How international expansion is a driver of performance for insurers in uncertain times Accenture Global Multi-Country Operating Model Survey May 2009 Copyright 2009 Accenture. All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.
Contents Introduction Key findings Summary and implications Appendix: survey methodology 2
The current global financial turmoil is creating a new and challenging industry landscape P&C: Back to fundamentals Profitability Of The Six Major P&C Primary Markets* 2001 2011 As % of net premiums earned, ROE as % of average shareholder equity 15% 5% Life: Severe challenges ahead Impact of market volatility Customer movement away from risky assets Lower demand for life products in general (economic downturn) Continued exposure to CMBS Variable annuity guaranteed payment exposure -5% -15% 01 02 03 04 05 06 07 08(f) 09(f) 10(f) 11(f) Underwriting Result Investment Result ROE After Tax *Markets include U.S. Canada, France, Germany, U.K. and Japan Source: Sw iss Re Special Report: Global insurance review 2008 and outlook 2009: Weathering the storm, December 8, 2008 3
Premium Growth, 2006-2007, in % Premium Growth, 7-yrs CAGR (2000-2007), in % Accenture research aimed to understand the drivers of performance for multi-country operating models in the insurance industry What is happening in the market? Insurers profitability is expected to significantly decrease in the coming years due to the current global economic turmoil. The Emerging Markets have been the world engine of growth. Accenture Global Equity Analyst survey conducted in 2008* demonstrated that organic growth in core markets is critical, but insurers also need to find other sources of profitable growth in order to achieve superior ratings. As a consequence, insurers need to expand internationally supported by the right operating model in order to grow and outperform their peers. 35% 30% 25% 20% 15% 10% 5% 0% - 5% CEE Russia Latin America Singapore Greater China Brazil India Spain France Germany 0 Premium Growth in Non-Life Markets, 2006-2007 World: $251 Japan Italy Source: Sigma/ Swiss Re, 2008 Bubble Size = 2007 Premium Volume, in $bn South Korea Finland UK Australia Denmark US *Accenture Global Equity Analyst Survey: 108 insurance equity analysts interviewed in December 2007 in order to understand the criteria that drive superior ratings by insurance equity analysts Switzerland 500 1,000 1,500 2,000 2,500 3,000 2007 Non-Life Premiums per Capita, in $ World: 8.2% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% Premium Growth in Life Markets, 2000-2007 World: $371 Brazil India Greater China CEE Singapore Latin America Italy US Denmark South Korea France Germany Finland Spain Australia Japan Bubble Size = 2007 Premium Volume, in $bn Switzerland UK World: 7.2% 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 2007 Life Premiums per Capita, in $ Russia is not included because its 7-yrs CAGR is negative (due to a phase-out of tax optimisation schemes in 2005) Source: Sigma/ Swiss Re, 2008 Why this research is important for insurers? The survey aimed to address the following strategic questions facing international insurers: How does the current economic and financial turmoil impact the international expansion of insurance companies? What are the plans for international expansion in the next 12 months within the insurance industry? What are the key drivers and challenges of international expansion? What is the current and the target multi-country operating model of international insurance companies? What are the top 3 key attributes of a multi-country operating model most likely to drive high performance (i.e. greater economic value) in the insurance industry in the next 3 years? 4
How can insurers benefit from this research? First survey of insurance companies designed to understand what drives performance of multi-country operating models within the insurance industry. When combined with Accenture s extensive High Performance and Multi-Polar World research programs, survey brings a unique understanding of what insurers can do to achieve high performance Survey results can help insurers define a multi-country strategy and execution plan that optimizes their performance. 5
