World Insurance Report 2011


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World Insurance Report 2011

  2. 2. 2011 WORLD INSURANCE REPORT CONTENTSTABLE OF CONTENTS 5 Preface 7 CHAPTER 1 Efficiency Model Shows Insurers Have Ample Room to Reduce Operational Expenses and Acquisition Costs 15 CHAPTER 2 Business Agility Is Critical for Insurers Seeking to Thrive Long-Term 16 — Front Office Agility Levers All Have a Direct Impact on Customer Satisfaction 19 — Claims Management, Key to Customer Experience, Is Ripe for Improvements 27 CHAPTER 3 Insurers Need to Transform Claims to Meet Their Brand Promise to Customers While Driving Results 37 Methodology 38 About Us 3
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  4. 4. 2011 WORLD INSURANCE REPORT PrEfaCEPrefaceCapgemini is pleased to present the fourth edition of the World Insurance Report (WIR). Insurance companiesaround the globe are re-focusing on their core operations. Some lost investment income during the crisis; othersface changing customer preferences; most must tackle a newly stringent regulatory environment. The 2011 WorldInsurance Report explores some of the ways insurers can dissect their business to identify opportunities for makingfundamental and lasting improvements in operations—improvements that will provide the underpinnings forlong-term success.We start by using an Efficiency Model to look at the current state of the non-life insurance markets in sevencountries (France, Germany, India, Italy, the Netherlands, U.K. and U.S.), identify emerging efficiency trends ineach market and potential lessons learned across markets.We then look at business agility—the ability to identify, anticipate and respond to specific changes in operatingconditions that directly impact an insurer’s ability to achieve sustained performance. We use a proprietaryBusiness Agility Maturity Model to analyze various insurers (life/non-life, stock, mutual, large, small) from aroundthe globe, focusing on front office and claims-management activities. We explore the spectrum of performance inkey sub-activities in the front office—activities that are relevant to life, health, and non-life businesses—and inthe discrete value chain for claims management, which is clearly most relevant to non-life insurers.Finally, we delve into the potential for improvement in claims management, which is so often the definingmoment in the customer relationship for non-life insurers. Specifically, this WIR looks at the potential forinsurers to improve customer retention and acquisition, process efficiency and effectiveness, and risk/indemnitymanagement by transforming claims processing.The report’s findings draw on more than 50 interviews with senior executives from leading global insurers,covering 14 countries: Belgium, Canada, Denmark, France, Germany, India, Italy, the Netherlands, Norway,Spain, Sweden, Switzerland, the U.K., and U.S.We are pleased to present you with this year’s World Insurance Report, and hope you find real valuein its insights. Jean Lassignardie Patrick Desmarès Global Head of Sales and Marketing Secretary General Global Financial Services European financial marketing Capgemini association (Efma) 5
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  6. 6. 2011 WORLD INSURANCE REPORT CHaPTEr 1 Efficiency Model Shows Insurers Have Ample Room to Reduce Operational Expenses and Acquisition CostsCHAPTER 1 INTRODUCTION Non-life insurance companies received a wake-up call during the recent financial crisis and realized they could not afford to depend heavily on investment income to sustain profits. As a result, many have begun to focus on improving efficiency, but the challenge is how to do so without impairing quality of service. The potential for efficiencies varies by firm, since the specifics of business models differ by country, service segment, firm strategy, etc. However, there are a limited number of levers non-life insurance companies can pull, so by dissecting the role of these levers in their business, firms can potentially identify specific efficiency-focused actions that could drive business improvement. Many firms acknowledge they need to reduce operational and acquisition costs to assure sustainable growth and profits. To explore insurers’ options in more detail, we looked first at the current state of the non-life insurance segments in seven countries: France, Germany, India, Italy, the Netherlands, U.K. and U.S. These countries together account for approximately two-thirds of the global non-life insurance market. By applying a proprietary efficiency model to measure performance, we were able to identify emerging efficiency trends in each market, and reveal potential lessons learned. 7
