Current conditions and challenges
Addressing different priorities in different markets, lines of business and customer segments
Despite a complex matrix of challenges, there is consensus among European and UK L&P executives that growth is within reach. And there’s broad recognition that the industry could do more to promote financial security across society.
Delivering such value will be challenging given the large and growing protection gaps. These shortfalls have multiple causes, including an aging population and longer lifespans, limited consumer access to affordable solutions, lack of trust in the industry and low levels of financial literacy.
Intense competition:
Today, traditional L&P providers compete with banks and investment houses, wealth and asset managers, InsurTechs and startups for the same customers and assets. The life insurance business now encompasses various sectors, from traditional protection products to retail retirement savings to commercial retirement plans. The long-term shift to individual responsibility—from defined benefit options to defined contribution products—continues to define the market, with health coverage, group insurance and employee benefits increasingly overlapping.
Regulatory pressures
After years of focusing on capital reserves and accounting standards, authorities in markets across Europe are now prioritizing consumer duty and customer value, taking steps to avert retirement savings crises and establishing rules for ethical and responsible use of artificial intelligence (AI). Auto-enrollment in pensions, the pensions dashboards in the UK and the drive to open insurance in other markets are among the highest-profile initiatives. In some nations, regulators are proactively engaging the industry to address the massive savings and protection gaps. But increased pressure on social safety nets and political polarization in many markets add to the complexity.
Demographic shifts
With the proportion of older citizens on the rise in many markets, the urgency to solve the savings and protection gaps will only increase. However, the impact of younger citizens shouldn’t be overlooked. Millennials, who are now entering their peak earning years, are looking for solutions that suit their lifestyle. Now’s the time to begin forging relationships with Gen Z who have very different expectations for financial services than previous generations.
Tech disruptions
Most firms in the L&P industry are still lagging their peers in other sectors. The nearly overnight rise of generative AI (GenAI) only highlighted the urgency for life insurers and pensions providers to modernize core platforms, embrace cloud-based systems and digitize both back-office operations and customer experiences. The goal must be to establish a lean, flexible and scalable IT environment that enables deployment of today’s most powerful technologies and positions firms for tomorrow’s inevitable disruptions.
Many types of firms are looking to win the same customers and assets, with the most intense competition for those with the greatest wealth. However, there’s plenty of growth potential in serving the mass market. To increase financial security for all and deliver better outcomes, the industry needs to work with state and quasi-state agencies and other firms to develop lean and highly efficient operations. Successful collaborations require that executives gain a deep understanding of the opportunities that lie ahead across all key product lines, each of which presents unique opportunities and challenges.
The retirement businessThe prevalence and scope of savings gaps means most new accumulation offerings will be unit-linked and defined contribution products. Tax-advantaged savings vehicles will be tied to employment or other earned income for customers of pre-retirement age. This is a result of the push toward “capital light” offerings by product manufacturers and the expanding investment options offered by asset managers. The increasing need for more support in the decumulation phase is also driving innovation in products (e.g., annuities) and services (e.g., digital tracking of financial position).
Fee-based products, unit-linked securities and hybrid offerings will be bigger parts of carriers’ portfolios.
The more assets customers accumulate, the brighter the growth outlook for the protection market.
Guaranteed “wealth protection” products aren’t going away entirely; there is a large, in-force book of traditional guaranteed products (particularly in continental markets) and they remain popular with mature customers who typically purchase through traditional broker channels. However, the guaranteed unit-linked market is almost nonexistent since the financial crisis, which virtually ended the sale of variable annuities.
Products and services are increasingly aligned to customer life stages, asset levels and engagement preferences. The financial capacity of 30-year-olds is obviously different from 50-year-olds. So too are their preferences for engagement and accessing advice (e.g., digital channels vs. in-person meetings). Clear customer journeys based on specific needs with “compliance by design” embedded at key touchpoints will help drive market-winning experiences and deliver strong customer outcomes. The ability to provide sound financial planning advice to a range of customers will also be a hallmark of tomorrow’s leaders.
ProtectionInsurers are navigating different conditions in the market for short-term and long-term products with living and death benefits. Factors such as home ownership, inheritance taxes and government- and employer-sponsored sickness and disability schemes define both the opportunities and challenges in this space. The protection business can continue to grow at a pace similar to GDP, with products acting as proxies for customers’ underlying wealth. Thus, the more assets customers accumulate, the stronger the protection market will be. But the scale and volume of the protection business means that many firms will view it as ancillary to retirement savings.
Given macroeconomic uncertainty and the increased financial pressure many citizens feel, protection products must be affordable and offer clear value for money. That puts a premium on lean operations and high degrees of automation across the entire customer journey.
The renewed interest in the protection business among many large composites is worth noting; they see potential for higher volume and attractive, risk-adjusted returns.
