Insurance. Industry Perspectives. Thoughts

Transcription

1 Insurance Industry Perspectives Thoughts

2 Insurance Industry Perspectives By Ian Brown and Cornel Bender, Partners The insurance industry is not a single, homogenous block. But most of its key players face many of the same challenges. Capital scarcity, historically low interest rates (an issue especially for life insurers) and regulatory compliance are causing many established names to review their business models, value propositions and customer base. Merger and acquisition will diminish the competition pool; yet the surviving individual competitors will become bigger and stronger. Steady evolution is giving way to revolution, as the pace of change picks up and customer touch points with brands proliferate. Demographic change, aggressive marketing and mobile device access are shifting perceptions and expectations among consumers. Value protection has become imperative and customers will start to demand value growth once more. Regulation is raising the compliance bar (with a corresponding rise in operating costs). Success and survival will both require deep strategic re-evaluation of operational capabilities. Emphasis on product innovation must be equalled by focus on distribution and innovative approaches to creating customer access, especially via new digital platforms. Products need to be distributed at lower costs. Above all, a traditional industry needs to align with the fast moving demands and desires of a new generation of customers. Understanding of the customer, their buying behaviour and the influence of social media, together with the impacts of regulation, are all crucial. In order to achieve profit, the objective must be to build an effective and cost-efficient operational model and distribution mechanism. Products must be driven by deep customer insight, while satisfying at best cost the current and likely demands of regulation. This will require innovation, agility, creativity and courage. The long-term rewards will be significant. Introduction The 21st century insurance industry agility and innovation are the best policy For insurers, as for everybody else, times are changing. Standing still is not a viable option. Success demands agile alignment with the preferences of a new generation of digital native customers. Creativity is called for in every aspect of the business. Innovation needs to be the order of the day in all key areas, including business structure and organisation, product and systems design and operational management and delivery. The agility that comes from an innovative approach will equip successful players to offer the market the products it wants, and in the in ways that customers prefer to interact with brands and manage their insurance product portfolios in the 21st century. Industry context challenges and change The last two years were exceptionally challenging for the insurance industry. The difficulties stemmed primarily from the depressed economic environment. Global life insurance premiums fell and low interest rates put pressure on book values. General insurance rates began to harden in some markets and premiums grew as a result in some business lines. However, overall, premiums declined 0.8% in real terms 1. Markets Life Non-life Total Advanced -2.30% 0.50% -1.10% Emerging -5.10% 9.10% 1.30% World -2.70% 1.90% -0.80% Real Premium growth in 2011 Source: Swiss Re, Sigma report What are the implications for the future? Real growth in the world economy slowed to 3% in 2011 and the outlook to 2013 appears depressed. This will diminish demand for general insurance products at both a commercial and retail level. Life insurance will see increased margin pressure, as pricing becomes more competitive. There appears to be a general consensus that the recession in Europe will continue to year-end at least. Emerging market growth is also slowing down. Even though absolute rates remain healthier than Western Europe and the US, they will be unable to boost revenues to any significant level in the West. 2

