Matthieu Despreaux
Director, Assurance – PwC Luxembourg
Article written by PwC Luxembourg as part of the sponsorship of ACA Insurance Days 2023, whose content is the sole responsibility of its author.
Life insurance in Luxembourg holds a prominent position in the Grand Duchy’s financial sector. With its robust regulatory framework, economic stability, and status as an international financial center, Luxembourg provides a conducive environment for the development and management of innovative and sophisticated life insurance products.
Market players in Luxembourg’s life insurance sector offer a wide variety of products that cater to the diverse needs of policyholders. This recognized expertise, combined with the flexibility of the structures offered, makes Luxembourg life insurance a sought-after choice for both residents and international investors.
However, due to competition, increased regulation, and evolving customer expectations, life insurance must reinvent itself. But what are the possible avenues of innovation for Luxembourg insurers in the current environment?
Innovation is becoming increasingly central to the evolution of life insurance products in Luxembourg, offering policyholders more personalized, flexible, and needs-focused solutions. Insurers are innovating on various fronts to differentiate themselves and enhance their value proposition.
The digitalization of the customer journey in life insurance has profoundly transformed how customers interact with insurance companies, making the process more transparent, accessible, and personalized.
Life insurers are increasingly offering online subscription options. These processes tend to simplify the subscription experience through online portals offering electronic forms, self-service tools, simulators (sometimes comparators), and faster access to product information.
Online simulators can help customers understand how different scenarios can affect their life insurance policy, whether in terms of returns, exposure to risks, premiums, or benefits. These simulations can enable the construction of theoretical investment portfolios that, for example, help customers analyze their potential environmental impact based on selected investments.
Online financial advice is becoming more common. Policyholders can now access digital platforms to receive personalized advice on financial planning, the selection of life insurance products, and other aspects related to their financial needs. This experience allows the user to have a “real-time” view of their investments, their surrender value, the composition of their portfolio, while allowing them to adjust beneficiary clauses and make contributions or withdrawals.
Among the innovations specific to life insurance products, we observe the development of contracts offering advanced financial management features, such as automatic portfolio rebalancing linked to insurance. This still relatively uncommon practice can open up new possibilities in terms of management practices.
Communication between insurers and policyholders is also becoming digitalized. Secure emails, mobile applications, and push notifications enable instant and increasingly effective communication.
One of the main challenges for insurers is to retain the habits of their senior clientele while updating outdated approaches to reach a younger clientele eager for innovation and modernization. We believe this is one of the keys to acquiring new customers.
The digitalization of the customer journey will inevitably pave the way for the implementation of modern computer tools that allow standardized and automated processing of management operations. This process can be a differentiating factor in the processing times of partial or total redemptions.
This substantial initial investment generally leads to significant productivity gains that allow insurers and their teams to focus on more technical or specialized cases.
Furthermore, automating the back office can improve internal processes, which has become strategic both to facilitate underwriting and daily management processes and to optimize review and documentation times imposed by the strengthening of regulatory requirements (AML, IDD, etc.). Beyond the sometimes prohibitive cost, implementing a new information system can have beneficial effects on the entire value chain.
Firstly, by automating and streamlining operational processes, the insurance company gains efficiency and reduces processing times while minimizing human errors.
Secondly, modern information systems facilitate the collection, storage, and management of data in a more centralized and structured manner. This allows for more in-depth data analysis. With the advent of robotics and artificial intelligence, data management and collection will sooner or later become a strategic issue. Current or future algorithms are, by definition, data consumers.
Indeed, when it comes to data, it logically involves the reliability of that data. By implementing new systems, companies can introduce analytical tools integrated into the systems, allowing for a more in-depth evaluation of risks. Furthermore, this collected data allows for more precise experience tables that can contribute to a better understanding of policyholders’ behavior and therefore better adaptation of pricing and subscription or redemption schemes.
Finally, a new information system will facilitate innovation because it will be more flexible with new possibilities and new technologies, enabling insurance companies to launch new products or offers more quickly.
Today, information systems are very focused on the downstream of the value chain. In a more holistic approach, upstream departments (product development and marketing departments) can be directly involved in parameterization and data integration (pricing, product specifics, customer details, etc.) to optimize and reduce downstream processing time.
The search for innovation is also reflected in the diversification of investment options within life insurance products. Policyholders increasingly have access to diversified funds, customized investment strategies, and solutions related to specific objectives, offering greater flexibility for savings and long-term financial planning.