Pensions risk transferDue to rising interest rates and market levels, large corporates can now afford to insulate their balance sheets from future risks through buy-in and buyout pensions. Derisking has created opportunities in the UK and some parts of continental Europe and other markets (e.g., the Netherlands, Ireland). The pipeline of such deals is estimated to be in the trillions of euros over the coming decade.
Pension risk transfer deals could amount to trillions of euros in the next 10 years.
Pensions risk transfer has been a boon for the industry, especially in markets that allow for large-scale deployment of capital through commercial transactions. The opportunity has opened the door to specialty players backed by banks and asset managers. Pensions risk transfer is likely to be a cornerstone of business models and growth strategies in several markets, but it’s important to recognize the specific capabilities necessary for success (e.g., pricing, operations, investment and capital management).
Just as different product sets represent fundamentally different lines of business, customer segments also vary significantly. The needs of younger digital natives, mid-career savers and older retirees (or pre-retirees) are so different as to require specialization. Serving each group profitably requires unique capabilities. However, increasing value, expanding product access and strengthening engagement are priorities across all segments.
Younger, digital-native accumulators Younger, digitally native consumers expect flexibility, self-service options and high degrees of automation. They are price conscious (thanks to free online trading platforms) and naturally suspicious of inflexible and packaged financial products. They will seek advice via online channels, not in person-to-person settings or through traditional relationships with brokers and advisors.
Firms are seeking to engage these accumulators earlier, with targeted investment propositions for those in their early 20s. To drive engagement, firms will need to increase their presence in social media channels with educational content (including videos). Mobile apps will become more user-friendly, with the gamification elements that Millennials and Gen Z now expect. The goal is to connect early to develop value-adding relationships that can last a lifetime.
Older pre-retirees, retirees and decumulatorsOlder customers—including asset builders (aged 41—50) and peak accumulators (aged 50—60)—are usually more comfortable with traditional advice models. Because their decisions are critical to retirement readiness given their age, their plans must account for multiple complexities (e.g., consolidation of pots from multiple employers, unique family structures). To serve this segment, firms will need to offer a range of appropriate products and options for accessing advice.
Even retirees can no longer be considered a single block as many older citizens continue working in some capacity and may “retire” multiple times as they transition out of formal employment. New decumulation products (e.g., collective defined contribution) may gain traction with the increasing number of citizens tapping personal retirement income.
Generations of workers who built their retirement outside of traditional, employer-provided defined benefit schemes or who have significant complementary “pillar 3” provisions are also entering the decumulation phase. This cohort faces critical decisions (e.g., annuitization versus draw-down, investment risk levels, tax planning, inheritance planning), which present a unique opportunity for firms. Those that can provide planning and advice at the right time through the right channel will be best positioned to retain existing and win over new customers.
Serving different asset levelsGrowth strategies and product offerings will differ across the major market segments, including high-net-worth (HNW), mass affluent and underserved customers. These segments have diverse needs, representing fundamentally different businesses, which means most firms will likely specialize in one or two segments.
The competition for those with the most assets is intense and may require firms to continually expand their offerings. This segment expects tailored, concierge-level experiences with easy access to non-traditional services (e.g., estate planning, tax and trust advisory services, legal, travel and lifestyle support). To own these customer relationships, firms will need to excel at relationship management, develop family office capabilities and build extended ecosystems with proven service providers.
Huge numbers of citizens with modest assets in both the UK and continental Europe would benefit greatly from the industry’s expertise and products. To serve them profitably requires low-cost robo models that combine simple, affordable products with basic guidance on savings and financial goal setting. Partnering more effectively with government and quasi-government entities and other firms, including fintechs, banks, asset managers and large employers, is also key. Embedded and bundled offerings available through non-traditional channels will help expand access in some markets.
More sophisticated robo-advice capabilities can deliver guidance that less financially savvy customers need, while extensive automation and digitization at every touchpoint will establish the lean and scalable operating environment necessary to profitably serve the mass market.
With the shift from defined benefit to defined contribution schemes likely to challenge many consumers in the next five years, more retirees will confront the reality of insufficient retirement savings, placing further stress on the system. The current average pension pot of £40,000 falls short of what people need for a minimally comfortable living standard in retirement, and the cost-of-living crisis has made the situation even more dire.
increase, from 2021 to 2024, in the size of pension savings needed to maintain a “basic” standard of living in retirement in the UK
Source: The Resolution Foundation
“Bifurcated” strategies are emerging as firms balance pensions risk transfer (requiring underwriting, investment and operational discipline) with net-new innovations in product design and distribution. The surplus in UK-defined benefit schemes is accelerating the pensions risk transfer market, which was projected to grow to £50 billion in 2024.
UK market values, end of Q3 2024
£1,176b: private sector defined benefit and hybrid pension schemes, 2024£830b: private sector defined benefit and hybrid pension schemes insurance policy assets £872b: private sector defined contribution and public sector defined benefit and hybrid pension schemes
Source: UK Office of National Statistics
More UK customers need advice to help preserve assets.
