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For some insurers, profound structural actions, such as run-off deals, are needed to better address the challenges they face.</div></div></div><div data-component="mdc-c-link-container" class="mdc-c-link-container___xefGu_2734c4f mdc-c-link-container--align-left mdc-c-link-container--display-column___X0HDD_2734c4f mdc-u-grid-gutter-sm"><a data-component="mdc-c-link" href="#" class="mdc-c-link-icon___SEKyg_2734c4f" role="button" aria-label="Share on linkedin" data-layer-event-prefix="CTA Link" data-layer-action="click" data-layer-category="share" data-layer-subcategory="social" data-layer-subcategory2="linkedin" data-layer-text="Share on LinkedIn"><span data-component="mdc-c-icon" class="mdc-c-icon___oi7ef_2734c4f mdc-c-icon--radial___y3csX_2734c4f mdc-c-icon--size-xl___3BEee_2734c4f mck-linkedin-thin-icon"></span></a><a data-component="mdc-c-link" href="#" class="mdc-c-link-icon___SEKyg_2734c4f" role="button" aria-label="Tweet on X" data-layer-event-prefix="CTA Link" data-layer-action="click" data-layer-category="share" data-layer-subcategory="social" data-layer-subcategory2="twitter" data-layer-text="Share on X"><span data-component="mdc-c-icon" class="mdc-c-icon___oi7ef_2734c4f mdc-c-icon--radial___y3csX_2734c4f mdc-c-icon--size-xl___3BEee_2734c4f mck-twitter-icon"></span></a><a data-component="mdc-c-link" href="#" class="mdc-c-link-icon___SEKyg_2734c4f" role="button" aria-label="Share on facebook" data-layer-event-prefix="CTA Link" data-layer-action="click" data-layer-category="share" data-layer-subcategory="social" data-layer-subcategory2="facebook" data-layer-text="Share on Facebook"><span data-component="mdc-c-icon" class="mdc-c-icon___oi7ef_2734c4f mdc-c-icon--radial___y3csX_2734c4f mdc-c-icon--size-xl___3BEee_2734c4f mck-facebook-thin-icon"></span></a></div></div></div><div class="BlogEntryHero_mck-c-blog-entry-hero__background-wrapper__9sSv7 BlogEntryHero_mck-c-blog-entry-hero__background-wrapper--small__MTxFZ mdc-u-grid-col-md-start-2 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-3 mdc-u-grid-col-lg-end-11"><style></style><div data-component="mdc-c-background-image" class="mdc-c-bg-image___GJdv1_2734c4f background-image-default-blog"></div></div></div></div></div><div class="mck-o-container"><div class="mck-o-container--wrapped mck-o-container--mobile-spacing mdc-u-grid mdc-u-grid-gutter-xxl"><div class="mdc-u-grid mdc-u-grid-col-1 mdc-u-grid-col-md-12 mdc-u-grid-gutter-xxl"><div class="mdc-u-grid-col-md-start-2 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-3 mdc-u-grid-col-lg-end-11"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-xxl BlogEntryContent_mck-c-blog-entry-content__authors-and-tags-wrapper__xvLOB"><div data-component="mdc-c-link-container" class="mdc-c-link-container___xefGu_2734c4f mdc-c-link-container--display-column___X0HDD_2734c4f BlogEntryContent_mck-c-blog-entry-content__tag-container__b0iuz mdc-u-grid-gutter-xxs"><div class="BlogEntryContent_mck-c-blog-entry-content__tag-link__fxyON"><a data-component="mdc-c-link" href="/industries/financial-services/our-insights/insurance-blog#/tag/life" class="mdc-c-link-icon___SEKyg_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">Life Insurance</span></a></div><div class="BlogEntryContent_mck-c-blog-entry-content__tag-link__fxyON"><a data-component="mdc-c-link" href="/industries/financial-services/our-insights/insurance-blog#/tag/growth" class="mdc-c-link-icon___SEKyg_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">Growth</span></a></div></div></div><div class="mdc-o-content-body"><p><span class="BlogEntryContent_mck-c-blog-entry-content__display-date__vCR9M"><time dateTime="2019-12-04T00:00:00Z">December 4, 2019</time></span>The profitability of European life insurers is under pressure. Major challenges involve shrinking investment returns from an ultra-low interest environment, increased capital requirements from Solvency II on traditional (guaranteed) products, and unaddressed structural cost challenges.</p> <p>Life insurance carriers must consider all levers to address these challenges. Especially for those trapped in a position of idle growth, one promising strategy is to transfer unprofitable closed books to consolidators to free up resources and energy to focus on higher-growth areas. While the United Kingdom and United States have seen many closed-book deals, players in continental Europe have made less use of this option to date. The frequency of closed-book deals is likely to increase throughout Europe in the next few years, and the opportunity is significant.