  7. 7. Measuring Efficiency In all cases, ratios depend on a variety of externalOur efficiency model uses metrics that are consistent factors, including general economic conditions,with industry-defined ratios for individual insurers, government regulation, business type, consumerbut it offers a better comparison for industry preferences, and so on. As a result, it is rarely relevantperformance across regions. The model, valid only for to compare ratios directly across regions. It is typicallynon-life insurance companies, reflects the cost and more germane to compare trends over time withinfinancial-performance ratios of each country based on regions, and perhaps within business types orcore and non-core insurance business. The efficiency insurance segments.ratios are calculated using various expense and profitmetrics against gross written premiums (GWP). GENERAL FINDINGS FROm EFFICIENCy mODEL While each market is characterized by distinctMost notably in our model: conditions, some generally applicable findings did emerge from our efficiency analysis of insuranceƒ Underwriting ratio: Like the ‘combined ratio’ performance in 2006-2009. In particular: industry benchmark, it measures the percentage of premiums an insurer pays out in claims and ƒ Underwriting ratios generally rose between 2006 expenses. The lower the ratio the better, since a and 2009, indicating pressure on profitability. In higher ratio means expenses are eroding more most countries, insurers were paying out a greater premium revenues. Notably, when insurers were percentage of premiums in claims and expenses earning steady and substantial investment income, in 2009 than they had in 2006 (see Figure 1.1) for they could remain profitable by offsetting weakness two key reasons: 1) non-life underwriting expenses in underwriting ratios with investment gains. increased slightly from 2006 to 2008, and 2) GWP After losing investment income in the crisis, many dropped for most countries in 2008-09 due to the insurers have refocused on the fundamentals that financial crisis. In the Netherlands, the ratio was drive the underwriting ratio. lower in 2009 than in 2006, but mostly because theƒ Claims ratio—(total claims and benefits ratio had spiked higher in 2006 after the introduction disbursed) / (GWP)—offers a proxy for underwriting of a new health insurance act (see country detail). efficiency. In general, a lower claims ratio produces ƒ Claims ratios varied from year to year in higher returns. most countries, largely because of natural catastrophes and variability in premiumsƒ Acquisition ratio—(total commission and fees written. The claims ratio is highest in India and paid) / (GWP)—reflects the effectiveness with which the Netherlands, where regulatory change has distribution networks are being managed. While it is been a significant factor in recent years. A lack beneficial to financial results to keep the acquisition of historical data has also contributed directly to ratio low, these costs are inherently higher in some underwriting inefficiencies. The claims ratio has business models, so it may be more relevant for a held mostly steady in France, largely because the firm to focus on the trends in its own acquisition frequency in claims declined, helping to offset the ratios than to benchmark directly against other rise in claims costs. businesses or regions. ƒ Acquisition ratios tend to be lower amongƒ Operational ratio—(total operating expenses) / mutual insurance firms and firms that rely (GWP)—helps to explain the maturity with which heavily on direct distribution. The ratio is lowest insurers are managing routine expenses. In general, in the Netherlands, where non-life insurers have the lower the operational ratio the better. been leveraging the Internet to bring down costs.ƒ Investment ratio—(net investment income + capital The ratio is also low in India, but mostly because gains (losses)) / (GWP)—shows returns on insurers’ few insurers have invested in multiple channels to investment portfolios. In general, the higher the date. As they invest more, the ratio is likely to rise. investment ratio the better. Direct distribution is especially limited in Germanyƒ Profit margin—(profit before tax) / (GWP)— and Italy, but largely because consumers prefer to measures profits from the overall insurance business. buy through agents, and not because there is a lack Notably, mutual insurance companies tend to have of technical know-how. French non-life insurers lower profit margins than proprietary insurers also operate mainly through intermediaries, because there are no stockholders demanding annual inflating their acquisition ratios. The mature returns, and because mutual insurers may choose, markets of the U.K. and U.S. have multiple for example, to return earnings to policyholders in distribution channels, increasing the overall the form of lower premiums rather than dividends. cost of acquisition.8
