Life insurance for retirement savings

The retirement saving market is evolving rapidly as the role of governments and employers in pension provision declines. An ageing global population is challenging the funding of pension systems, as a smaller working-age population must support a growing retired population – especially in some developed economies. At the nexus of the retirement planning system, voluntary pension saving schemes are emerging as an utmost individual necessity to supplement traditional state-sponsored and occupational pensions.

Individuals on even moderate incomes are increasingly in need of ways to accumulate assets for retirement. Financial services providers, especially banks and life insurers, have a growing role to play. The life insurance industry has an opportunity to become a lifeline for retirement preparedness. To achieve this, life insurers will need to differentiate their offerings from competitors by innovating on the asset management front. Identifying avenues to activate and meet new demands of a broader consumer group will be key.

Responsibility for retirement saving is shifting rapidly onto individuals as ageing populations challenge the funding of pension systems. Concern is growing that the rate of saving for retirement accumulation globally falls far short of the sums that will be needed. Life insurers can respond to this growing long-term private savings need by activating new demand.

It is estimated that about $2.3 trillion of savings premiums were written globally in 2022, and according to Swiss-Re’s forecast this will grow to $4 trillion globally in 2033, a 2.7 percent average annual growth rate in real terms.

To harness the opportunity and differentiate insurance saving products from competitors, life insurers may wish to free up capital, boost their underwriting capacity and focus on product innovation for growth.

The large, mobilizable long-term saving pools that are emerging also require life insurers to be agile in anticipating evolving consumer needs, to grow saving business competitively, and help to narrow the retirement savings gap. There is an opportunity for life insurers to develop new convertible life products that proactively anticipate consumers’ needs and market them through digital channels.

Actions for innovation and growth

Beyond reinsurance, further tapping the retirement saving market entails life insurers taking targeted actions and innovating. The large, mobilizable long-term savings pool opportunity emerging requires life insurers to be agile and anticipate evolving consumer and investor needs. There are several calls for action through which life insurers can have a medium-term market impact, by growing their savings business and narrowing the retirement savings gap – but today we will cover two key aspects: raising financial literacy, and mobilisation of retirement savings to help the deepening of capital markets.

Raising financial literacy

The need for individuals to possess sufficient financial knowledge to plan for retirement becomes more urgent as more responsibility for retirement planning passes to them. Multiple factors determine financial literacy, including one’s socio-economic status, field of employment and education level. The target customer for life insurance is expected to widen from high net-worth to more middle-income individuals. However, less financially sophisticated households with resources concentrated in fewer financial products are typically less knowledgeable of the benefits and functions of the different life insurance saving products.

Low financial literacy and higher product complexity can hamper uptake of life insurance policies. Life insurers may wish to take steps to increase consumer knowledge of the life insurance value proposition as a saving and retirement planning vehicle. Avenues to bridge the knowledge gap include consumer outreach campaigns through traditional and digital platforms. Combining online and social media outreach could help raise the awareness of the benefits of life insurance fast, and catch-up with competitors. Public education is also key. There is scope for governments to improve the provision of this public good and life insurers can engage with and advise policymakers to integrate financial literacy courses into learning curricula.

Deepen capital markets, particularly in developing economies

Life insurance penetration is positively correlated with indicators such as greater GDP per capita, wealth and asset ownership. In many emerging economies, the limited depth of local capital markets is often a key growth limitation for the private sector. The absence of a large and active pool of domestic investor capital, and deep trading liquidity for securities, typically hampers companies’ access to growth capital, but also prevents investors such as life insurers from accessing at fair prices a wide range of assets and derivative products to mirror their long-dated liabilities and manage risks.

For life insurers, deeper domestic capital markets would be highly beneficial as they typically seek to buy and hold longer-duration assets to match their typically long-dated liabilities, in contrast to banks, which use short-term funding and maturity transformation. The life insurance industry requires deep and well-functioning domestic capital markets to raise its own long-term capital to finance its investment and growth.

The insurance industry can support governments, regulators, investors and other market participants to promote deeper capital markets. Implementing a robust regulatory and supervisory framework would be a first step to establish investor confidence and support improved financial intermediation.

Conclusion

Life insurance can function as a strategic tool to support savings for retirement in growing by competing, attracting and retaining saving businesses. It has the potential to strengthen an insurer's balance sheet, stabilise earnings and write new business, while mitigating risks and optimising capital.