Changes needed to ensure resilience in the current challenging climate
London, 5 November 2008 — The life and general insurance industries may well become the next victim of the global financial crisis. Some insurers will have to raise new capital, while smaller players are likely to be taken over. However, two new reports from Booz & Company indicate that many UK insurance players will prove more resilient than the doomsayers think – providing they take action now.
The reports, The Future of Life and Pensions: Life-saving Solutions, and General Insurance: Getting Back to Basics, are the first in a series of papers examining future trends for the life and general insurance industries and what companies will need to do to survive in the current economic climate.
Booz & Company has identified several key trends affecting the industry. Those players that manage to reposition themselves in response to these trends are those that are likely to benefit the most. “Aggression and radical action will in some cases be required, which is unusual behaviour, particularly in the life and pensions business,” commented Alan Gemes, partner at Booz & Company. “In the general sector, those insurers who manage to succeed in this increasingly challenging environment will be those that get back to basics.”
Scale or specialisation? Now is the moment for insurers to make a clear strategic choice – should they position themselves to capture the benefits of scale, or pursue specialisation? The latter has been a trend in the UK – in 1998, 55% of companies followed a diversified approach, compared with 33% today. Lloyds TSB and HBOS’s integration of life businesses will be interesting to watch, as their approach to capturing synergies could set a radical new tone in the industry.
A move into asset management? For the life sector, those that take bolder steps into this sector now may be richly rewarded. Some traditional insurers, such as Allianz and AXA, have already repositioned themselves as asset managers. Booz & Company forecasts the compound annual growth rate for the asset management industry between 2006 and 2017 will be around 6%, compared with less than 4% for life and pensions. Absolute operating profit in the asset management sector is forecast to be €93 billion by 2017.
Attacking the cost base. Insurers will look to settle genuine claims as cost-effectively and efficiently as possible. Where possible, streamlining the claims handling process further will not only bring cost savings, but will improve customer service. And insurers will be vigilant against fraudulent claims, which tend to be more prevalent during an economic downturn.
Looking east. The best performing insurers already have a strong presence in Asian markets. For example, ING, which has taken stakes in Indian, Chinese and Thai banks, earned 48% of its new business profit from Asia last year. Booz & Company predicts that by 2017, the highest margins in the life and pensions business will be found outside mature markets; in China, India, south east Asia and Brazil, profit margins will be around 8%. In Western Europe, margins will be thinner – most likely around 5%.
The third way. Demographic changes will have a significant impact on the kinds of products customers need. The retirement income market in the UK, currently worth £12 billion a year, is set to grow to £18 billion by 2012. Of this, a growing share should be made up of ‘third way’ products which fall in between the two traditional poles of annuities and drawdown products.
Techno-advice and innovation. Remote advice delivery systems using video conferencing, already being trialled by companies such as HSBC, are expected to hit the mass market within the next five years and will be used in the affluent and mass affluent segments much sooner. These will transform the way in which advice is delivered to the customer and will significantly improve the economics of customised advice delivery.
In the general sector, during the economic slowdown consumers are increasingly likely to see insurance products as luxuries. Scale players can learn from the specialist players who have driven innovation in products such as ‘pay as you drive’ and product features such as no claim cash backs. General players are also seeing a major shift in product distribution; in the UK, call centres are the currently the strongest channel for sales, but there is a growing demand from customers to be able to purchase, not just obtain quotes for, products online. Another trend in the UK is to buy insurance through online aggregators, which has reduced margins for insurers and led to the development of cheap, no-frills offers.
Culture shock: Insurance companies will have to transform their operating culture in order to maximise profitability. Booz & Company’s Org DNA profile analysis has identified 40% of UK insurers as having a ‘passive aggressive’ culture. Ninety-seven per cent of benchmark companies in the Org DNA survey agreed that important strategic and operational decisions are quickly translated into action, compared with just 31% of insurers.
“Life insurance companies need to expand in both directions of the value chain, going up into asset management as well as further down into sales, distribution and marketing,” commented Fabienne Konik, principal at Booz & Company in London. “These changes need to occur rapidly, and within the context of the most challenging economic and financial environment we have seen for decades.”