SMSFundamentals: Older People Are Life Insurers’ Future Challenge

SMSFundamentals | Oct 26 2023

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Life insurers face huge outflows as populations age

-The over-50 population will reach 3.2bn people by 2050, or 33% of the world's population
-Dependency ration seen rising to 26% by 2050 from 15% today
-Policyholders aged 65-plus now control 40% of life insurers’ AUM
-By 2040, policyholders will transfer most of these assets to beneficiaries

By Nicki Bourlioufas

Life insurers must better embrace aging policyholders

Humans are living longer and healthier lives and by 2050 the over-50 population will reach 3.2bn people, or 33% of the world's population. This will significantly strain government finances and pass the responsibility for retirement income to individuals, concludes Capgemini’s World Life Insurance Report 2023.

Thanks to advances in healthcare, improved living conditions and better access to healthcare, the total population of individuals aged 50 years or older has increased substantially. According to a United Nations report, from 1990 to 2050, the average life expectancy at age 65 will have increased by 33%, or five years, with women on average living three years longer than men.

The birth rate will fall by -48%.

The Capgemini Life Insurance Report explores how this aging population creates challenges but also opportunities for life insurers. The report finds most individuals aged 65 or older don’t have a financial adviser and are unprepared in their inheritance planning – even as history’s most significant intergenerational wealth transfer is about to begin.

Life insurance policyholders aged 65-plus now control 40% of insurers’ assets under management (AUM); by 2040, they will have transferred most of these assets to beneficiaries.

“The life insurance industry's financial situation is in flux as history's largest inter-generational wealth transfer could cause a massive outflow of nearly 40% of life insurers’ AUM by 2040. Thus, strengthening relationships with aging policyholders and their beneficiaries is a strategic necessity,” the report finds.

Retire income gap growing

The report finds the retirement protection gap, or the difference between desired retirement income and actual income from pensions, savings, and social security, is growing rapidly as populations age.

“That gap is on track to grow exponentially in the coming decades: the World Economic Forum (WEF) predicts it will expand by four times, from US$99trn in 2022 to US$400trn by 2050, in markets with the largest established pension systems (as the chart below shows),” the report finds. These markets include Australia, Canada, China, India, Japan, the Netherlands, the UK and the US.

The dependency ratio, defined as the ratio of the dependent population (age 65 and above) to the working-age population (aged 15 to 64), is predicted to increase to 26% by 2050 from 15% today. Older individuals require more public resources than other age groups, but government support is constrained.

Inadequate retirement savings is a serious concern for Australians who are living longer. Australia enjoys one of the highest life expectancies in the world, at 83.2 years in 2021 for males and females at birth combined – ranked fifth among 38 member countries of the Organisation for Economic Co-operation and Development (OECD). The country with the highest life expectancy at birth for males was Switzerland (81.9 years), and for females Japan (87.7 years), as the chart below shows.

More engagement needed with policyholders

To take full advantage of this opportunity and protect their AUM, life insurers will need to engage earlier and more effectively with future beneficiaries to develop comprehensive financial solutions that support customers’ desire to live long, healthy lives, the report finds.

“Insurers that enhance touchpoints across the customer lifecycle will protect their current assets and unlock future growth. The goal is to evolve from today’s product-centric approach, where offerings are determined mainly by what’s technically feasible, to a more customer-centric model, based on broader value propositions and more personalised experiences,” the report finds.

Priorities for life insurers should include transforming the customer lifecycle based on aging-well gaps to create unified value propositions and convert claims into revenue generation opportunities. In addition, insurers need to develop a range of services offering ‘hyper-personalised’ engagement with policyholders and engage earlier with beneficiaries to identify their needs. This will require modernising technology and enhancing data management capabilities to streamline operations, enrich customer experiences and enable more informed decision-making.

While Australians benefit from one of the world’s leading public health systems, the financial burden of healthcare is increasing as costs rise. This burden is increasingly being borne by individuals and includes direct financial out-of-pocket costs paid by individuals for the diagnosis, treatment, and management of illness.

According to life insurer PPS Mutual, there is a common misconception that public and private health insurance combined will cover all costs associated with treating and recovering from a trauma; this is a myth.

“The sharp increase in healthcare costs and ‘gaps’ involved in the cost of healthcare are often not fully covered by private insurance; private health cover will only cover so much of a private hospital’s or practitioner’s fees, which are uncapped,” PPS Mutual finds in a recent report, “The healthcare burden no one is talking about”.

Life insurance can help to meet the burden of out-of-pocket healthcare expenses and open greater treatment choices.

“In the same way that private health insurance gives patients the choice of whether to go the public or private route in their treatment, life insurance also gives people greater choice and flexibility on treatment for disease,” says PPS Mutual.

The insurer says many Australians are underinsured – PPS Mutual estimates there are about 14.3m underinsured for trauma insurance and 3.4m underinsured for income protection insurance.

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