May 2015

Innovation and the Protection Gap

By Jeff Katz

katzThe life insurance protection gap remains an issue in the United States. Swiss Re research estimates the gap between the life coverage families should have for income protection, versus what they actually have, at $20 trillion in aggregate in 2010. This is up from $18 trillion in 2001 after adjusting for inflation. The average family has a gap of $378,000, up from $347,000.

Why is this?

The protection gap has been decades in the making. Changes in risk selection and product design over the past 40 years have consistently focused attention on higher-end consumers and those who already owned policies. The advent of rates differentiated by smoking habit allowed producers to re-engage with existing customers with offers of better rates for nonsmokers. Preferred risk underwriting took this to the next level. Inexpensive term products are geared toward the element of protection rather than savings, but it became uneconomical for producers to devote their time to cultivating new clients among new entrants to the labor force. Policies large enough to generate reasonable commission dollars are by definition aimed at the higher end of the market.

Universal Life products emphasize the tax-deferred build-up of the savings element. Variable UL was another enhancement aimed at upper-end consumers. Indexed UL started out as a product that might be attractive to the average consumer, offering equities market upside without as much volatility or downside as VUL. But the latest IUL enhancements—more exotic indices and policy loan interest rate arbitrage—once again aim at sophisticated investors rather than protection-oriented buyers.

My comments are not meant to suggest there is anything wrong with these changes and developments. The problem is more one of unintended consequences: not appealing to the masses, and not attracting a new generation of consumers. Annual sales of new life insurance policies peaked at 18 million in the mid-1980s. The industry sold a little more than 10 million policies in 2012. Over the same time period, the average policy size rose from about $50,000 to $160,000. As noted earlier, the protection gap has been increasing.

Innovations, particularly in technology, provide opportunities to close the protection gap. The Internet offers a direct-to-consumer distribution channel at a fraction of the cost of a mail campaign. Mobile communication devices are used increasingly by younger consumers to search for products of all kinds, gather information, and make purchases. Success, however, will hinge in part on a convenient sales process and attractive pricing. Communications technology will need help from a few other ingredients:

  • Fluidless underwriting. Access to a variety of data, such as MIB, MVRs, and prescription drug checks, can help manage risk. More sophisticated analytics using data mined from retailers or social networking sites—or consumers themselves—can help identify potential applicants who are more likely to purchase and more likely to pass the underwriting screens, as well as provide input to the underwriting process.
  • Simple products aimed at protection. Consumers are paralyzed by not knowing how much life insurance to buy. Let's offer products popular in the 1960s, with a monthly benefit paid over a fixed period of time or to a specified age. The consumer can readily tie the benefit to the amount of monthly income they need to protect. Term insurance structured this way will be simple, affordable and accessible.
  • Reputation. The newest generations of consumers use social networking to connect with peers, gathering input on almost anything they want to buy. They will then follow up with these peers for confirmation that they've done the right thing. Building a reputation using these networks takes care and time. Buying life insurance on the Internet is not likely to go viral, but a trusted brand can build its reputation more quickly than in the 20th century.
  • Investment. Keeping rates competitive with more traditional underwriting will require openness to experimentation and learning from mistakes. Predictive analytics will not eliminate anti-selection. Success will take multiple iterations. Required investments include front-end technology and data to make the sale, back-end systems to monitor and analyze results, and losses that will emerge from initial attempts that are flawed.

Engaging the life insurance buyer is likely to trump all of these factors. While the sales and underwriting process needs to be simplified, it also must be viewed as an opportunity to engage with our customers. Even if we can't turn this into a fun exercise, we can certainly make it informative. Data, analytics and the decades of knowledge our industry has built up of biometric risk can be combined to offer bespoke information and insights consumers want about their specific human condition. Engaging them through the value they derive from the process will increase sales, and close the protection gap.

Jeffrey S. Katz. FSA, MAAA, is Senior Vice President - Head of Marketing Actuaries for Swiss Re Life & Health America.  He can be reached at