</p> <h2>Three considerations to maximize value with life closed books</h2> <p>As the business needs of life insurers evolve, in-house management of the closed-book business may no longer be aligned with overarching strategy. Owners that want to explore whether a closed-book sale makes sense should first evaluate three factors.</p> <p><strong>1. Optimal exposure to closed books.</strong>Insurers need to calculate the economic value of the in-force business against the potential value creation of innovative products and new ways to engage customers. If they estimate the value added above the cost of capital from new products to be much higher than the capital returns from existing policies, insurers should seriously consider lower exposure.</p> <p><strong>2. Current skill set of the organization.</strong>Insurers should thoroughly assess their existing capabilities to run an effective closed-book operation—especially compared with the skill sets of specialized consolidators. Without the required skills, increasing the strategic focus by transferring the closed books is likely the better option.</p> <p><strong>3. Relationships with clients and distributors</strong>Insurers need to assess how not operating a closed book would affect the nature of their client and distributor relationships. They should also investigate how they can mitigate potential hurdles—notably, in terms of customer ownership and quality of service.</p> <h2>Consolidators outperforming traditional owners across geographies</h2> <p>First, closed-books consolidators can maximize efficiency by managing closed books at scale. Our analysis shows steady consolidator outperformance of traditional life insurers across markets over the past ten years: US run-off players have performed better on both total shareholder returns (TSR) and return on equity (ROE). In the United Kingdom, run-off players have outperformed by TSR, while ROE is on par with the overall life insurance market. German run-off players have also consistently delivered a higher ROE.<sup>1</sup></p> <p>Second, when looking at consolidators’ operational metrics, the total cost per policy is below market average. In mature markets—such as the United States, where consolidators have achieved more scale than life insurance players—the pure administration-cost ratios of consolidators account for only 50 percent of those of the average market.</p> <p>European life insurers have been reluctant to sell to consolidators—a reticence reinforced by conventional wisdom that the public views such deals negatively. Yet our research finds such challenges are no more severe throughout continental Europe than in the United Kingdom or United States, both of which have enjoyed a robust closed-book deal market.<br/> <br/> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-inline-module-container mck-o-md-center"><div class="mdc-u-grid mdc-u-grid-gutter-lg mdc-u-grid-col-sm-1 mdc-u-grid--align-start mdc-u-mb-3 GenericItem_mck-c-generic-item__sGwKL"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-xs GenericItem_mck-c-generic-item__content__gq1m0"></div></div><div class="mck-u-inline-module-border-top mck-u-inline-module-border-bottom"><picture data-component="mdc-c-picture" class="Exhibit_mck-c-exhibit__image__pyIDm"><source media="(min-width: 768px)" srcSet="/~/media/mckinsey/industries/financial%20services/insurance%20blog/perspectives%20on%20the%20european%20life%20closed%20books%20market/exhibit%20life%20closed%20books.png?cq=50&cpy=Center"/><img alt="" src="/~/media/mckinsey/industries/financial%20services/insurance%20blog/perspectives%20on%20the%20european%20life%20closed%20books%20market/exhibit%20life%20closed%20books.png?cq=50&cpy=Center" loading="lazy"/></picture></div><div class="mck-u-sr-only"></div></div></p> <h2>The answers to successful closed-book deals</h2> <p>When evaluating the possible sale of closed books, life insurers must understand the ways in which consolidators can create value, as these upsides are split between the buyers and sellers, depending on the transaction structure. Consolidators can implement a set of actions to create value (exhibit). Acquirers that successfully pull off all five can improve TSR by a factor of 1.4 to 1.9 after the deal. The value split between the two parties is then reflected in the transaction price along with deal appetite, negotiation skills, and other factors.