The challenges and opportunities of individualisation
Tjitsger Hulshoff, Senior Investment Manager and Fiduciary Adviser at Aegon, examines the growing trend towards individualisation and what it it means for insurers
Sara Benwellposted on Monday, December 07, 2020
Sara Benwell: Is individualisation a growing trend among insurers and if so, why?
Tjitsger Hulshoff: Individualisation is an important and fast-growing trend when it comes to both wealth accumulation and decumulation. This comes from a range of factors, all of which independently drive developments towards individualisation.
It relates to corporates who cannot or will not bear the financial risks (and accompanying credit risk) for collective pensions. It comes from financial risk and related solvency risks that the provider of the pension bears. It stems from the trend towards total remuneration benefits, and it relates to the operational expenses that come from complexity in patched collective arrangements.
And more importantly, it relates to societal developments. People expect to economically own their assets, have real time insight and access to their assets, and have no hidden or not-chosen-for solidarity. They expect a pension as a service that is tailored to their specific needs and circumstances.
"People expect to economically own their assets, have real time insight and access to their assets"
All of this takes place on the back of the mega trend of an ageing population, which in itself causes a downward pressure on interest rates. It also causes a challenge for governments, as pension gaps are increasingly unlikely to be covered by future generations.
Governments (local and EU) consider it a human right for elderly citizens to have a financially sufficient life and hence look to the marketplace for solutions and will promote citizens (and corporations) to address potential pension gaps themselves (the latter is included in the EU action plan on the CMU)
Sara: What are some of the challenges with individualisation and how can they be overcome?
Tjitsger: Pensions have always been a low interest topic. People find it complicated, distrust providers due to information asymmetry, and show a range of behavioural biases when it comes to taking control of their future pensions (including the ostrich effect, present bias, bandwagon effect and optimism bias).
It is difficult to get people to act, and even more difficult to get them to act in the appropriate manner. The challenge for providers goes beyond this, as they need to ensure that the pension service is appropriate and suitable to the individual, now and in the future.
It should match their individual goals, (financial) circumstances, and their wishes, while aligning the complexity of the product with the cognitive abilities of the client.
"People find it complicated, distrust providers due to information asymmetry, and show a range of behavioural biases when it comes to taking control of their future"
This challenge is multiple: the proposition should be i) price efficient ii) transparent iii) explainable iv) fit for purpose and v) fitting for the client.
This requires great effort in a) a solid product oversight governance with the provider b) choice architecture (including but not limited to defaults and auto enrollments) and meta data (combining data of similar customers or cross product data) c) collective execution and collective arrangements d) tailoring of (relevant aspects of) product features to the client e) relevant interaction with clients and f) responsible investing.
Sara: What are the opportunities associated with individualisation and how can insurers best leverage these?
Tjitsger: The main opportunity with individualisation is to create features that create a service that is uniquely suitable and appropriate to the client and continuously in line with the (risk based) goals and desires of the client.
If combined in a collective execution at low cost, with embedded responsible investing, it can create a pension service that is fit for the client and empowers the client in solving their needs.
"A key component here is to own and leverage knowledge of the client."
This is in line with the two major trends in the asset industry, where institutional investing becomes more retail-like and retail investing becomes more institutional.
A key component here is to own and leverage knowledge of the client. Large datasets and clever interaction can identify the clients’ needs and goals (now and over time) and make the pension service a success. This is the leverage point.
Sara: Looking to the longer term, do you expect individualisation to become even more popular?
Tjitsger: Individualisation is a key trend. But it also is something of a semantics issue. Individualisation is about tailoring, not about execution. Collective arrangements can provide individual tailoring, just as individual solutions can.