  8. 8. 2011 WORLD INSURANCE REPORT CHaPTEr 1ƒ Firms have been trying to bring down operational ƒ Investment ratios fell across the board during ratios to keep costs in check. France, for example, the crisis, but the sharpest losses were at has the lowest operational ratio among the seven large global firms, which generally had more studied countries and has witnessed ongoing cost- exposure to toxic assets. Large U.S. firms were saving initiatives by large insurers. This helped to hit especially hard, because dividend income and reduce their operational ratios further in 2007. India asset values dropped sharply. Investment ratios at has by far the highest operational ratio as firms have Indian non-life insurers were far higher than most been investing heavily to scale up their operations. because regulators dictate that these insurers be India could leverage lessons learned from France to heavily invested in domestic government securities. optimize their operations going forward. German Those investments have offered above-average firms, which generally lack scale, have managed to returns in recent years and kept India’s insurers maintain moderate operational ratios by outsourcing out of more volatile assets. In general, firms with a extensively. Italian non-life insurers rarely have greater percentage of fixed-income bonds in their propriety networks or significant exposure to direct investment portfolios also performed better during channels, so their operational ratios are relatively low the financial crisis. while acquisition ratios are quite high.Figure 1.1 Non-Life Insurance Expenses as a Percentage of GWP, by Country, 2006-2009 FIGURE 3.1. Non-Life Insurance Expenses as a Percentage of GWP, by Country, 2006-2009 Underwriting Ratio CAGR 2.3% 4.5% -0.8% 0.7% 1.8% NA 3.5% 2006-2009 7.3 125.0 6.9 123.2 5.4 119.0 125% 107.1 106.1 105.6 105.2 Underwriting 11.35.2 104.6 104.4 11.9 5.8 103.9 103.9 11.05.2 101.9 9.4 6.2 102.0 101.5 100.9 Ratio 98.4 97.7 97.0 95.6 12.8 10.8 94.4 29.0 93.8 93.7 93.7 92.9 29.1 12.9 11.1 92.2 13.3 11.5 91.9 14.8 13.2 10.8 90.0 100% 30.2 Acquisition 17.5 16.00 16.0 18.2 14.60 16.1 17.4 8.2 15.1 17.1 Ratio 17.3 16.0 14.88 16.1 10.7 16.2 8.2 14.7 15.4 14.03 16.2 7.9 14.9 18.7 Operational 20.1 19.7 19.2 18.1 Ratio 15.4 75% 18.5 15.7 50% 88.7 88.1 87.2 86.4 86.2 85.7 83.4 77.6 73.20 73.17 73.6 Claims Ratio 70.8 70.8 70.1 66.03 68.8 68.6 68.2 67.8 67.7 67.1 63.49 66.3 66.3 66.0 62.7 62.7 25% NA 0% 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 U.S. U.K. Netherlands Germany France India ItalyNote: (1) The ratios are valid only for non-life insurance. The ratios reflect non-life data as reported by the countries themselves, and hence include health insurancefor France, India, Italy and the Netherlands, but not for Germany, U.K. or U.S. (2) At the time of analysis, no 2009 data was available for India, where the financialyear ends March 31st. The Underwriting Ratio CAGR over 2006-08 for India was 7.1%.Source: Capgemini analysis, 2010 9
  9. 9. ƒ Profit margins declined on crisis-related losses in ƒ A significant drop in investment income resulted 2008, but have been steadily improving with the in a drop of 1.7 percentage points in profit margins recovery in financial markets—despite continued for French non-life insurers in 2008. The investment underwriting losses. The non-life insurance ratio dropped to 6.6% in 2008 from 8.3% in 2007 amid segments in many countries remained profitable the global financial crisis, but profitability shot up in even in 2008 (see Figure 1.2), though returns 2009 with the recovery in capital markets and asset were clearly lower than in prior years because of values. Nevertheless, French non-life insurers have weak investment ratios. Profit margins have begun increased their focus on core operations to reduce their to recover, but insurers are still battling various dependence on investment income for profitability. profitability challenges. In India, for example, claims and acquisition ratios are rising, and in the GERmANy Netherlands, regulation has pushed up underwriting Germany is the second largest non-life insurance market ratios. Across the board, insurers are refocusing on in the world and the largest in Europe. In Germany, core insurance operations to safeguard profitability. insurance is mandatory for everyone, helping the segment grow quickly. Most of the major non-life players aremOST INSURERS FACE CLAImS AND ExPENSE German, though a few pan-European giants also have aPRESSURES THOUGH COUNTRy SPECIFICS VARy tangible presence. With more than 200 non-life insurers,The efficiency modeling reveals the general pressure the German market is highly fragmented.on non-life insurance companies to optimize their corecapabilities, but each market has distinct operating ƒ The claims ratio was generally stable betweenconditions that affect the degree to which insurers 2006 and 2009, except for fluctuations in propertycan change the way they operate while pursuing and motor insurance claims after storm Emmasustainable growth. Here we offer some perspective on and Hurricane Kryll. The claims ratio for the top 20the non-life insurance segments in each of the seven insurers grew at an annualized rate of 0.6% in 2006-countries we studied. 