3 Indicators outlining the economic and financial conditions facing households and businesses continue either to be weak or adverse. Similarly, wage growth remains weak and the climate for major economic purchases is subdued. Businesses appear to be undertaking defensive strategies involving cost 2 cutting, rather than increasing capital spending. Indeed there has been a level of disinvestment in the industry. For example, in the UK total net investment is estimated to have been 20 billion in the fourth quarter of 2011, nearly 7 billion higher than the third quarter figure, but a similar level to the first two quarters of In 2011 as a whole, total net investment is estimated to have been 72 billion. This is very similar to the 2010 level. There was net disinvestment by long-term insurance companies in 2011 (see figure 1 on page 4). Provisionally, this will be the first year this has occurred since How do we move forward? Insurance is a distinguished industry that now faces some substantial pressures. It also stands on the brink of some very big changes. There are many things it has done very well. It has been a custodian of assets and protected value for generations. But continuity without change is not a possibility. Competitors from other parts of financial services - and even complete outsiders are entering the industry. They will disrupt all current assumptions and challenge any remaining certainties. However, with any challenges come opportunities that the astute will seize. Exploiting these opportunities effectively, and in a timely manner, will demand full recognition of the key drivers for change and an understanding of their impact. The message for the future is that disruptions cannot safely or sustainably be ignored. Threats and challenges must be acknowledged, understood and acted upon. Opportunities must be identified and exploited. So, do any of the existing players have the capabilities to change the game? Where once product was king, distribution must now be recognised as first among equals. Customers are now the starting point of any successful strategy. Reaching out to them is key to success and it starts with deep understanding of the culture shifts in the market place. From the cost of claims and reserving in general insurance to capital strain and risk based product pricing in life insurance, the value chain is being redefined. Yet all the resulting pressures can be mitigated by superb product delivery, through effective and diverse distribution channels. And one channel at least will serve a dual purpose: emerging digital media is not merely a channel for sales but one for aggregated customer data too. What are the key change drivers the market and the consumer It is tempting to immediately (and even exclusively) cite regulation, credit crunch and cost/shortage of capital or other external factors as the major drivers. 3

4 billion Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q4 Figure 1: Total net investment by long term insurers Source: The Office of National Statistics, UK 4

5 Of course, these are profoundly important. But the industry must recognise the social and behavioural changes within its core markets that will have the most lasting impacts of all, over time. These changes must be understood and the corporate culture and operation must adapt to take them fully into account. What are the changes? Channel proliferation online access from a multiplicity of devices means the most direct customer access ever to a vast choice of product options. The impacts include demystification of the industry, the continued commoditisation in the retail market across life and general insurance and price pressures. Customer behaviour customers expect instant decision making, even in areas of life as potentially important as choice of insurance products. At one point, the ten minute form was hailed as an industry breakthrough in customer friendliness. For the generations at the end of the alphabet, 10 minutes of detailed attention will look like a marathon! The appetite for instant answers will spread even further, deep into the claims resolution process. Customer attitudes financial services have lost much of their previous trusted status. What are the implications? Consumer touchpoints with insurers will have to become increasingly fast, easy and user-friendly. Brand stature will only be built and maintained through superb customer service experience. The consumer appetite for innovation will drive regular refresh of the product portfolio the appeal of the new and innovative will be powerful. Even long-term customer relationships will be damaged by slow and arduous claims resolution. Any delays will automatically be attributed to stalling or sharp practice. Cumbersome and out-dated back office systems will not be accepted as legitimate reasons for slow service. Going forward, the organisations that achieve best alignment with the preferred channels and styles of business of their customers will stand the highest chance of sustained success. This statement might be easy to make on paper. But the journey to best alignment will be far from easy for many insurers. Key change drivers commercial and regulatory environment Customer preference and behaviour will shape the market of the future profoundly. But the commercial environment will provide the trading context. Some of its most salient features are detailed below: Cost of Capital post credit crunch, this has gone up and stayed up. In addition, insurance companies have the dual aspect challenge of growing asset values and facing the prospect of having to pay out on those assets. Distribution more than before is central to insurers strategies for success. In the UK, the Retail Distribution Review has fundamentally altered the investment and life insurance savings market. More generally across Europe, distribution costs per channel are being tested and the viability of some channels is being questioned. Companies need to balance the costs against the revenue gains derived from maintaining multiple channels. Clear cost allocation by channel and 5

