new strategies for europian insurance

8/12/2019 New Strategies for Europian Insurance

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INSURANCE

Corporate premiums for predictable risks will likely disappear

Four very different value propositions are emerging

Supplemen ting welfare asset gatherers or service providers



Patrick Wetzel

T FIRST SIGHT, IT MIGHT S M a relatively straightforward task to define

the size and scope of the E urop ean insu rance m arket. Statistics show

that the prop erty and casualty (P C) market in G erm any is worth

DMIOO billion, for example, and that Switzerland has Europe's highest life

premium s per capita .

But statistics mask industry trends that pose significant strategic questions for

every chief executive officer of an insurance company. The traditional delin-

eation betw een life and non-life in suran ce p rod uc ts is beg innin g to fade, as is

the distinction between the insurance and reinsurance businesses. At the

same lime, the very boundaries of the insurance industry are blurring. Life

investment companies, reinsurers, asset managers, investment bankers, and

private bankers all find themselves competing in the same arena for business

not always traditionally regarded as insurance.

To define insurance in terms of the types of cover available, such as motor,

death, invalidity, and fire, therefore no longer suffices. A difterent gauge,

capable of reflecting tlie industry's growing com plexity, is required if CEOs are

to understand the trends in their industry and plan accordingly It is therefore

useful to examine the four value propositions around which todays European

insurance industry ap pea rs to be grouping.

Insurance as an instrument to cover unpredictable cash needs

For many customers, insurance policies are instruments for meeting unpre-dictable cash needs: a premium paid in advance gives the insured the right to



NEW STRATEGIES FOR EUROPEAN INSURANCE

in today's derivatives markets, whereby a premium paid in advance givthe investor the right to sell {or buy) certain assets at a fixed price som etim

in the future.

It is a similarity that a handful of the most sophisticated insurance com pani

and multinationals are beginning to exploit to their advantage. Rather th

pay ing p r emiums to an insurer o r re insure r to cover their r isks, the

companies a re de facto buying an insurance opt ion - an instrument th

guarantees cash as and when losses occur, regardless of any specific line business. If these new ins t ruments becom

-T-i • • . -I com m on currency, they will thre aten ere

T h e r e is an emerc i im t r end , , ^ , . . , . - ' , ^

, I • -̂ I • ,1 chunks ot traditional insurers revenue,

toward plac ing severe r isk m t h ema r ke t by issu ing r isk bo nd s , . .-, i • r. i i

• • A r u • • It works like this. Rather than m su nn g eveins t e ad of buy ing insu ranc e .- , • . • , ,-

aspect ot Its business, a multinational spli ts traditional insurance needs into predi

table risk {risk that can be predicted statistically and for which it can pla

such as a small fire or a strike) and severe risk. Th e predictable risk is nlonger insured , as the com pany will itself be able to provide the necessary ca

Severe risk, however, such as a hurricane that destroys an entire plant ancould bankrupt a company, needs to be covered. Although this risk is st

largely placed w ith insurance o r reinsurance com panies, there is an emergi

trend toward placing it in th e market. Instead of buying a n insurance polic

a com pany could issue risk bon ds. Normally, buyers of these bond s woureceive an annual premium, but in a year when unpredictable r isk occu

they eould lose part of the p rincipal of their investm ent. In effect, insu ran

risk could start to be secu ritized just like credit risk.

Some mul t ina t iona l corpora t ions a re already going one step further an

wondering why they cannot com bine the ir insuran ce risks with o ther risk

such as currency risks, issuing a single instrum ent to cover losses from wh

ever source - be it a huge fire or a currency collapse. Reinsurance compani

such as Swiss Re and other global insurance companies , most ly via the




and has greater control over cash flow For conventional insurance playersactive in commercial and corporate business as well as in reinsurance, thetrend could represent a significant threat to the structure of their portfolios.Premiums traditionally paid by corporations for predictable risks will,essentially, disappear from the statistics, as could traditional reinsurancemechanisms, to be replaced by new, cash-oriented insurance instrumentswhich could also be oflered by investment bankers.