The survey was designed to understand the opinions of leading international insurance companies on the future developments of multicountry operating models within the insurance industry Approach Accenture commissioned a quantitative global survey of 104 Insurance Companies The survey covered 40% of the insurers with significant international activities* in the countries in the scope of the survey (Please see the Appendix for more details on the home market of the insurers interviewed) Telephone interviews were conducted from December 2008 to April 2009 by Kadence Ltd** in order to guarantee the quality of the responses and to ensure the objectivity of results: Respondents to the survey were C level Executives involved in the decision making process for the investment decision of their organization related to international expansion and/or development of cross border operating model The questionnaire was designed by in-house industry experts in order to encompass all of the major business challenges facing multinational insurers. This document presents the detailed findings of the survey. Scope of respondents: Activity covered in the survey: P&C 51% Life 49% Respondents location: APAC 26% Europe 42% America 32% Respondents were located in the following countries USA, Brazil, UK, Denmark, Finland, France, Germany, Italy, Spain, Switzerland, Australia, Japan, China, India, Singapore, South Korea (Please see the Appendix for more details on the splits between these countries) *Over 20% of the activities are made outside the home market **Some interview s were conducted by Accenture experts 6
Contents Introduction Key findings Summary and implications In a context of financial crisis and limited opportunities, international expansion is critical to the delivery of future economic value in the insurance industry. The focus is dominated by opportunities in Emerging Markets as a source of future economic value as well as a way to reduce the impact of business cycles and cost. However, insurers are facing significant challenges in order to optimize the benefits of their international expansion strategy and multi-country operating model. Insurers will move to a regionally or globally integrated model which allows for scale in investments and for more industrialized and cost effective operations. Appendix: survey methodology 7
International expansion is an important driver of economic value and the competition between insurers will be tough The environment is more challenging than ever in both Life and P&C: Stock market volatility will shift consumer buying behavior in the savings and retirement and pensions business Softer demand for insurance products will increase competition and require faster turn around for putting more new commercial products on sale Organic Growth in core markets is not providing sustainable growth and the highest opportunities for economic value. In addition to strong domestic market positions, insurers will need to develop robust expansion strategies in order to remain competitive Insurers recognise the urgent need for them to act and the majority have plans for expansion in the next 12 months How would you rate the importance of international expansion as a driver of economic value in the insurance industry over the next 3 years? Does your company plan to expand internationally in the next 12 months? Critical 26% Yes 62% What areas are you planning to expand geographically in the next 12 months? Life 68% Important 54% 80% P&C Personal P&C Commercial 43% 45% 57% P&C- Personal OR Commercial No 38% Base: all respondents who are planning to expand internationally in the next 12 months Not really important 19% Not important at all 1% Source: Accenture Multi Country Operating Model Survey 2009 8
The current financial and economic turmoil is increasing the importance of international expansion in the agenda of insurance companies The current financial and economic turmoil is actually offering increased international expansion opportunities for insurers: Reduced stock prices will make some companies acquisition targets. New geographies will represent attractive growth prospects. The most successful players will be the ones who will have implemented a model that allows customization to local markets but also cost efficiency. Do you think that the current financial and economic turmoil will offer increased international expansion opportunities in the insurance industry in the next 3 years than before? No 25% According to you, will the current financial and economic turmoil boost the international expansion of insurance companies in the next 3 years on the following aspects? More creation of offerings tailored to local markets More commitment to senior leaders to international leadership roles % yes 79% 77% Higher use of international basis as cost reduction plays 73% 75% Yes More management time More commitment of funding/capital allocation Higher priority for the global management 71% 67% 64% Faster speed of implementation 53% Source: Accenture Multi Country Operating Model Survey 2009 9