</p> <p>To date, European insurers have avoided selling their closed-book business, justifying this decision by pointing to regulatory, client, or distribution constraints. But as the UK and US markets suggest, the potential benefits are substantial. Carriers should closely review whether they truly are the best owners of their closed-book business. Evaluating their optimal exposure to closed books and their organizational capabilities is a constructive first step to capturing this value.</p> <br/> 1. To date, no German consolidator is listed; therefore, it was not possible to analyze or compare TSR performance with the overall German life insurance market.<br/> <em><br/> Contributors: Pierre-Ignace Bernard, Thomas Bossart, Marion Hämmerli, Nils Jean-Mairet, Johannes-Tobias Lorenz, Diego Mattone, and Sirus Ramezani and Thorsten Röttger </em><br/></div></div><aside class="mdc-u-grid-col-lg-start-11 mdc-u-grid-col-lg-span-2 BlogEntryContent_mck-c-blog-entry-content__side-bar__YsMpJ"><section class="RelatedBlogPosts_mck-c-related-blog-posts__GnKmg"><h3 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-c-heading--title___5qyOB_2734c4f mdc-c-heading--border___K8dj3_2734c4f mdc-u-ts-5">related</h3><div data-component="mdc-c-module-wrapper" data-module-theme="light" data-module-background="white" data-module-category="" class="BlogItem_mck-c-blog-item__A6TBP BlogItem_mck-c-blog-item--transparent-bg__UXfdT mck-u-animation-slide-up"><a data-component="mdc-c-link" href="/industries/financial-services/our-insights/a-vision-for-european-life-insurance-the-time-for-bold-actions-has-come" class="mdc-c-link___lBbY1_2734c4f"><picture data-component="mdc-c-picture" class="BlogItem_mck-c-blog-item__picture__8xtXH"><style>.picture-avis-0 { aspect-ratio: 8/5 }</style><img alt="A vision for European life insurance: The time for bold actions has come" class="picture-avis-0" src="/~/media/mckinsey/industries/financial%20services/our%20insights/a%20vision%20for%20european%20life%20insurance%20the%20time%20for%20bold%20actions%20has%20come/vision-for-european-life-insurance_1536x1536_500.jpg?cq=50&mw=767&car=8:5&cpy=Center" loading="lazy"/></picture></a><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f BlogItem_mck-c-blog-item__text-container__WEEHk BlogItem_mck-c-blog-item__text-container--related__VjvZk"><h4 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-u-ts-6"><a data-component="mdc-c-link" href="/industries/financial-services/our-insights/a-vision-for-european-life-insurance-the-time-for-bold-actions-has-come" class="mdc-c-link-heading___Zggl8_2734c4f mdc-c-link___lBbY1_2734c4f">A vision for European life insurance: The time for bold actions has come</a></h4><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f">To survive and thrive in the coming years, European life insurance players must adapt by embracing six bold moves.</div></div></div><div data-component="mdc-c-module-wrapper" data-module-theme="light" data-module-background="white" data-module-category="" class="BlogItem_mck-c-blog-item__A6TBP BlogItem_mck-c-blog-item--transparent-bg__UXfdT mck-u-animation-slide-up"><a data-component="mdc-c-link" href="/industries/financial-services/our-insights/where-the-life-insurance-industry-can-go-from-here" class="mdc-c-link___lBbY1_2734c4f"><picture data-component="mdc-c-picture" class="BlogItem_mck-c-blog-item__picture__8xtXH"><style>.picture-where-0 { aspect-ratio: 8/5 }</style><img alt="Where the life insurance industry can go from here" class="picture-where-0" src="/~/media/mckinsey/industries/financial%20services/our%20insights/where%20the%20life%20insurance%20industry%20can%20go%20from%20here/stateoflifeinsurance-visual_1536x1536-01.jpg?cq=50&mw=767&car=8:5&cpy=Center" loading="lazy"/></picture></a><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f BlogItem_mck-c-blog-item__text-container__WEEHk BlogItem_mck-c-blog-item__text-container--related__VjvZk"><h4 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-u-ts-6"><a data-component="mdc-c-link" href="/industries/financial-services/our-insights/where-the-life-insurance-industry-can-go-from-here" class="mdc-c-link-heading___Zggl8_2734c4f mdc-c-link___lBbY1_2734c4f">Where the life insurance industry can go from here</a></h4><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f">Our annual life insurance and annuities review finds that the industry is poised for growth but will need to improve its capacity for bold resource allocation and productivity improvement.