Products and customersSome firms are focusing on accumulation offerings for younger customers. Others are developing innovative new decumulation products (e.g., collective defined contribution). Increasing customer access and engagement, often through digital and app-based journeys and experiences, are priorities for all types of firms. Feeling pressure to work longer, more consumers are unlocking assets (e.g., release of home equity). Banks, retail investment platforms, wealth managers, independent financial advisors and neobanks are competing for these and other customers, with many positioning around critical life stages.
Firms recognize the need to increase accessibility and engage customers where they are, including through new technology and gamification. One mainstream UK L&P provider has established a vlogging platform. Access to guidance and support will only become more important. Though relatively few UK life insurers offer direct advice today, more customers need it, particularly for preserving assets. Customers looking to convert property equity into retirement savings may also be seeking guidance.
Regulatory outlookAuthorities are focused on providing better value for money in workplace propositions, which point toward greater customer centricity. The drive to open insurance, accelerated by regulatory initiatives like auto-enrollment and pensions dashboards, is breaking down barriers to entry into what has traditionally been a closed sector. Participating in pensions dashboards will require many insurers to simplify their offerings and clarify their value propositions.
At the same time, firms are closely monitoring the pending outcome of the FCA’s Advice Guidance Boundary review, and the Targeted Support consultation given the potential changes to the distribution landscape these may create. Additionally, through its Pensions Bill, the UK government is weighing options to enhance the operation and outcomes of the UK pensions market; the considerations include fund consolidation and stimulating UK growth through defined benefit pension surplus investments.
Learn more about the global insurance outlook >>
The recent past has tested shareholders, management and clients of insurance companies as they responded to a prolonged period of low interest rates followed by significant volatility and ongoing uncertainty. Revenue has been largely flat and growth in reserves similarly sluggish. Reducing interest rates initially inflated the stock value of provisions, only to reverse dramatically in 2022. Rising reserve surrenders in 2022 and 2023 compounded the impact, reducing the stock of in-force liabilities, with the biggest impacts in Italy and Luxembourg. The annualized change in traditional business technical provisions across the region was nearly -2%. The closing reserves at the end of 2023 were less than 90% of the opening valuation at the end of 2016.
European citizens financially confident about their retirement, 2023
Source: EIOPA
In contrast, indexed and unit-linked (UL) provisions grew with a compound annual growth rate (CAGR) of 8%, with UL reserves at the end of 2023 reaching 175% of the opening value. This trend is evident across all markets, including Germany, which has nearly doubled its share of total provisions in UL from 8% to 15%.
Operational considerations have been a high priority, given sluggish growth and high inflation. Rising expenses, some of which result from investments, are consuming an increasing share of operating income. Acquisition costs aligned more closely with growth metrics. Despite consolidation, nearly a quarter of all life operating entities have ceased reporting since the commencement of EIOPA’s SII reporting. Consolidation has been most evident in Benelux, where it exceeds 35%, and in Spain, where the population of life insurers has halved.
What’s next for the life sector in Europe
With a total technical provision of €6.5 trillion at the end of 2023 and a critical purpose to protect the wealth and well-being of the region, the sector’s outlook is generally positive. However, the persistence of uncertainty and likelihood of future volatility confirm the need for change and transformation. As we highlight, the priorities include strategic focus, increased customer centricity, modernized tech, and refreshed talent and cultures.
Consolidation and reorganization: More consolidation is likely to right-size the sector and achieve the scale to meet evolving investment requirements. The consolidation opportunities are clear in Germany and France. Potential buyer options have expanded beyond pure-play consolidators to include large-scale composites and insurers. A notable recent move is Allianz’s acquisition of specialist consolidator Viridium, following potential sales of Zurich Insurance and Axa’s domestic German life operations.
Interest appears to be waning in pan-European and cross-border life insurance operations, partly driven by Italy’s trend to domesticate manufacturing (e.g., Intesa San Paolo’s return from Ireland to Italy). However, some successful pan-European players (e.g., Allianz Global Life) continue to thrive through product innovation.
The competitive landscape: The role of banks is also evolving. Many are seeking to operate in the life insurance sector beyond distribution. Having rebuilt their balance sheets after the financial crisis, banks have renewed their ability to generate returns. The normalization of interest rates has helped. Banks largely recognize the need to innovate, as evidenced by their efforts to add capital-light and fee-generating products to their portfolios.
The integrated finance model (e.g., Allfinanz) is resurgent, as banks aim to protect their futures against challenges to their core earnings. The new Capital Requirements Regulations (CRR3), effective from 1 January 2025, made capital treatment for bank ownership of assets attractive, leading to enhanced interest in bank-to-buyout joint ventures and insurance capabilities, including adjacent businesses in advice and asset management.