International expansion will be used to generate economic value as well as a way to reduce the impact of business cycles and cost The global financial economic turmoil demonstrated the critical need to find a way to better balance risks and balance business cycles: international expansion and investment in diversified markets appear to be one of the most efficient way to do this. Economic slowdown/ recession softens insurance demand and premium growth is putting additional emphasis on controlling costs for insurers. There is an urgency to focus on cost management as an additional means to offset investment losses. What is the importance of the following drivers for the international expansion of your company in the next 3 years? Spreading risks and balance business cycles 48% 29% 77% Optimizing cost efficiency Rapid increase in Gross Written Premiums/ Net Written Premiums Leveraging differentiated capabilities Exploiting attractive prices for M&A opportunity Compensating Gross Written Premiums slow growth in home country Benefiting from attractive government policies 38% 36% 74% 57% 11% 68% 42% 20% 62% 35% 24% 59% 43% 14% 57% Very important driver 34% 12% 46% Important driver Source: Accenture Multi Country Operating Model Survey 2009 10
The focus is dominated by opportunities in emerging markets In the context of the current global financial turmoil and the recession affecting the major developed markets, the development in Emerging markets is a realistic alternative to maintain growth and belong to the few insurance companies who will have reinforced their position in these challenging times. Nevertheless, situation and the impact of the crisis are very different from one Emerging country to another and a strong assessment of the risks and opportunities as well as a realistic business case need to be made. Insurance business growth in emerging markets, which has so far grown robustly in 2008, is expected to slow in the coming quarters Swiss Re, Dec. 09 Which countries do you expect to receive the highest level of investment for the international expansion of your company in the next 3 years? Please select the top 3 regions for your Life activities Please select the top 3 regions for your P&C activities BRIC countries Emerging Asian countries except China, India Western Europe Eastern Europe except Russia North America Middle East/Africa Japan Latin America except Brazil Australia/New Zealand 9% 7% Source: Accenture Multi Country Operating Model Survey 2009 13% 13% 11% 30% 30% Base: Life respondents 43% The biggest focus for Life companies in the BRIC markets and other Asian emerging countries w ill be on China, India, Russia and South Korea. 57% Western Europe Emerging Asian countries except China, India BRIC countries Eastern Europe except Russia North America Latin America except Brazil Middle East/Africa Australia/New Zealand Japan 0% 7% 11% 20% 29% 27% Base: P&C respondents 42% 42% 40% The biggest focus for P&C companies in the BRIC markets and other Asian emerging countries w ill be on China, India and Brazil. 11
The execution of a clear entry strategy articulating properly capital funding and supported by a strong business case will be key success factors for international expansion The scope of challenges that insurers will have to face is very large: all the different aspects of the international expansion are considered as challenges. At the top of the list, the execution of the entry strategy, the capital funding and the business case have been mentioned by over 80% of the respondents as important challenges and by half of the insurers as very important. According to you, what will be the main challenges for your company in terms of international expansion to belong to the top performers in the next 3 years? % Very important % very important challenge + Important Execution of the chosen entry strategy Capital and funding demands/constraints Building an efficient and realistic business case 49% 47% 53% 82% 83% 85% Assessing risk efficiently and effectively Having a deep local market knowledge Creating local strategic and/or distribution partnerships/alliances Finding the right acquisition candidates Sourcing of sufficient expertise to support the local/regional markets Having a strong governance and scope control in place Creating differentiated capabilities Availability of local leadership/management skills Managing cultural gaps Managing complexity of processes Source: Accenture Multi Country Operating Model Survey 2009 20% 45% 42% 41% 41% 40% 38% 35% 33% 33% 89% 88% 74% 62% 87% 83% 81% 86% 80% 75% 12
The entry strategy is not differentiated and will be driven by the market being entered Insurers do not have preferred entry strategies: M&A and Joint Ventures/Alliances/Partnerships appear to be 2 strategies equally considered. Considering the countries/regions you are targeting in priority, what are your preferred entry strategies? M&A Least likely (1) 1.9 (2) Most likely (3) Joint Ventures/Alliances/ Partnerships Least likely (1) 1.9 (2) Most likely (3) Source: Accenture Multi Country Operating Model Survey 2009 13