</div></div></div></section></aside></div></div></div><div data-component="mdc-c-module-wrapper" data-module-theme="light" data-module-background="lightest-grey" data-module-category="StandalonePromo" class="BlogPromo_mck-c-blog-promo__hSsYu BlogPromo_mck-c-blog-promo--full-width__pKXqL mck-u-animation-slide-up BlogEntryContent_mck-c-blog-entry-content__promobar___qKLu" data-layer-region="blog-one-click-module"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-lg"><div class="mck-o-container"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-lg mck-o-container--wrapped mck-o-container--mobile-spacing 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type="application/json">{"props":{"pageProps":{"locale":"en","dictionary":{},"sitecoreContext":{"route":{"name":"Perspective on the European life closed books market","displayName":"Perspective on the European life closed books market","fields":null,"databaseName":"web","deviceId":"fe5d7fdf-89c0-4d99-9aa3-b5fbd009c9f3","itemId":"e59c2c9a-a897-4df7-aaef-b89cecca5beb","itemLanguage":"en","itemVersion":1,"layoutId":"ae753eb4-a035-40b4-83bf-4b4438df6742","templateId":"d929136a-019a-4786-8072-3e3a60b2f31c","templateName":"Blog Entry","placeholders":{"jss-main":[{"uid":"e18e4703-f541-45d8-89c1-d5d8407f1708","componentName":"BlogEntry","dataSource":"","fields":{"data":{"blogEntry":{"title":{"jsonValue":{"value":"Note to the CEO: Our perspective on the European life insurance closed-book market"}},"sEOTitle":{"value":""},"description":{"jsonValue":{"value":"The life market in Europe is changing. For some insurers, profound structural actions, such as run-off deals, are needed to better address the challenges they face."}},"sEODescription":{"value":""},"displayDate":{"jsonValue":{"value":"2019-12-04T00:00:00Z"}},"body":{"value":"\u003cp\u003eThe profitability of European life insurers is under pressure. Major challenges involve shrinking investment returns from an ultra-low interest environment, increased capital requirements from Solvency II on traditional (guaranteed) products, and unaddressed structural cost challenges.\u003c/p\u003e\n\u003cp\u003eLife insurance carriers must consider all levers to address these challenges. Especially for those trapped in a position of idle growth, one promising strategy is to transfer unprofitable closed books to consolidators to free up resources and energy to focus on higher-growth areas. While the United Kingdom and United States have seen many closed-book deals, players in continental Europe have made less use of this option to date. The frequency of closed-book deals is likely to increase throughout Europe in the next few years, and the opportunity is significant.\u003c/p\u003e\n\u003ch2\u003eThree considerations to maximize value with life closed books\u003c/h2\u003e\n\u003cp\u003eAs the business needs of life insurers evolve, in-house management of the closed-book business may no longer be aligned with overarching strategy. Owners that want to explore whether a closed-book sale makes sense should first evaluate three factors.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e1. Optimal exposure to closed books.\u003c/strong\u003eInsurers need to calculate the economic value of the in-force business against the potential value creation of innovative products and new ways to engage customers. If they estimate the value added above the cost of capital from new products to be much higher than the capital returns from existing policies, insurers should seriously consider lower exposure.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e2. Current skill set of the organization.