6 products sold in each is becoming a fundamental strategic building block of profitability and a key component in performance metrics. Regulation the pressure from regulators continues, with emphasis on getting the house in order across a range of issues - from solvency provision to data management. Regulation requires set-aside of more (and more expensive) capital than previously. This in turn limits availability of resources for operational improvement. Merger and acquisition the competitor landscape will continue to evolve. In addition, new profiles of competitor are emerging from non-traditional areas. factors is already causing reduction in competitor numbers. Some institutions are divesting, or will divest, their insurance interests (a situation reminiscent of the period ). It is a growth industry as defined by expansion in demand for some product categories, such as life insurance and corporate pensions. The industry is not just on the verge of major change. The change is already having a number of visible impacts, from product portfolio development to back office practice. To keep up with, or preferably to lead change, the following issues must be understood and acted on: What are the implications? Perhaps as an example of unintended consequences, consumer choice over time may in fact reduce, as some players disappear from the market completely, or integrate into previous competitor offers. Those who remain will need to be able to fund the changes required to satisfy the regulators. They will need to create stronger, more market-aligned organisations, post-merger. They will need to reduce operating costs while continuing with product innovation and without compromising compliance. Interim summary so where do we stand today? We have a traditional industry in a state of some flux. It is a shrinking industry as defined by the number of players. Cost of playing catch-up with regulatory compliance, the impact of cost of capital and other The product portfolio needs to be configured to appeal to new market sectors and customer profiles. The certainties of customer targeting have changed. The young professional and grey wealth profiles of just a few years ago have fragmented. Customer insight is a more subtle and demanding challenge. But getting it right is also a major opportunity. Increasingly, consumers and businesses are looking at the insurance industry as a route to value creation, as well as asset protection. It is potentially an attractive alternative to the banking sector and exploiting this potential represents a major opportunity. It is also a necessary defence against existing and new forms of competition. The touchpoints with the brand need to achieve and sustain parity with the best of online marketing practice. Product innovation and relevance need to be supported by a fresh, accessible, engaging and rapidly rewarding user experience. Distribution needs to become - and then remain in lock step with product innovation and speed to 6

7 market. Disparities between sales experience and subsequent brand touchpoints notably claims resolution need to be removed. And cost of distribution needs to be controlled and reduced. Compliance needs to be incorporated into central strategic planning, rather than reacted to tactically. The sense and direction of the legislation is usually reasonably clear, even in advance of the fine detail. issues), drive up complexities in distribution and add to operational costs. There is also a pressing need for systems improvements to support a clearing house mechanism, in situations where separate organisations have to administer a shared risk. Technology transformation needs to be achieved on a more cost-effective basis and with more predictably positive outcomes. Most regulation is intended to foster improved controls, risk management, transparency and consumer friendliness. None of these values should be at odds with a viable market strategy. The challenge is to find a route to compliance that minimises upheaval and outlay. Each legislative implementation stage does not inevitably have to result in a groundhog day, with organisations behaving as if this is the first time they have had to achieve any degree of compliance. More agile systems and approaches can minimise the costs and disruptions associated with compliance, while leaving the business in better operational and commercial shape. Process supported by the most appropriate underlying technology needs to be as efficient and effective as possible. It must take account of customer demands, regulatory requirements and best practice benchmarks. Preparing for the future what will the successful organisation look like? It will have committed to remaining within the industry. It will have the resources to fund necessary structural and systems changes. It will achieve truly competitive stature (in all key areas from consumer offer, through marketing styles and modes and distribution to compliance). So what would a profile of such an organisation look like? How will tomorrow s insurers interact with their customers to build long-term and profitable loyalty? The only truly durable foundation of success will be creation and delivery of an innovative customer experience. Systems and Technologies the brisk M&A environment in particular has resulted in not just one, but multiple sets of legacy systems being run within a single organisation. Costs associated with integration and modernisation can prove prohibitive. Yet obsolete technologies contribute to end-customer dissatisfaction (claims resolution delays, other The innovative customer experience why? and what? The multiple daily touchpoints customers have at the heart of their banking services are typically not replicated with insurance. Partly, this is a function of 7