The optimization of the market share is critical for the success of international expansion strategies: investment will need to be focused on true market differentiation Investment on true market differentiation will be key. One driver of differentiation is a differentiated product offering via a unique set of products for the region with minimal localization in each country but attractive product offering. Sophisticated market segmentation in each country to target a fast market share on fast growing profitable segments will be a key success factor as well as an effective distribution strategy leveraging selected independent distributors and bank insurance and taking the full benefit of cross selling. The goal is to focus investment on market differentiation and not on sophisticated internal processes. According to you, what is the most successful international expansion strategy? Focus on the geographical coverage: expansion in a larger number of countries including in countries with limited market share 23% 77% Focus on market share: expansion in a limited number of countries in order to optimize market share in every market Source: Accenture Multi Country Operating Model Survey 2009 14
The majority of the insurers do not consider their current multi-country operating model is a source of competitive advantage Overall, is your multi-country operating model providing a source of advantage and therefore a source of higher performance relative to your competitors? Yes to a great extent you are performing at a higher level than your competitors in most areas 27% Yes to some extent - you are performing at a higher level than your competitors in some areas but are performing at the same level in most areas Your operating model is not creating an advantage for you 9% 64% 73% of the insurers do not consider that their current multi-country operating model is a source of competitive advantage Source: Accenture Multi Country Operating Model Survey 2009 15
Insurers have not optimized their multi-country operating model yet The majority of the insurers expect more benefits in terms of cost reduction and time to market over the next 3 years. What benefits were actually achieved up to now from the implementation of your multi-country operating model? What benefits are you planning to achieve in the next 3 years? What reduction in your business operations costs did you achieve up to now? Are you targeting for the next 3 years? Business operations costs have been/ will be reduced 66% 76% Achieved Planned 11.6% 14.6% IT applications and infrastructure costs have been/will be reduced 51% 56% Achieved Planned 15.7% 17.7% Time to Market has been/will be improved 55% 70% Achieved Planned 27% 24.4% Achieved Targeted Base: insurers who have achieved/who plan to achieve benefits Source: Accenture Multi Country Operating Model Survey 2009 16
The regional model (Hubbing model) is the dominant model but there will be an increase of the importance of the global model in the next 3 years What best describes your current operating model across different geographies/countries? What model do you plan to use in the next 3 years? International (Columbus model) Multi-National (Mini-me model) Highly centralized operations based in home country with limited end customer offering localization 2009 2012 Highly decentralized operations with strong localization around offerings 2009 2012 13% 13% 19% 17% Regional ( Hubbing model) Shared support services at the regional level with a balance between localization of offerings and efficiency of supporting operations 2009 2012 55% 50% Globally Integrated Globally-integrated operations: strategy, management and operations handled as a single globallyintegrated entity 2009 2012 13% 20% Source: Accenture Multi Country Operating Model Survey 2009 17
Those insurers that have implemented regional and more significantly globally integrated models have reaped the most benefits What benefits were actually achieved up to now from the implementation of your multi-country operating model? International (Columbus model) Reduction of business operations costs Reduction of IT applications and infrastructure costs Multi-National (Mini-me model) Reduction of business operations costs Reduction of IT applications and infrastructure costs Regional ( Hubbing model) Reduction of business operations costs Reduction of IT applications and infrastructure costs Globally Integrated Reduction of business operations costs Reduction of IT applications and infrastructure costs Limited impact Important impact Moderate impact Very important impact Source: Accenture Multi Country Operating Model Survey 2009 18
