Why Innovation During Times of Interest Rate Decline is Crucial to Longevity
Throughout our conversations with carriers and distribution orgs, the concerns about dropping interest rates have been brought up over and over. Just last week at the LIMRA Distribution Conference, we heard from several carriers that this is one of their top concerns. With the Federal Reserve lowering interest rates three times in 2019, and amidst the prospect of continued falling rates, this is definitely creating a new environment for insurance companies.
It’s no secret that the insurance industry was founded upon the basis of risk pooling services provided to customers, which are used to finance investments. As an industry, therefore, it is inexorably linked to the fluctuation in interest rates. And historically, the profitability of the insurance industry has moved in conjunction with interest rates due to interest rate risk, or the idea that the value of fixed-income investments falls as a result of changing interest rates.
As the CEO of an InsurTech, I’m witnessing the impact that falling rates have on carriers first-hand. But, I can also see how InsurTechs can help counter some of the risks the industry is facing.
The biggest risk to the insurance industry when it comes to falling interest rates is a decrease in profitability. Lower interest rates decrease carriers liabilities and by decreasing their future obligations to policyholders they are making insurance products less attractive to consumers. This leads to lower sales and, in turn, lower-income that carriers have available to invest. Carriers are therefore investing less and with lower interest rates they are generating lower returns, which again, leads to lower profits.
Shielding yourself from the risks
There’s no doubt in my mind that partnering with an InsurTech will shield carriers and distribution orgs from some of the risks associated with dropping interest rates.
One of the best ways to protect yourself from risk is to stay competitive in the market and the easiest way for incumbent organizations to do this is to leverage the technology and agility of InsurTech companies. I’ve written about the build vs. buy scenario several times, and about how the best way to modernize and remain competitive is to leverage companies that take a technology and user-first mentality. In our experience, the innovative and client-first carriers whom we work with end up increasing sales by upwards of 23% and decreasing costs by 35% within the first year. It may seem counterintuitive to invest during a downturn, however, those that do invest in innovation during harder times position themselves to boost the productivity of their distribution which leads to an increase in income and reduction in costs - creating a positive impact on profitability. I’ve seen that truly innovative companies can turn negative market conditions into their competitive advantage.
Investing in relationships with InsurTechs that are enabling carriers and distribution organizations means getting access to products that are easy to use, easy to manage, and provide you with a wealth of consumer, product, and market data. Incorporating these technologies can help incumbents drive efficiency to every step of the value chain while drastically improving the customer experience. The ability to generate more income while lowering your costs and building customer loyalty is a win-win in a delicate financial environment.
New technologies can also help carriers better understand customer behavior, market fluctuations, and product needs and respond accordingly. InsurTechs capture and analyze huge amounts of data and can help incumbents understand their consumers better than ever before. This means they’ll have the ability to better target more products to specific market segments, which can lead to an increase in sales.
In the face of sustained low interest rates, it’s crucial for insurers to stay competitive. The easy thing to do is cut innovation budgets and scale back client-first initiatives for a short-term boost to profitability, however, forward-thinking carriers will invest in innovation and modernize their distribution because of the market conditions. Leveraging technologies allows carriers to achieve a deeper understanding of their customers, target a broader range of them more efficiently, and make data-informed decisions that keep them competitive and maintain customer loyalty.