Two points highlight the magnitude of the changes ahead. Predictable riskcould easily represent 40 to 50 percent of the total premiums paid by corpo-rations today, and 80 percent of UK companies already retain a significantproportion of their own risks. Under these circumstances CEOs of middle-size insurance companies, whose business has largely depended on predic-table risk, will have to ask themselves how far they will be able to com pete forthe more sophisticated business in markets dominated by investment bankersand a few giant insurance piayers such as AUianz, Swiss Re, Munich Re,

Gerling, Zurich, and Generali.

They should also bear in mind that there is no apparent reason why the trendtoward all-inclusive insurance should not spread to other market segments,such as the small commercial market or high net-worth individuals HNIs).HNIs, for example, might be interested in a product covering their unpredic-table risks accident, invalidity, or severe healthcare problems), while retainingmore predictable risks.

ass market demand

If demand for insurance as a cash instrument in the corporate sector posesa threat to insurers, there should be new opportunities in the mass marketin areas that are not yet a primary focus of the insurance business. Ratherthan providing cash to cover for the unexpected, future insurance productswill provide cash to deal with the kinds of problems people commonly, if notinevitably, bave to confront in the course of their lifetimes, such as unem-

ployment, old age, and sickness.




As the burden of social costs continues to rise across Europe, it is difficult imagine that governments will not increasingly welcome the introduction similar kinds of private insurance products as substitutes for, or at least suplements to, the basic cover offered through the welfare system. These neproducts could include coverage for health, invalidity, accident, and long-tercare, as well as pensions in the form of a life policy They could be sold eitherindividuals or households, or to corporations as fringe benefits for employee

The historical (and legally enforced) separation between accident (P&C), lifand health insurance business is therefore becoming an increasing burdefor insurers wanting to offer a comprehensive package of personal cover. the Netherlands and Switzerland, where semi-public health insurance alreadexists, alliances between different types of insurers are already springing uWinterthur, for example, has integrated into its Swiss structure the fifth

biggest nationa l health insurer, KFW, ancreated out of it a Wincare unit.

Banks are aggressively sellingperson a] equ ity plans as tax- r i r̂

oJ; • , • , . I-,- , ^ A privatization ol the European pensioelricient rivals to hie products... ^ , , ,

system to Ihe same degree as already exisin the US (with its 40I(k) regulation) cou

conceivably generate more than 3 000 billion ecus in additional assets be managed, either by insurers or professional asset managers - such the magnitude of the potential opportun ities emerging. Similarly, 500 billioecus in premiums could be generated by opening the healthcare market

private insurers.

nsurance as an investment instrument

Beside being an instrument for meeting cash needs in return for premiumpaid in advance, insurance is also seen as an investment. Life insurers manag10 to 15 percent of the world's financial assets, accumulated thanks to geerous tax incentives from the state for those who take out life polices. Lif

policies have become not only a means of absorbing risk, but of saving moneBanks, on the other hand, have had to contend with modest, or even negativ




as those enjoyed by life insurance products, governments have not only puttraditional life insurance under severe performance pressure, but have alsoblurred the distinction between life insurance and investment management.In the UK. banks are aggressively selling personal equity plans (PEPs) as tax-efficient rivals to life products.

insurers, however, have largely been slow to wake up to the fact that they arenow in direct com petition for asset m anagement money. Some have turnedtheir investment function into a profit center, or acquired asset manage-ment expertise. The best-known examples are the acquisition of Kemper($60 billion under management) by the Zurich Insurance Group, and theacquisition of Barings by Dutch insurer ING. Other players have choseninstead to outsource their investment function, as Scandia Life has done.Scandia now offers unit-linked products of a selected number of chosenfunds, run by external asset managers and banks. But many insurers incontinental Europe are only now discovering unit-linked products that allow

clients to choose how to invest their savings.

Some banks have moved still further ahead. They offer not only their owntraditional life products, but also a new range of products, mostly mutualfunds, that replicate financially the attributes of typical life insuranceproducts: a guaranteed minimum return with the opportunity of additionalreturns depending on the underlying asset chosen for the investment. Thedifference, of course, is that there is no guaranteed lump sum payable on

death. The recently launched asymmetricfunds of S C Warburg are examples of these i u i i, . J ., . ^ ...In su re rs, however, are slowlykinds ot products. , . ^ ,̂ r . *L »»u

^ wak ing up to the fact that they, , ,. . are now in direct com petitio nIn the medium term, every insurance com- <• ^ ^