09, with the top 20 performing better (i.e., a smaller increase in the claims ratio) than the overall marketFRANCE during that period. Property and motor lines, whichFrance is the third-largest insurance market in constituted around 60% of the market share in termsEurope. The P&C segment dominates French non-life of premiums earned in 2009, were adversely affectedinsurance, generating 74.2% of the market’s overall by claims from natural disasters.value in 2008. ƒ The non-life operating ratio was a moderate 13% in 2009. Many large non-life insurers have takenƒ The claims ratio rose in 2009, primarily because significant steps to reduce administration costs and premiums declined and floods in Southern restructure their back offices in recent years. France increased claims. In general, though, the Despite unrest among labor unions, global non-life claims ratio held quite steady between 2006 and insurers have begun outsourcing their operational 2008 at around 70%, because declining claims and administrative activities to low-cost centers, frequency offset increasing claims costs. In 2008, the but economies of scale are still lacking at most positive effects of lower motor claims were wiped out German insurers. by bodily-injury claims and health-related expenses.ƒ French non-life insurance companies have ƒ The non-life industry is increasingly adopting excelled at reducing operational expenses, with direct sales channels, which are expected to reduce two insurers among the ten most efficient in acquisition costs. Germans still prefer to work Europe. Firms are investing in consolidated IT through agents when buying policies, but the role of operations to improve efficiency even further and intermediaries is diminishing. Large firms with an enhance customer experience. Global firms have established brand have started to focus on the use of lower operational ratios than local firms primarily alternate low-cost distribution networks, which are due to economies of scale. especially attractive to younger consumers.ƒ The common practice of selling through ƒ German non-life investment income dropped intermediaries has resulted in a comparatively only marginally during the crisis as insurers high acquisition ratio of around 15%. While were heavily invested in low-yielding but safe most firms have diversified distribution networks registered bonds, debentures and loans. However, and product-sales mechanisms, selling through this meant Germany’s insurers were not positioned intermediaries is more common. The Internet has to gain from the recovery in world markets either, not gained traction as a distribution channel, but and their investment ratio dropped in 2009, continues to grow as a support channel. reducing profitability. Profits were also squeezed10
  10. 10. 2011 WORLD INSURANCE REPORT CHaPTEr 1 by rising underwriting ratios as disaster-related scale and more aggressive growth initiatives. claims jumped. Nevertheless, despite these recent Operational ratios are also lower for large firms challenges—and the price wars, saturated demand than for smaller ones. and stiff competition that characterize the market— ƒ Commission and acquisition costs grew in 2008, German non-life profit margins are among the fueled by motor insurance. Acquisition costs have highest among the studied countries. been increasing as firms expand their distribution networks. Commission expenses have also risen dueINDIA to increasing competition in the non-life segment.India’s non-life insurance industry is in a nascent Acquisition costs for public-sector players are aboutstage compared to the other studied countries. The two times that of private sector has opened up since deregulation in 2001, and ƒ Strong returns on safe investments have helped22 firms now sell non-life coverage, though the top Indian non-life insurers to offset underwritingfour are public-sector firms. Insurance penetration losses. India’s non-life insurers are largelyis very low, except for compulsory third-party motor invested in government securities, which helpedinsurance. However, privately held insurers are mitigate crisis-related losses and has guaranteedincreasingly looking to penetrate health