8 culture. Banking gives rise to many transactions. Insurance is chosen a single transaction. Then the typical customer actually hopes they will never have to transact again; i.e. to make a claim. When they do, apart either from renewal or choice of a new insurer, they are often in extremis. How can this situation be transformed into a customer experience and a managed increase of customer touch points? in action will look like in the insurance business. (It should be noted that these innovations will not be limited to customer-facing applications alone. The distribution network will need to embrace them too. They may not move towards innovation as quickly as customers. But, as customers demand higher levels of online interactivity, Financial Advisers and Brokers in particular will have to respond.) The answer lies in a deeper appreciation of the customer of tomorrow and a determination to embrace innovation. Successful brands will need to appeal to the digital native generations. They will have to match the online banking experience in terms of ease and speed of access and device-driven convenience. They will need to speak the same language as their customers and to use the same communication tools. When they achieve all this, what will their service delivery look like? Whether accessed by laptop, tablet or smartphone, customers will enjoy a portfolio approach which makes all their insurance-related products - and their current status as easy to access as online banking. This will make life more convenient. For example, appropriate cover for a high value new purchase or travel abroad can be sourced and confirmed quickly and easily. The new cover will then be visible alongside all the other elements of the insurance portfolio. Importantly from a commercial (and customer service) perspective, renewal reminders can be posted onscreen in a timely fashion, along with any associated incentives or bonus as part of a highly targeted push campaign. The insurer can effectively leverage up- and cross-sell opportunities. This innovative and creative approach will bring insurance into the fold visible, easy and accessible on a variety of device platforms. This is what innovation How do we get from today to tomorrow? Today, we have an industry that faces serious issues on the road to meeting its challenges effectively. Many players would like to modernise but face huge expense. Even if they were to build the infrastructures capable of delivering regulatory compliance (a first base consideration), it is unlikely they could do so without crippling costs and ongoing operational disruption. Tomorrow, we need an industry that gives equal emphasis to its distribution mechanisms (and does not relegate them in favour of its product development). What are the specific areas of focus and their associated actions - needed to get us from today to tomorrow? Operational excellence improving efficiency and flexibility in sales, services, back-office processes and product development. Compliance complying with regulatory requirements (i.e. Solvency II, Basel II). Customer service moving from a push to pull principle to provide high-quality customer service. 8

9 Sales effectiveness improving management of sales channels and partners to gain competitive edge. Asset performance optimising investment strategies to reduce costs and better monitor asset allocations. Product innovation developing innovative and differentiating products that can be rolled out more quickly and flexibly. Mergers and acquisitions streamlining merged organisations cultures, products and IT systems more efficiently. Technology reducing costs and improving IT flexibility. Effective digital platform placing products and services into readily accessible online portfolios and transforming distribution into a valued customer experience. What specific outcomes/changes should organisations be looking at? In order to make a successful journey to a new and more desirable state, organisations will need to take some milestone actions. Some of the most important areas are listed below: Regulatory change delivery help update or modify systems and processes to meet changing regulations. Business and IT operating models design and deliver innovative operating models to help manage and grow the business. Build contentrich, connected, integrated operations with high levels of automation, real-time processing and process optimisation. Enterprise architecture accelerate change delivery through Xpress services-oriented architecture (SOA) integration. Seamlessly connect older systems with new technologies to improve sales and service effectiveness; implement a common customer view across applications and lines of business; ease integration efforts; extend the life cycle of older systems and streamline risk management. Regulatory health checks - diagnose and re-orient regulatory change programmes to deliver strategic outcomes. Deploy rapid diagnostic methodology to assess the likelihood of successfully achieving programme delivery objectives. The role of external support and counsel Clearly, a wide variety of consulting resources is available. The most supportive and productive will be those who understand the industry and are prepared to take an agnostic stance. They will start by asking what are the problems you want to solve? - rather than immediately advocating specific approaches or proprietary systems. The most effective counsel will understand the relationship between three key issues: the changing demographic of the customer base; the evolving lifestyles and preferences of customers; and the supporting technologies required to create and enable more dynamic customer relationships. External consultants should of course be knowledgeable about pressures facing the industry and they should be sympathetic towards the many 9

