A comeback for life insurance: in the future, the industry will look very different, but will be vibrant and growing.

Over the years, life insurance industry critics frequently have disparaged its slow growth, high costs, low return on capital and recurring tendency to enable market conduct issues and product mis-pricing However, in the past three to four-years, insurers have delivered strong performance and successfully attacked many of the industry's problems. The sector is well positioned to build on its success and be even more prosperous. Here's how the industry might look in the year 2015.

Winning with Scale

Driven by pressures to grow the business and reduce costs, and seeking to take advantage of increasingly complex risk management methodologies and reporting requirements, the industry will be more concentrated in 2015. The top 25 insurers will own more than 85% of the market, compared to the 75% market share they have today. The top 10 will grow from today's 50% market share to more than 65%.

The industry also will go global as large companies search for growth and diversification of risk. For the largest domestic companies, their share of earnings from non-U.S, sources will rise from about 10% today to more than one-third.

Capturing the Boomers

Back home, insurers will score big in the retirement market. The industry's ability to offer guarantees will allow companies to capitalize on retiring baby boomers' needs for income, elder care and assert liquidation in the years ahead. Having learned from its past mistakes, insurers largely will avoid suitability and compliance issues that can come with marketing to the elderly.

Individual insurance markets also will experience revolutionary changes. Mandated producer compensation disclosures, finally arriving in a once protected and opaque market, will rock the individual markets. However, agent-based distribution systems will adapt to new compensation programs better matched to the services provided in specific market segments. These efforts will turn around the declining and aging sales force and lead to the recruitment of younger, more dynamic advisers.

While the high-net-worth market will remain irresistible to many companies, the real growth story in the years ahead will be the industry's success at penetrating the underserved middle market. Self-motivated, low-advice purchasing will enjoy broader acceptance. Banks, aided by compensation disclosures, will finally solve the life sales conundrum and capture a significant share of non-high-net-worth sales. The industry will finally expand the market, providing growth opportunities for all companies.

Advanced risk management methods will be essential to the success of all companies. Capital markets will drive a growing demand for non-reinsurance solutions for balance sheet management. Supported by the market's appetite for uncorrelated risks, securitization and transfer of insurance risk to the markets will become a common risk management technique.

Regulations Converge 

Finally, by 2015 the U.S. regulatory environment will be in the early stages of converging with the approaches taken by most of the world. The federal option will have been adopted, and large companies will have chosen federal regulation. State-based regulation will be reexamined and repositioned to focus on the needs of small, local companies.

In the near future, the industry will be vibrant, profitable and growing. It will have the strength to tap new markets at home and abroad, and compete with the largest financial institutions in the world.

Robert Stein, a Best's Review columnist, is global vice chairman of Global Financial Services for Ernst & Young and editor of CrossCurrents. He may be reached at [e-mail].