Changing us demographics–future of life insurance by Sutherland Global Services

Changing US Demographics–Future of Life Insurance December, 2013

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US population is projected to increase from c. 309 Mn in 2012 to c. 400 Mn in 2050, reaching c. 420 by 2060 United States Population: 1990 to 2060 â&#x20AC;&#x201C; (in Mn) 600

500

400

420

400

309 282 300

250

200

100

0 1990

2000

2010

2020

2030

2040

2050

2060

Source: US Census Bureau

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US baby boomers c.76 Mn people will begin to exit the workforce over coming years Population by Age and Sex: 2012 – (in Mn) Baby Boomers

0 Under 5 years

5 to 10 to 15 to 20 to 25 to 30 to 35 to 39 40 to 45 to 50 to 55 to 60 to 65 to 70 to 75 to 80 to 85 years 9 years 14 years 19 years 24 years 29 years 34 years years 44 years 49 years 54 years 59 years 64 years 69 years 74 years 79 years 84 years and over

Note: According to the U.S. Census Bureau, a baby boomer is a person who was born during the demographic Post–World War II baby boom between the years 1946 and 1964 Source: US Census Bureau

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Distribution of Population by Age: 2012 and 2060 Distribution of Population by Age: 2012 and 2060 â&#x20AC;&#x201C; (% of total population)

14%

65 Years and Over

22%

18 to 64 Years Under 18 Years

63%

57%

23%

21% 2012

2060

Source: US Census Bureau

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Population of 65 years and above is gradually becoming larger than that of under 18 years Population Under 18 Years and 65 Years and Over: 1990 to 2060 â&#x20AC;&#x201C; (in Mn) 100 90 80 70 60 50 40 30 20 10 0 1990

2000

2010

2020 Under 18 years

2030

2040

2050

2060

65 years and over

Source: US Census Bureau

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For life insurers, two most promising segments are consumers in the 18-35 age group and over 55 years Demographic shift reshaping the addressable market 25 2010

As per the US census Bureau, the proportion of US population in the 18-35 age group and over 55 years is set to grow with 25-30% and 1012% respectively by 2020

Population in Mn

2020

0 0-4

5-9

10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89

90+

Age Source: US Census Bureau

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Three key retirement challenges faced by US.... • Based on a survey conducted by Prudential Inc. of workers eligible to participate in a defined contribution plan:

Saving Challenges

– Only one in five of the respondent felt "very" confident that they would be able to save enough to retire when they want – Nearly two third of senior finance executives sponsored by Prudential believe that a significant portion of their workers will have to delay retirement due to inadequate savings

Coverage Challenges

Retirement Income Challenges

• As per various estimates, somewhere between 36% and 48% of private-sector workers have no access to retirement plans on the job as a part of their job reward – According to the National Institute on Retirement Security, 48% of private-sector employees between the age of 28 and 64 had access to a retirement plan on the job by 2011 which was down from 62% in 2000 – The American Society of Pension Professionals and Actuaries estimates the private-sector access to retirement plans for full- and part-time workers to be at 64%

• After 1980, many employers have discontinued their defined benefit plans and replaced it with defined contribution plan • These plans are largely funded by plan-participants who are responsible for managing their own investments and the payouts that are not guaranteed but are dependent on how much participants save and how their investments perform • In 1980, ~84% of private sector workers had a defined benefit plan and 38% had a defined contribution plan. This changed drastically by 2011, where only 3% have defined-benefit pensions alone, and just 11 percent had both a defined-benefit plan and a defined-contribution plan

Source: IIS 49th Annual Seminar, US Census Bureau

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..can only be overcome by insurance industry and government collaboration

Automatic enrollment and escalation of participant contributions

• Saving challenge has been addressed by a number of collaborative initiatives between government and the private sector • The Pension Protection Act of 2006 encourages the automatic enrollment of employees into defined contribution plans, and automatic escalation of participant contributions • As a result, these practices have been adopted by many defined contribution plan sponsors and are improving participation and savings rates

• Employers of all sizes have long considered the cost and long-term liabilities associated with defined benefit plans. However, small employers consider the defined contribution plans as costly and complex

Multiple Small Employer Plans (MSEP)

Agents as financial planners and investment advisers

• In order to improve the plan coverage, private players are developing proposals to allow for the creation of Multiple Small Employer Plans (MSEPs) • MSEPs would allow companies employing fewer than 100 people each to participate in a single plan, thereby achieving economies of scale

• Under the defined contribution plan participants are responsible for managing their own investments • There is a particular segment of retirees and near retirees who have a complex set of financial needs and they would look for retirement income and expect not to outlive their accumulated assets • This opportunity can be well served if insurers train their agents to act more like financial planners and investment advisers as against merely distribution agents • At the same time there is a challenge posed by other non insurance players like wealth management companies which have an edge in terms of better technology and a strong line of products • This change in demographic presents opportunities for insurers to offer alternative lifetime-income solutions to protect the retirement security of individuals (e.g., certain deferred fixed annuities)

Source: Federal Insurance Office, US Census Bureau

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Life insurers need to match their distribution networks to the needs of younger generation

Different set of needs among younger consumers

• Today, there are more single households than married ones who would like to stay single for a longer period • These young single consumers are more likely to experience major life events, which often lead to the purchase of life insurance, including getting married, having children and buying a home • Single people are often additionally responsible for their elders, and they want to make sure their dependents are being cared for • Their needs would gradually change with these life events and they would be looking for basic protection and savings as they enter the life insurance market for the first time

Simpler Financial Needs

• Past few economically weak years have forced consumers to cut household expenditure on insurance, this decline is most noticeable among younger consumers • 18-35 age group customers who are first time buyers of life insurance products are complete strangers to life carriers. This younger generations have adopted a distinctive lifestyles and behavioral patterns that are unfamiliar to the industry • For several years, insurers have been focusing on needs of baby boomers and developing products accordingly, but now this value proposition would not work for younger consumers • New younger consumers would be looking for basic protection and savings when they enter the life insurance market for the first time. In order to serve this younger segment of customers, insurers are trying to understand and measure customer behavior by collecting data on individuals • These insights play important role in responding to the needs of the younger customers

Online Buying Preference

• Gen Y consumers are technically savvy, have an optimistic outlook and have high expectations in terms of products and how they are served by insurance companies • Considering their novice behavior towards life insurance products, there is high tendency that they would like to develop basic understanding through online search • To serve the needs of this segment insurers are becoming more technologically savvy and developing a more connected distribution channel • Many insurers have started taking social media seriously as a marketing tool and monitoring it regularly in order to compliment their offerings

Source: US Census Bureau, SGS Research and Analysis

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Thank You