insurance. above-average returns in recent years. However,ƒ Claims ratios are high among Indian non-life infrastructure-fund investments in 2006-08 did insurers, especially government-owned insurers, generate significant losses. due to less efficient underwriting practices. ƒ Profitability is high, mainly because competition is Private-sector firms have significantly lower claims low and investment returns are high. Despite some ratios than public-sector players. of the worst underwriting losses in the world, overallƒ Operational ratios are high, with new firms profitability is still above-average because of the high investing to build capabilities, and incumbents investment returns from government securities. spending to expand and scale up operations. However, increasing competition, continued Private-sector firms have higher operational ratios underwriting losses and declining investment returns than public-sector players because of their smaller are starting to eat into the sector’s profitability.Figure 1.2 Non-Life Insurance Profit Before Tax as a a Percentage of GWP, by Country, 2006-2009FIGURE 3.2. Non-Life Insurance Profit Before Tax as Percentage of GWP, by Country, 2006-2009 CAGR -10.3% -26.7% -8.5% 9.0% -1.5% NA -4.8% 2006-2009 23.9 25% 19.0 18.4 18.9 20% 13.7 14.1 15% 13.0 12.0 11.2 11.0 11.0 10.1 9.8 9.5 9.1 10% 8.2 8.7 7.0 5.4 5.1 5.4 3.9 3.7 5% 1.7 2.1 NA 0% -0.7 -1.2 -5% 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 2006 2007 2008 2009 U.S. U.K. Netherlands Germany France India ItalyNote: (1) The ratios are valid only for non-life insurance. The ratios reflect non-life data as reported by the countries themselves, and hence include health insurance for France,India, Italy and the Netherlands, but not for Germany, U.K. or U.S. (2) At the time of analysis, no 2009 data was available for India, where the financial year ends March 31st.The Profit Before Tax as a Percentage of GWP CAGR over 2006-08 for India was -60.7%.Source: Capgemini analysis, 2010 11
  11. 11. ITALy fragmented: the market leader holds less than a 10%Italy is one of the largest non-life insurance market share, though the top five insurance groupsmarkets in Europe, but market penetration is low, account for more than 70%.with individuals typically resorting to minimal ƒ The claims ratio, which surged after the Healthand compulsory coverage. Apart from a few large Insurance Act of 2006, decreased marginallyinternational insurances companies, most insurers over 2006-09. Still, the claims ratio is now amongare Italian, and only a few of those players, such as the highest in the world as the introduction ofGenerali, have a strong presence globally. compulsory health insurance has led to a hugeƒ The claims ratio for Italian non-life insurers rose number of claims. Non-life insurers that do not sharply from 2006 to 2009, driven by declining provide health coverage have also witnessed premiums and increasing claims. During that increasing claims, but they continue to earn modest time, a series of regulatory reforms was introduced profits as claims ratios are lower than average. to lower the cost of compulsory insurance for ƒ Operational ratios dropped significantly in Italian households. At the same time, premium 2007-09 as productivity improved in the core income dropped while claims for property and business, due to proactive efforts by insurers to motor physical damage rose, further increasing increase efficiencies. the claims ratio. ƒ Intermediaries are still an important channelƒ Italian non-life insurers rarely have propriety for selling non-life insurance, but Internet usage networks and have limited exposure to direct has been increasing in recent years. Acquisition channels. As a result, the operational ratio is slightly costs have risen, though, as non-life insurers have lower than in other countries while the acquisition sought to build and scale up their capabilities to ratio is a little higher. Low penetration of direct sell products online. There have been many new distribution channels, along with high bargaining entrants in the market focusing solely on direct power of agents, has inflated the acquisition ratio, sales through the Internet. though the ratio has decreased marginally with the increasing use of the Internet as a direct channel. ƒ Overall profitability recovered in 2009 afterƒ Despite conservative investment strategies, dropping sharply in 2008. The underwriting ratio investment income fell significantly during of non-life insurers decreased marginally over 2006- the crisis. Italians banks and insurers have 09 as companies became more mature (especially traditionally had relatively low investment income in the health segment). Local Dutch players have ratios (of around 8%) as they are very conservative performed better than global players as the latter in their investment strategies. But with the Italian suffered more during the economic turmoil of 2008. stock exchange index falling by almost 50% in Investment ratios marginally improved in 2009 with 2008, insurers experienced a major drop in their the global recovery in capital markets. investment ratios nevertheless. U.K.