10 complexities involved. They should appreciate insurers need to overcome problems that are unique in every instance, but that also have a common thread. But they should not be bringing more of same to the table. More dynamic (and durable and profitable) customer relationships will demand change from the systems, organisational and operational perspectives. New challenges require new and different approaches. One of the corollaries of delivering the digital native friendly service experience we described earlier is that the front-through-to-back office approach will need to become simpler, more consistent and more agile. There will need to be far fewer internal divisions and much greater commonality of data. This data will need to be clean, current and managed in such a way as to optimise rapid insight into customer behaviour and preferences. Innovation in the key areas of software prototyping and development, systems integration and data management all have a major role to play in moving an organisation towards an innovative and agile approach to product marketing and distribution. The overarching goal should be simplification in pursuit of the best possible customer service. Reaching this goal will require creativity from external counsel and a determination to help the organisation achieve new and market leading levels of customer service and experience. Conclusions The insurance industry is certainly not change proof and therefore cannot remain change resistant. Sensitivity to changes in customer demographics must translate into product portfolios that are innovative and attractive. (As well as being offered in the context of high quality leader not follower touchpoints with the brand.) BUT successful companies going forward will need to give as much emphasis to their distribution mechanisms as they do to their product development. With ever-increasing pressures on margins and the high costs of capital, every cent, penny and dime counts. Business and IT operating models the right ones can contribute significantly to cost containment and reduction (while driving customer satisfaction and accommodating the demands of regulatory compliance). Technology informed by the right strategy can make the difference between leaving the industry or remaining and succeeding. The time has come for a major shift in thinking. Insurance is no longer insulated. A more dynamic and entrepreneurial culture will prevail, supported by more robust, flexible and cost-effective distribution mechanisms. From here on, agility combined with innovation is indeed the best policy. Footnotes 1. All premium growth rates provided in this study are in real terms adjusted for inflation (measured using local consumer process indices), unless otherwise stated. From Sigma report 2. Second Estimate of GDP, Q August 2012, The Office of National Statistics, UK. 3. The Office of National Statistics, UK - statistical bulletin release. All data is reported on a current price basis. 10

11 Ian Brown is a partner in Capco's London office and leads the UK Insurance practice. With over 20 years' experience in the financial services sector he has extensive programme and project management experience, and has successfully delivered complex operational and technical change across both the insurance and capital markets sectors. Ian s extensive technical and business knowledge plays a key role in providing strategic, business and technical solutions across the sector. ian.brown@capco.com Cornel Bender is a Managing Partner with Capco, based in the firm s Frankfurt office. He has significant experience across both the Insurance and Capital Markets segments of the financial services industry, and currently leads Capco s Insurance domain in Germany, Austria, and German-speaking Switzerland. His financial services industry expertise covers asset management, exchanges / infrastructure and investment banking and he has led insurance projects that included fast close, balance sheet consolidation, asset management, and related regulatory topics like Solvency II. cornel.bender@capco.com Thanks also to Mandeep Sarikaya for the insight and analysis in preparing this document. Mandeep is a Managing Principal in the insurance practice in Capco UK. With over sixteen years experience in the insurance sector, specifically in insurance investments, life and general insurance, she has delivered global transformation, entered new markets and redefined strategy for multiple insurance organisations. 11

12 About Capco Capco, a global business and technology consultancy dedicated solely to the financial services industry. We work in this sector only. We recognize and understand the opportunities and the challenges our clients face. We apply focus, insight and determination to consulting, technology and transformation. We overcome complexity. We remove obstacles. We help our clients realize their potential for increasing success. The value we create, the insights we contribute and the skills of our people mean we are more than consultants. We are a true participant in the industry. Together with our clients we are forming the future of finance. We serve our clients from offices in leading financial centers across North America, Europe, Africa and Asia. Worldwide offices Amsterdam Antwerp Bangalore Bratislava Chicago Düsseldorf Frankfurt Geneva Johannesburg London New York Orlando Paris San Francisco Toronto Washington DC Zürich To learn more, visit our website at CAPCO.COM The Capital Markets Company NV. All rights reserved. T EU