Insurers worldwide face a range of challenges that may seem to threaten prospects for growth. But, as our global insurance leaders point out, change is often accompanied by opportunity. Companies who can adopt a strategic approach, with clear goals and a well-articulated vision of what success will look like, can secure a competitive advantage from the current uncertainty.
Doing business in fraught and uncertain national, regional and global economies is not easy for anyone. Insurers in mature North American and European markets in particular face challenging economic conditions, disruptive regulatory changes, and cuts in public spending. These are significant challenges to growth. Historically, for example, there has been a high correlation between Gross Domestic Product and non-life insurance volumes. So a sustained period of zero or low economic growth will act as a major brake. Equally, the attractiveness of some products depends on the performance of the capital markets, which are under severe pressure.
Depressed share prices and low price/ earnings ratios also mean that some market capitalizations of European and North American insurers are below book value. In these conditions attracting investment to fund growth plans is another challenge.
If many European and North American economies are in well-publicized deficit, many Asian economies are in surplus. But this superficially benign condition throws up its own challenges for local insurers. In particular, these surpluses mean there is no large or well developed debt market and the lack of such long-term investment opportunities increases interest rate risk, complicates duration-matching – especially for products with a mortality risk – and constrains the insurance industry’s ability to create the innovative and attractive longer-term products that are increasingly in demand.
However, some Asian and Latin American markets have the enormous advantage that economic growth, rising living standards, and the emergence of a financially more sophisticated, asset-rich middle class mean that insurers are not competing for a share of a finite market. In principle, everyone can grow in these dynamic, emergent economies – if they have access to efficient and effective distribution channels.
With agency distribution dominant in Asia, the ability of insurers to attract existing agencies with a strong network is key. And, although distribution deals with banks may appear to be a fast-track route to the customer, in practice most Asian markets have many more insurers than banks. Consequently, the banks can command high rates of commission and tie-up fees. Overall, the successful growth strategies and business models in Asia are the ones that are able to manage relationships with distributors effectively.
In Latin America, meanwhile, the trend towards banking distribution has driven consolidation of the insurance industry over the past few years. Future success is likely to be more dependent on innovation in products and distribution channels.
Regulatory developments such as Solvency II in Europe or the Solvency Modernisation Initiative in the US are also transforming the way insurers operate – from capital requirements, to risk management, to transparency of reporting and provision of information, to distribution arrangements and sales processes. Not only are these changes absorbing large amounts of management time and energy, they are also threatening to introduce additional structural costs. This places an intense focus on the need for insurers – especially in Europe and North America – to take active steps to review their business models, reduce their cost base and become more efficient, for example by investing in back office systems and moving even further and more quickly towards shared services.
But this focus on efficiency is also an opportunity. There is no one-to-one correlation between growth in revenues and growth in profitability. Anyone with experience trying to do business in India and China, for example, will testify to that. In the current climate, business strategies and models have more than ever to focus in an integrated way on profit growth, rather than simply pursuing volumes for their own sake.
For European and North American insurers – and indeed those insurers in relatively mature markets like Australia, Japan and Korea – the Asian and Latin American markets may seem rich in opportunities for growth. But challenges remain. There is, for example, no ‘Asian’ market as such. There are instead a number of different markets in different stages of economic and social development, each with their own evolving regulatory challenges in such areas as capital requirements, data privacy and customer protection. This complexity creates a massive potential burden for anyone attempting to create a pan-Asian business. Regulatory change in these new markets can happen quickly and local insurers have already recognized that success lies in being nimble and efficient: they decide on a target operating model and then grow into it. For example, having identified IT as an important enabler of growth, they are actively avoiding creating large infrastructures in each country in favors of shared services.
There are important lessons here for Western insurers, especially those seeking to take advantage of growth opportunities in the East. In particular, strategies have to recognize that to win in Asia, insurers – wherever they originate – need detailed, hands-on local knowledge so they can identify which markets to target, how to approach them and, crucially, how to access distribution networks.
The extent of economic and social change also requires insurers in all markets to pay more attention than ever to the needs of customers. In major Asian markets, populations are becoming wealthier, more urbanized and more sophisticated in their approach to financial services. Similarly, the growing wealth of Latin America is increasing consumption – so people have more goods and properties to insure – and driving more conscious savings behavior. In Europe and North America, meanwhile, austerity measures are cutting into public provision of pensions, healthcare and welfare benefits, which will inevitably lead to increased interest in self-provision.
The winners will be the ones who understand these changes and offer the right savings and protection products at the right time, crafting products that match people’s requirements with their ability to pay. The winners will also maintain close contact with customers, supporting people with appropriate products at every stage of their life – from savings, to life products to non-life products – and pursuing conservation activity to track funds as policies mature and go off-book.
In this new world recruiting and retaining creative, energetic talent will be crucial. China will need to attract back the skilled people, like actuaries, who are currently working on European insurers’ Solvency II programs. European and North American insurers, for their part, will have to address their inability to compete successfully for top talent with superficially more glamorous industries like investment banking.
Insurers in Europe and North America whose business strategies are currently defensive and heavily focused on compliance will need to look beyond regulatory change to identify the markets, customers, products and business models that will deliver profitable growth in the face of increased global competition. The recent investment by a stateowned Chinese reinsurer in Lloyds of London is just a hint of the potential for Asian insurers to leverage the strength of their domestic business by expanding into global markets.
M&A may appear to be an attractive route to growth in Western markets – especially as banks sell off their insurance assets to boost capital reserves and enable a tighter focus on ‘core’ business. Given the regulatory barriers to entry, M&A may also be essential for both Eastern and Western insurers to gain sustainable access to high-growth Asian markets. In North America, companies currently tend to be well-capitalized in relation to today’s requirements, but the uncertainty around future requirements means they are perhaps concentrating more on strategic, focused acquisitions than on some of the larger scale deals of the past. However, leveraging financial strength alone will not be enough to guarantee success. Effective post-M&A integration will be needed to ensure the fundamental goals of efficiency, flexibility and low cost are not compromised.
So, while closeness to the customer and speed of innovation will be important, more than ever quality of management and consistency of execution will be vital to deliver profitable growth. The leading insurers of the future are likely to be those that integrate risk and performance management in an effective and timely fashion. We are in a period of sustained transformational change; and doing nothing is not a winning strategy.
Global Sector Leader, Insurance
KPMG in Germany
Tel: +49 89 9282 1867