ƒ Profitability started to recover in 2009 after being hit in 2008 by rising claims ratios, new The U.K. is the world’s fourth-largest non-life government regulations, and the financial insurance market. Premium volume dropped in 2008 crisis. Premium incomes declined in particular due to the financial crisis, but the U.K. is still the in 2007-2009 amid extensive motor and property second-largest European insurance market. The non- physical damage and an increase in car thefts in life market is saturated, with most households having 2008. Profitability started to recover in 2009 as some form of insurance. Unlike life insurance and better-performing capital markets helped to boost pensions, non-life insurance has been mainly bought investment income. by individuals or households. ƒ Claims have been predictable for most types ofNETHERLANDS insurance, but property claims ratios have risenThe Dutch non-life insurance industry saw a systemic due to floods. U.K. non-life insurers’ claims ratiosshift in 2006 after the introduction of universal health have held steady mostly due to accurate underwritingcoverage, which mandates that all residents acquire and a lack of catastrophic events. However, therehealth insurance and requires health insurers to was a significant increase in claims paid onprovide at least basic coverage to anyone who applies. property insurance in 2007 due to summer floods.(Coverage is funded by individual contributions Nevertheless, innovative underwriting processesand government subsidies.) The non-life market is have ensured a smooth claims ratio over the years.12
  12. 12. 2011 WORLD INSURANCE REPORT CHaPTEr 1ƒ Business consolidation and new investment ƒ Expense ratios (operational and acquisition to streamline administrative processes have ratios) rose in 2008, because written premiums contributed to a higher operational ratio. declined, negating cuts in overheads. The Insurers are collaborating with banks and other operational ratio for the U.S. non-life industry networks, which has pushed up integration costs varied only marginally during 2006-09, though the and increased the operational ratio. Ongoing ratio was smaller for large global firms. price pressure is forcing insurers to streamline ƒ U.S. firms have been pioneers in the use of operational and administrative processes and novel distribution channels, such as the Internet achieve greater efficiency for the long run. and mobile technology, to gain and retainƒ Distribution strategy has been undergoing market share. The U.S. is a saturated market so radical change as insurers pursue more direct firms invest substantial amounts to gain more channels, such as the Internet, bancassurance business and improve market share. However, and mobile applications. Acquisition expenses the expenditures almost negate the benefits of have been stable as sales through direct channels implementing new technologies. As a result, with have been trending upward. Unlike many of their written premiums declining, the acquisition ratio European counterparts, U.K. consumers prefer to rose further in 2006-09. research insurance products themselves (especially ƒ Insurers realized capital losses of $19.8 billion property and motor products). Social networking on investments in 2008. However, the investment sites are becoming commonly used to research ratio improved vastly in 2009 as global capital and share information about insurance products, markets rallied and economic conditions improved. customer experience, and value for money. Smaller firms typically have enjoyed betterƒ Profitability dropped at most U.K. non-life investment returns than larger firms. insurers in 2007 and 2008 as investment income ƒ Profit margins increased four-fold in 2009 fell and acquisition and claims ratios rose. The as investment income rose and claims and drop in net investment income was mostly due to operational ratios improved. In 2008, insurers’ capital losses realized as stocks plummeted amid returns and profitability tumbled as catastrophe the U.S. subprime crisis in 2008. Larger firms losses, recession, and crisis in the financial system suffered most due to their greater exposure to took a toll on underwriting and investment results, global capital markets and U.S.