Library: McKinsey – Running up on runoff: Strategic options for life closed books

Executive summary :

Insurers’ solvency and profits are under considerable pressure 

The traditional value proposition of life insurance in Europe has been called into question. Breakout moves have not reached industry scale, and as the need for old-age provisioning continues to grow, the challenges continue to increase.

These challenges include an ultra low interest-rate environment, which has prevailed for more than a decade; industry-wide structural costs that have not been sufficiently addressed, especially administration and acquisition costs; and a new capital regime (Solvency II) that not only demands higher capital charges for high-guarantee books but also leads to higher volatility in risk capital charges over time (exhibit 1).

Further complicating matters, the COVID-19 crisis has accelerated these challenges. Capital market turmoil and a further reduction of interest rates have put pressure on the solvency and profits of life insurers, with effects ranging from decreasing premiums paid because of lockdowns to increasing economic uncertainty and mortality.

In this article, we explore how insurers can create value from their closed books—policies that continue to generate revenue but no longer receive new business—as well as which partnerships and circumstances show the most potential.

To this aim, we have conducted analyses on three different runoff markets: the United States, the United Kingdom (both mature closed-book markets with long histories of consolidation), and Continental Europe, where the consolidation of closed life books is still in its initial phase.

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