The rise of environmental regulations has opened up new opportunities for insurers to offer new funds. Responsible funds aim to generate financial returns as competitive as those of “classic” funds while making a positive contribution to social and environmental issues.
In Luxembourg, responsible funds are gradually gaining popularity, reflecting growing demand from investors for investments aligned with their ethical values and future regulatory requirements. Indeed, the Luxembourg financial center has also committed to sustainability, with initiatives aimed at promoting responsible finance and offering investment solutions aligned with the sustainable development goals of various regulators.
Through existing vehicles (UCITS / SIF / SICAV), insurers offer different types of funds, some more innovative than others, but allowing them to position themselves with specific Environmental, Social, and Governance (ESG) offerings. Insurers can diversify their offerings through various types of funds, such as funds that actively incorporate ESG criteria into their asset selection process.
Other funds develop differentiation strategies, such as thematic funds that focus on specific sustainability themes, such as renewable energy, gender equality, health, etc. Conversely, there are exclusion funds that prefer an exclusion approach, avoiding investments in controversial sectors or companies related to environmental or social issues.
These new products often include transparent ESG reports, allowing investors to understand how ESG criteria are taken into account and what positive impacts are generated by their investments.
One of the limitations of this exercise is to convince investors of the value of choosing greener investments where, for some, only statistical history or a company’s reputation is sufficient to make certain investment choices (either for profitability or valuation reasons).
The second limitation lies in the lack of objectivity of certain indicators or reports assessing non-financial performance and societal impact of the entities in which to invest. The current lack of objectivity in evaluating non-financial performance highlights the need for a more uniform and transparent approach to ensure that investors have reliable information for informed decision-making. Overcoming the challenges related to the subjectivity of ESG indicators is now imperative to create a more ethical and sustainable market. Regulators and government bodies have understood this challenge and are actively working to standardize and objectify these indicators. The advent of SFDR and CSRD reports should contribute to improving existing regulations and standards.
The abundance of offerings in Luxembourg also lies in the high level of expertise of market participants. Indeed, Luxembourg clients have access to a wide variety of distribution channels to choose insurance policies that meet their specific needs. Not all market participants apply the same distribution strategies. Distribution is carried out through different channels, combining traditional approaches and more modern strategies.
Firstly, insurers continue to use their traditional distribution networks. Insurance agents and brokers play a key role in promoting proximity, loyalty, and advising local and international clients. The relationship between brokers and Luxembourg life insurers is an essential component of the life insurance industry in Luxembourg. Brokers play a crucial intermediary role by connecting clients with the appropriate life insurance products offered by insurers.
Subsidiaries of international banking groups, on the other hand, benefit from the banking network to deploy insurance offerings. This method allows bank clients to access markets or offerings that may not necessarily exist in the policyholder’s country of residence.
The relationship between family offices and life insurers in Luxembourg is often close and can take on several dimensions due to the key role these advisors play in managing and preserving their clients’ wealth. Collaboration between family offices and life insurers in Luxembourg is multidimensional, ranging from wealth management to estate planning and asset diversification. It is based on a deep understanding of the specific needs of each family and the ability of life insurers to provide customized solutions.
These B to B to C models allow insurers to focus on creating innovative products while having access to a knowledgeable clientele. The customer relationship is no longer direct with the policyholder but with a third-party wealth management professional who serves as a financial advisor to the client. This third-party professional can recommend products from different insurance companies, thus offering a wider range of options to their clientele and fostering competition in terms of pricing.
Distribution methods can be influenced by digitization and the establishment of online platforms. More and more insurers are offering online platforms that allow clients to subscribe to, manage, and track their life insurance policies from a connected device. This digitization has allowed new, more agile, and more responsive players (Fintech) to enter the market compared to traditional players. However, these startups must demonstrate the robustness of their offer and business model over time.
The integration of technology plays a crucial role in the design of innovative life insurance products. Luxembourg insurers leverage AI capabilities for risk assessment, offer personalization, and improved customer experience. The integration of AI into the Luxembourg life insurance market will represent a significant advancement that could profoundly influence how products are designed, managed, and marketed. This convergence of technology and insurance opens up new opportunities and tangible benefits.
Firstly, AI can be widely used in risk assessment. AI algorithms can analyze massive volumes of data. This will result in more personalized pricing and better adaptation of life insurance products to policyholders’ specific needs.
Secondly, AI plays a crucial role in improving the customer experience. AI-powered chatbots can instantly answer policyholders’ questions, provide information about products, assist in the subscription process, or, in some cases, handle legal issues. This will ultimately lead to smoother interaction and better understanding of customer expectations.