Focus will be made on IT and processing capability in order to increase industrialization and reduce cost What changes to your multi-country operating model are you currently undertaking or are you considering for the next 3 years in order to make your international expansion strategy a success? IT infrastructure IT services* 36% Product offer 34% Channel mix 36% 30% Service operations 34% 31% Finance operations 26% 33% Organization/structure 30% Distribution management Policy management 29% Marketing Claim management HR operations P&L responsibility 11% 15% 22% 34% 23% 21% 34% Underwriting 20% 31% 24% 25% 27% 39% 36% 27% 25% 31% 48% 59% 57% 56% 54% 54% 51% 34% 38% 42% 68% 66% 65% 72% 78% Changes currently being implemented Changes planned Changes ongoing or planned in over 2 insurers out of 3 Changes ongoing or planned in over 1 insurer out of 2 Source: Accenture Multi Country Operating Model Survey 2009 *Applications development maintenance 19
The optimal multi-country operating model will be at least regionally integrated in order to allow scale in investment and industrialization What geographic level do you consider as optimal for each of the following elements for a successful multi -country operating model in the next 3 years? Country (1) Small regional** (2) Large regional** (3) Global (3) IT infrastructure Finance operations HR operations IT services* Organization/structure Service operations Policy management Marketing P&L responsibility Product offer Underwriting Claim management Channel mix Distribution management *: applications development maintenance ** Small regional = less than 5 countries ** «Large» regional = more than 5 countries 2.4 2.4 2.3 2.2 2.1 2.1 2.1 2.0 1.9 1.9 1.8 1.8 2.7 2.6 20
Contents Introduction Key findings Summary and implications Appendix: survey methodology 21
DRAFT Conclusion For those insurers with well established international operations: Focus on opportunities to scale-up existing territory operations M&A or organically through market discontinuities Need to develop vision for long-term integrated multi-country operating model Supporting both revenue growth and cost optimisation drivers Migrate function by function activities to regional or global level Centres of excellence, low cost support and processing centres, global systems platforms Establish on-going optimisation and benefit realisation approach For insurers establishing and yet to establish international operations: Time may be running out Develop overall integrated internationalisation strategy Territorial prioritisation, Product/market focus and market differentiation Entry strategy (M&A, de-novo, etc.) Integrated Operating Model (global/regional structure, local product and distribution adaptation) Execute establishment strategy and multi-country operating model implementation in parallel Programme risk management Building coherent and adaptive culture Accelerate operating model through optimised sourcing 22
DRAFT Accenture has distinctive capabilities that can help insurers achieve international expansion successfully and maximise value creation Formulation of corporate development and international expansion strategy Evaluate product/territory opportunities and establish target geographic footprint Entry strategy; acquisition, JV, alliance, de-novo Target evaluation and operational due diligence; investment case assessment Optimisation of local product market strategy Local market opportunity assessment Product/service shaping and market testing Design of Target Operating Model Proprietary insurance process excellence and high performance insights Marketing, Sales & Service transformation Underwriting, Claims and Policy & Billing capability and process design IT capability and solution design Cost optimisation Delivery of Integrated Operating Model Regional and global systems integration; build, roll-out and application outsourcing Shared services transition management and outsource Outsource processing Dedicated Accenture Insurance practices and expertise in all major global markets 23
Contents Introduction Key findings Summary and implications Appendix: survey methodology 24
Method of the Survey Data Collection Research Period Quantitative survey of C-level Executives of insurance companies on the future developments of multi-country operating models within the insurance industry 104 interviews conducted by phone by Kadence Ltd From December 2008 to April 2009 Activity covered in the survey Location of the Executives surveyed Home market of the insurance companies interviewed P&C 51 America: 33 Europe: 44 America: 35 Europe: 50 Life 53 Brazil* 5 Denmark 4 Brazil* 3 Belgium 2 USA 28 Finland 1 Canada 2 France 9 Global revenues 500m 1 bn$ 12 1-20 bn$ 61 > 20 bn$ 31 APAC: 27 Australia 6 China* 5 India* 2 Japan 5 Singapore 1 South Korea* 8 France 7 Germany 2 Italy 11 Spain 8 Switzerland 2 UK 9 USA 30 APAC: 19 Australia 2 China* 4 India* 2 Japan 4 South Korea* 7 Germany 7 Italy 7 The Netherlands 4 Nordic 5 Spain 5 Switzerland 4 UK 7 *Emerging markets 25