iii colÓquio internacional sobre seguros e fundos de pensÕes july 7th, 2004
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III COLÓQUIO INTERNACIONAL SOBRE SEGUROS E FUNDOS DE PENSÕES July 7th, 2004. Denis Duverne Member of AXA Management Board Chief Financial Officer. The Future of the Insurance Business : Challenges and Perspectives. What happened in the past 10 years. CONSOLIDATION, DEMUTUALIZATION - PowerPoint PPT PresentationTRANSCRIPT
III COLÓQUIO INTERNACIONAL SOBRE SEGUROS E FUNDOS DE PENSÕES July 7th, 2004
Denis DuverneMember of AXA Management Board
Chief Financial Officer
Lisbonne- Denis Duverne - 07/07/04 - Page 2
The Future of the Insurance Business :The Future of the Insurance Business :
Challenges and PerspectivesChallenges and Perspectives
Lisbonne- Denis Duverne - 07/07/04 - Page 3
What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION Increased competition, with market share strategy a strong option More capital oriented, with ROE a key theme Emergence of sophisticated capital management Increased pressure from regulators Increased risk outsourcing (from large reinsurance capacity to stretched capacities with selective approach from reinsurers)
DISTRIBUTION Development of Financial planning and Asset Allocation advice Emergence of :
Direct insurance, Bancassurance, Move towards Open-architecture
PRODUCTS More single premium products Unit-linked products Bigger demand for private pensions Emergence of hedge funds, mutual funds,derivativesBlurring distinction between life insurance and mutual funds
CUSTOMER More demanding More risk adverse Seeking for advice
Lisbonne- Denis Duverne - 07/07/04 - Page 4
Investment margin squeeze
Lower fees on UL
High level of equity losses
Low technical margin
Increased demand for protection
Pressure on solvency and profitability
Since 2000, the insurance sector has undergone a more challenging environment
Property & Casualty Unprecedented level of claims
Sept 11 Natural catastrophes Asbestos
Judicial inflation : “Deep pocket syndrome”
Increasing price of reinsurance
Life and Savings Lower return & uncertain equity market Widening pension GAAP Volatility & Risk awareness Demand for “safer” products Relative failure of recent regulatory changes (stakeholder, riester …)
Lisbonne- Denis Duverne - 07/07/04 - Page 5
In L&S, insurers had to quickly adapt to lower returns and tight capital
Following the recent financial market collapse, client turned to safer products, with guaranteed rates.To face this challenging environment and preserve theirs margins, insurers had to :
Reduce credited rates, in line with low fixed income returns and depleted capital gains
Reinforce Asset/Liability Management
Foster unit-linked sales, being less capital intensive and more profitable products in the long run, while providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 6
"BACK to BASICS"Selective underwriting
Increased retention and cross selling through efficient CRM
Higher productivity through service centers & call centers
Reduced claims costs through relationship with approved repairers
and spare parts distributors
In P&C, emphasis was on efficiency, through disciplined underwriting
This challenging environment has forced companies to focus on underwriting. More and more, P&C insurers are going “Back to Basics” to reduce expenses, while focusing on profitable clients through selective price increases. Market share-led strategies seem no longer to be an option.
107,6%106,5%
98,5%
4,8%
5,9%6,2%
92%
94%
96%
98%
100%
102%
104%
106%
108%
110%
2001 2002 2003-1%
1%
2%
3%
4%
5%
6%
7%
8%
Combined ratioInvestment return INCL. capital gains / assets
Source : Average investment return and combined ratio for Allianz, AXA, Generali and AIG, based on company public disclosure
Lisbonne- Denis Duverne - 07/07/04 - Page 7
Despite the recent turmoil, worldwide insurance premiums have increased...
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002
Worldwide gross insurance premiums evolution between
2001- 2002 (%)*
0
200
400
600
800
1000
1200
North Am. W Europe Japan S/E Asia Latine Am. CentralEurope
20012002
Industrialized countries Emerging countries
+9%
-1,5%
+17%+3% +9%
+3,5%
0500
1000150020002500300035004000
Japan
N America
W Europe
Oceania
S/E Asia
Premiums per capita in USD, 2001- 2002*
...with emerging markets posting a particularly strong growth, especially in Asia
Lisbonne- Denis Duverne - 07/07/04 - Page 8
Future and challenges for the insurance sector ?
To remain attractive, the insurance sector has to grow profitably while satifying client needs…
What future in terms of growth?
What future in terms of distribution ?
What future in terms of offer ?
What future in terms of margins ?
What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 9
Emerging markets represent a sizeable growth engine...
0
500
1,000
1,500
2,000
2,500
3,000
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000
GDP per capita
Life
den
sity
: GW
P pe
r cap
ita
JapanSwitzerlandUnited Kingdom
United StatesIrelandFinland
SwedenNetherlandsFrance
DenmarkHong Kong
Belgium
NorwayLuxembourg
AustriaCanada
Germany
SingaporeItaly
Australia
TaiwanSouth Korea
South Africa IsraelSpain
New Zealand
Portugal
North America
Western EuropeAustralia &
NZ
South East Asia
Central & Eastern Europe
Middle East
Latin America and Caribbean
+30%
+3500%
Source: Swiss Re; World Bank.
Geographical mix is the key variable with emerging markets offering the highest margins and the highest growth rates
Lisbonne- Denis Duverne - 07/07/04 - Page 10
1 Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands, Switzerland, Belgium and Austria
2 Two home markets: Netherlands & BelgiumSource: Boston Consulting Group, companies, press
Many potentially sub-scale local positions within top players’ portfolios Due to capital
requirements, strategic fit, minimum size and profitability, the insurance sector continues to rationalize.