\u003c/strong\u003eInsurers should thoroughly assess their existing capabilities to run an effective closed-book operation\u0026mdash;especially compared with the skill sets of specialized consolidators. Without the required skills, increasing the strategic focus by transferring the closed books is likely the better option.\u003c/p\u003e\n\u003cp\u003e\u003cstrong\u003e3. Relationships with clients and distributors\u003c/strong\u003eInsurers need to assess how not operating a closed book would affect the nature of their client and distributor relationships. They should also investigate how they can mitigate potential hurdles\u0026mdash;notably, in terms of customer ownership and quality of service.\u003c/p\u003e\n\u003ch2\u003eConsolidators outperforming traditional owners across geographies\u003c/h2\u003e\n\u003cp\u003eFirst, closed-books consolidators can maximize efficiency by managing closed books at scale. Our analysis shows steady consolidator outperformance of traditional life insurers across markets over the past ten years: US run-off players have performed better on both total shareholder returns (TSR) and return on equity (ROE). In the United Kingdom, run-off players have outperformed by TSR, while ROE is on par with the overall life insurance market. German run-off players have also consistently delivered a higher ROE.\u003csup\u003e1\u003c/sup\u003e\u003c/p\u003e\n\u003cp\u003eSecond, when looking at consolidators\u0026rsquo; operational metrics, the total cost per policy is below market average. In mature markets\u0026mdash;such as the United States, where consolidators have achieved more scale than life insurance players\u0026mdash;the pure administration-cost ratios of consolidators account for only 50 percent of those of the average market.\u003c/p\u003e\n\u003cp\u003eEuropean life insurers have been reluctant to sell to consolidators\u0026mdash;a reticence reinforced by conventional wisdom that the public views such deals negatively. Yet our research finds such challenges are no more severe throughout continental Europe than in the United Kingdom or United States, both of which have enjoyed a robust closed-book deal market.\u003cbr /\u003e\n\u003cbr /\u003e\n[[exhibit 1]]\u003c/p\u003e\n\u003ch2\u003eThe answers to successful closed-book deals\u003c/h2\u003e\n\u003cp\u003eWhen evaluating the possible sale of closed books, life insurers must understand the ways in which consolidators can create value, as these upsides are split between the buyers and sellers, depending on the transaction structure. Consolidators can implement a set of actions to create value (exhibit). Acquirers that successfully pull off all five can improve TSR by a factor of 1.4 to 1.9 after the deal. The value split between the two parties is then reflected in the transaction price along with deal appetite, negotiation skills, and other factors.\u003c/p\u003e\n\u003cp\u003eTo date, European insurers have avoided selling their closed-book business, justifying this decision by pointing to regulatory, client, or distribution constraints. But as the UK and US markets suggest, the potential benefits are substantial. Carriers should closely review whether they truly are the best owners of their closed-book business. Evaluating their optimal exposure to closed books and their organizational capabilities is a constructive first step to capturing this value.\u003c/p\u003e\n\u003cbr /\u003e\n1. To date, no German consolidator is listed; therefore, it was not possible to analyze or compare TSR performance with the overall German life insurance market.\u003cbr /\u003e\n\u003cem\u003e\u003cbr /\u003e\nContributors: Pierre-Ignace Bernard, Thomas Bossart, Marion H\u0026auml;mmerli, Nils Jean-Mairet, Johannes-Tobias Lorenz, Diego Mattone, and Sirus Ramezani and Thorsten R\u0026ouml;ttger \u003c/em\u003e\u003cbr /\u003e"},"hidePromoBar":{"boolValue":false},"hideDek":{"boolValue":false},"mobileReady":{"boolValue":true},"selectedModalSubscriptions":{"targetItems":[]},"hideFromSearchEngines":{"boolValue":false},"parent":{"id":"70BFA27C78D340E9903B27188D52CA4D","name":"Insurance Blog","title":{"value":"Insurance blog"},"description":{"value":"Short takes on vital topics for insurance leaders."},"url":{"path":"/industries/financial-services/our-insights/insurance-blog"},"heroImage":{"alt":"Video loop on Insurance matters","src":"/~/media/mckinsey/industries/financial services/insurance 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