Going further, AI could also be used in investment management. AI models could analyze financial markets in real-time, make forecasts, and automatically adjust investment portfolios to optimize returns based on policyholders’ financial goals. This would bring a dynamic and efficient dimension to the management of life insurance funds.
Ultra-connectivity could also allow insurers to integrate devices such as health sensors, smartwatches, or other wearables that will collect real-time data on policyholders’ health. The goal would be to adjust policy pricing based on lifestyle and habits.
However, the integration of AI also raises challenges, including data privacy and transparency. Ensuring the protection of personal information while maximizing the benefits of AI remains a crucial concern and a strategic issue for both insurers and regulators.
Other options may be considered by insurers, if regulation allows, such as using blockchain technology to improve transparency, security, and efficiency of insurance contracts. For more daring clients, insurers could also offer products indexed to the value of reference cryptocurrencies.
Overall, the integration of AI into the market represents a strategic step towards a more agile, efficient, and customer-centric industry. This illustrates the sector’s determination to stay at the forefront of innovations to better meet the changing needs of policyholders in an ever-evolving digital environment.
There are numerous challenges for insurers wishing to disrupt and align with the expectations of their current and future clients. Current technological and computer developments, combined with the advent of AI, are revolutionizing a rapidly changing market. However, insurers face strong constraints that could slow down their innovation strategy.
Firstly, the insurance market is one of the most regulated environments in Europe, and the related regulation (with the ultimate goal of consumer protection) sometimes pushes insurers to limit or postpone their actions. The insurance sector is subject to strict regulations, and Luxembourg insurers must comply with local and international standards.
Indeed, innovative initiatives often have to align with regulatory requirements, which can slow down the innovation process. Cross-border business may require dealing with different regulators applying their country’s political rules. It can sometimes be challenging to find solutions that can satisfy each interlocutor for the same issue.
Still related to regulation, data protection is a key concern. Insurers must ensure the confidentiality and security of clients’ data, which can be a constraint when adopting new technologies and using big data on international servers. Moreover, data processing, backup policies, and server management can result in prohibitive costs.
From the client’s perspective, information security and data management issues can lead to reluctance to adopt new management or subscription methods. In addition, insurance products can be complex in their structure. Innovation in this context requires increased communication and education to clients or those responsible for their relationship to ensure proper understanding of new products, their risk levels, and their regulatory and tax impacts.
The implementation of new technologies and innovative products can require significant investments in terms of financial, human, and technological resources. This financial constraint can limit insurers’ ability to innovate quickly. The strong competition in the Luxembourg market can limit risk-taking. Different initiatives must allow reaching new customers without negatively impacting the collection or existing products. Moreover, future innovative products must comply with regulatory constraints without eroding the company’s margins.
The increasing longevity of the population can also be perceived as a constraint, with annuities to be projected over a longer period, but this could favor the emergence of new products specifically designed to cover longevity risks, offering benefits over an extended period or conversion options into life annuities.
Innovation in Luxembourg life insurance products is characterized by a combination of advanced technological approaches, increased personalization, and diversified investment solutions, creating an environment conducive to meeting the changing needs of policyholders. With the development of AI and ultra-connectivity, new products will appear in the coming years.
Some products could also be created to address challenges related to climate change. Life insurance products could be designed to cover specific risks related to extreme weather events.
With longer lifespans, multi-generational life insurance could involve life insurance products that encompass several generations, with benefits for policyholders and their descendants, promoting long-term estate planning.
Society and work habits tend to evolve, and new generations no longer necessarily aim for a career but prefer a new form of independence. Based on this premise, insurers must also evolve their products to reach these target audiences, which are very different from their usual targets, with life insurance products specifically tailored to independent workers and entrepreneurs, taking into account their unique financial protection needs.
These mass offerings must, however, generate profits to interest life insurers. In this context, process automation will become a major issue that will enable the economies of scale necessary to reach new, less profitable targets individually but with a high volumetric potential.
Innovation, regardless of its form, will be a key challenge in the coming years to continue creating value. Insurers with access to high-quality data and who choose to invest in tools to manage and use this data will have a competitive advantage. One of the challenges lies in finding the right balance between retaining a premium clientele expecting a more traditional relationship with a physical presence and dedicated moments, and new end-to-end digital communication modes with users who want immediate access to information and standardized digitization. Many solutions are available in the market, both in terms of tools and partnerships. The range of possibilities is wide.
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