greater pricing transparency, increased product simplicity, availability of information online and on social media, and the ability to purchase insurance through multiple channels (e.g.,online, call center, and agents) transform auto insurance. Term-life is following a similar pattern, and some of major insurers have recently started selling whole-life insurance direct to consumers.

This change is forcing other insurers to follow suit, thereby creating an irreversible trend towards greater transparency and product simplicity. This is creating a positive feedback loop: Greater numbers of young consumers are "buying" insurance, or at least contacting carriers or agents after visiting carrier or aggregator websites. These trends may soon relegate the old saying "Insurance is sold, not bought" to the history books!