^ ,, , ,, for asset m ana gem ent m oneypany should probably plan lor a more evenlaying field n which fisc l advantages givento products with little real insurance content have been eliminated, and

they find themselves in direct competition with investment managers forlong-term savings. To survive, they will either have to wholeheartedly enter




It is clear that the boundar ies of the life insurance business are chang

not only for the individual market but also for group business. Here i

interesting to note that in many countries, group life insurers still offer und

ferentiated investment products. The idea of offering u nit-linked pro du

for group life (as investment managers would do for pension money) is o

just dawning.

nsurance as a service to avoid distress n difficult situ atio ns

Despite their primarily product-oriented approach, insurers have traditiona

offered few product-related services. Until recently, they have been sim

payors, not service p roviders.

But as tradition al lines of insurance becom e mo re like com mo dities, insu

will have to start looking for new value prop ositions beside the purely c

one (you pay now and I pay you cash when need ed; or I invest your mon ey

you). A service offered eithe r to prevent or limit distress in difficult situati

is one such propo sition.

T he first movers in this field have be en not P C insurers, but health insur

In Switzerland, health insurers have started to reinforce their role as pay

by offering clients a whole range of real seiT ices: a selection of hospitals f

which to choose, a network of p hysicians, and in some cases direct delivery

drugs and other medical supplies. This LJS-inspired approach, known

managed care , has not only given health insurers a significant role in

reshaping of the whole healthcare industr

T- , . , J U I • lias also redefine d the b o u n d a r i e s of hor lost or d a m a g e d b e l o n g in e s , , , , • . •

7 , I health msurance business,some insure r s a l r eady r ep lace

stolen or d a m a g e d g o o d s r a th e r _, ,w • , • • .1 • • ^^ , The same thmg is happenme m other ms

than payine out cash ,. ^, ^. r r̂ - ,- • = ance Imcs. Car msurers such as Direct Li

in the UK or Centraal Beheer in the Nethe

lands offer to take care of the whole repair procedure after an accident

providing a replacement car, bringing the damaged car to the repair sho




repair services. In Belgium, several insurers have an agreement with MondialAssistance to offer home repair services.

In the case of lost or damaged belongings, some US insurance companiesalready replace stolen or damaged goods rather than paying out cash - aservice that is not only convenient for customers, but more likely todiscourage fraudulent claims. One, USAA, has become one of the leadingdirect retailers in the United States, able to negotiate professional

purchasing agreements with suppliers of consumer goods for items likelyto be stolen or damaged. The same trend is likely to emerge in Europe.Indeed, replacement rather than cash payment already seems to be anoption offered by some UK insurers.

Risk-prevention services could also become a new source of income forinsurance companies interested in delivering better value propositions,particularly to their commercial clients. The Gerling and Zurich groups

already provide a risk-consulting service, while P C companies would seemwell-positioned to link their home-owner coverage with advice about homesecurity or even to fit burglar alarms.

First-mover advantage in the trend toward ofiering additional, insurance-related services could be critical for success.

nsu ranc e as an adm inistrative service

One last role that insurers could play is that of transaction specialist. Clientswould use insurers not because they smooth their cash flows or invest theirmoney, but because they have the systems in place to deal with theadministrative tasks related to the insurance business: keeping track ofthousands of contracts, checking cover rules when claims are m ade, payingthe cash required in time.

Although this role might appear dull, it is a value proposition already ofteredby some, especially in the commercial and corporate sectors. Allianz, through




W ha t do es all this m ean?

What was once a clearly defined industry is changing its scope. he speedchange may vary by country depending on the regulatory environment bnot the growing complexity of the market. For companies that would like stay in the old world of product lines and traditiona l sales channels thmarket will also be an increasingly difficult one. Significant chunks traditional business are set to be eaten away by new competitors from oth

industries or by com petitors with new value propositions.

It means CEOs of traditional insurance companies have a lot to deal witEmerging technoiogies and new sales channels present operationchallenges and pressure on costs and operational results will be severe. Ytheir first concern must be to act early at the strategic level for two reasonFirst they will take the right opera tional and investment measures onif they have a clear vision of where to go. and second strategic advantag

will go to those that are first into new areas because they will captuthe best partners and the most attractive customers. The opportunitiare there for early entrants who identify areas in which they can offer neclearly differentiated value propositions. The field is wide open - but onfor so long. Q

new strategies for europian insurance

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