According to a study by The Boston Consulting Group*, many insurance groups suffer from highly fragmented European portfolios, consisting of sub-critical units that have “severe structural disadvantages”.Number of western European markets outside home country 1
Ave
rage
wes
tern
Eur
opea
n m
arke
t sh
are
outs
ide
hom
e co
untr
y
* Back to the Future: The European Insurance Landscape
0%
1%
2%
3%
4%
5%
6%
7%
8%
0 2 4 6 8 10 12 14 16 18
20022003
ING
Fortis2
Baloise AvivaERGO (Munich Re)
WinterthurZFS
Allianz (91.8%)
AXA (67.3%)
Generali (89.8%)
(European premiums from markets with >5% market share)
...while developed countries will see further rationalizations
Lisbonne- Denis Duverne - 07/07/04 - Page 11
Changing demographics will provide opportunities for Life & Savings products
82% of baby boomers believe their lifestyle would decline upon the death of a spouse
72% of baby boomers who own life insurance believe they don’t own enough
7 of 10 non-buyers believe they still need to buy life insurance
*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003
Recent market studies* indicate that in the US for example, variable and fixed life insurance should grow as baby boomers enter retirement
Elderly Population (aged 60 & over) as a % of total population
0%
50%
Countries
% o
f eld
erly
1950
2000
2025
20501950 16% 16% 15% 16% 12% 11% 13% 8% 13% 8%
2000 21% 21% 23% 22% 24% 21% 16% 23% 16% 10%
2025 28% 26% 32% 30% 34% 30% 24% 36% 25% 20%
2050 32% 30% 35% 33% 41% 41% 26% 42% 30% 30%
France
UK Germany
Belgium
Italy Spain US Japan Australia
China
Life expectancy at birth by country
0
50
100
Countries
Life
exp
ecta
ncy
1950
2000
2025
2050
1950 66,5 69,2 67,5 67,5 66 68,9 63,9 69,6 40,8
2000 78,8 77,8 78,1 77,8 79,1 76,6 80,6 79,8 71,4
2025 81,8 81,1 81,2 81,2 81,9 80,5 82,8 82,3 77,4
2050 83,5 83,1 83,2 83,2 83,5 83,9 84 83,8 81
France
UK Germany
Belgium
Italy US Japan Australia
China
Life
Source: United Nations, US Census bureau
Source: United Nations
Lisbonne- Denis Duverne - 07/07/04 - Page 12
Mass Affluent
Mass market
High quality networkAdvice toolsWide product offer (innovation,
performance…)Rich Internet proposition
(value added services, information…)
Standardised product offerRecruiting machineCost-effective channel managementLow cost / streamlined back-office
operations“Off-the-shelf” selling proposition
Advice &
Relationship
Sales and
Service
industrialization
Focus of Focus of business modelbusiness model
Source: McKinsey & Company, “Reinventing for growth”
2 business models emerge in L&S, with insurers well positionned on Mass Affluent
Towards a more segmented and differentiated distribution
Lisbonne- Denis Duverne - 07/07/04 - Page 13
Full OwnershipBancassurance
• Capital intensive
• Potential conflict of interest (capital allocation)
Joint-Ventures
Co-Ownership of a separate entity to cross-sell products:
• Alignment of interests
• Governance is key
Partnerships are increasingly important, notably in bancassurance
• Capital allocation similar to proprietary distribution
• Allocation of profits between manufacturer and distributor is key
Bancassurance, one of the avenues for third-party distribution can be dealt with three different approaches...
Distribution Agreements
Lisbonne- Denis Duverne - 07/07/04 - Page 14
Offering innovative and tailor made products and services will be key
Innovative & tailor made products Development of unit-linked business with guarantees (GMIB, WB…) Development of protection products Development of tailor-made offering in P&C
Specialized and trained life agents Open-architecture
Improved customer service IT investment (consolidated customer view) Expanded internet proposition
advice/educationtransparencyavailabilityfaster settlementsquality
broad range of products and services
protectionretirement incomeelderly care solutions
Insurers will have to focus on …to answer clients needs for
Lisbonne- Denis Duverne - 07/07/04 - Page 15
Maintaining margins will require :
A better leverage of technology investments
A constant discipline to improve internal processes
A more rigourous analysis of opportunities offered by outsourcing (components of risk as well as components of the service proposition)
Improved risk management and capital allocation practices
A focus on market segments where sustainable competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 16
What future in terms of required capital ?
After softening rules during the market turmoil, European Regulators are revisiting their models
Solvency II project aims at developing a more risk sensitive system for assessing the overall solvency and risk management discipline of the industry What is the true level of capital required
Existing regulatory capital Risk Based Capital (RBC) Internal models Rating agencies’ models Adequacy of reserves
What adjustements are needed to reflect the quality of risk management
?
Lisbonne- Denis Duverne - 07/07/04 - Page 17
Key success factors - Capital management and discipline ...
Capital should be allocated to one core business
Capital is a very expensive resources that need to be tightly managed
Capital is the last currency you need to use
Financial protection only
Economic capital methodology
Selective expansion and divestments
Lisbonne- Denis Duverne - 07/07/04 - Page 18
Conclusion
Insurance will remain a growth business
Thanks to a reduced capitalization and improved risk management practices, future cycles should be less pronounced
The unbundling of the various components of the value proposition will be key to the future success of insurance companies
Thank you