-based assets. Profit but profitability came roaring back in 2009. margins started to rise again in 2009 as investment income recovered. CONCLUSION The global financial and economic crisis has affectedU.S. profitability in various ways at non-life insuranceThe U.S. is the world’s largest non-life insurance companies around the globe. Claims ratios in manymarket. The majority of households have one or countries have risen as the number of premiumsmore types of insurance and the market is flooded written dropped and/or claims themselves increasedwith specialty and general insurance providers, in frequency and size (a trend that tends to worsenwhich provide the bulk of products. Motor insurance during economic downturns). More obvious still haveis mandatory and accounts for the largest single been the declines in investment income.segment of non-life coverage. Innovative products,mature distribution and global best practices across By the second half of 2009, conditions had startedthe insurance value chain are hallmarks of the U.S. to improve and many non-life insurers were startingnon-life insurance industry. In terms of performance: to see profits trend back up. Nevertheless, theƒ The claims ratio for U.S. non-life insurers crisis provided insurers with a stark reminder that deteriorated in 2008, primarily due to the they cannot rely on investment income to deliver increase in catastrophic losses and the drop results, and they must refocus on the core drivers of in premiums written. Global firms in the U.S. operational excellence, especially the factors that drive have a lower claims ratio than smaller, local non- underwriting ratios, to achieve sustained growth. life insurers, which tend to have less stringent underwriting guidelines. Larger firms also have a better mix of products, which helps to hedge losses. 13
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  14. 14. 2011 WORLD INSURANCE REPORT CHaPTEr 2 Business Agility Is Critical for Insurers Seeking to Thrive Long-TermCHAPTER 2 HIGHLIGHTS Insurers face tough operating conditions at present. The financial crisis has contributed to a drop in earned premiums, a rise in claims, and a loss of investment income. And shifts are under way in numerous other business factors—from regulation to customer preferences and technology. At the same time, customers are willing and able to research coverage and switch providers easily, and their expectations are high. Given these realities, insurers must be sure they can adapt to shifting conditions quickly and effectively if they are to solidify customer relationships and achieve sustained results. This adaptability, or “business agility”, necessarily takes different forms at different firms, but essentially refers to the ability of insurers to adapt rapidly and cost efficiently to significant changes in their business environment so as to gain competitive advantage. The specifics will depend on a firm’s size, profile, goals, etc., but the overarching goal for insurers is to identify where agility—a quick and appropriate response to important environmental and business shifts—could help to drive sustained success. So, how agile are insurers today? We employed a proprietary Business Agility Maturity Model to analyze a variety of insurers (life/non-life, stock, mutual, large, small) from around the globe. The results show agility depends at least in part on an insurer’s business line (pure non-life players, for example, are more likely to excel at claims agility), but more significantly, insurers that describe themselves as being in a dominant market position have achieved that success while being agile in only a few key areas. In short, there is every reason to believe that business agility is an important attribute for insurers seeking to differentiate themselves and outmaneuver the competition, but insurers can be highly successful by targeting agility in just a few critical areas. The key for insurers is to understand those elements in the changing landscape that are pivotal for them, and decide when and how to increase their responsiveness. 15
  15. 15. THE BASIS FOR AGILITy mODELING agility maturity ‘score’ for surveyed insurers. ThisOur Business Agility Maturity Model gauges the degree enabled us to outline a spectrum of business agility forto which insurers are agile (their “maturity” in terms of these levers (see Figure 2.2).agility) in certain elements of the value chain. Here we illustrate some of the activities along theWe broke down the insurance value chain into four agility spectrum:independent links: Product design, front office, policy 1. Customer Needs Management. Insurers areadministration/underwriting, and claims. We then generally employing numerous tactics in this area,evaluated the levers that influence each element of the such as scoring customer value and agent value,value chain (see Figure 2.1). segmenting customers, analyzing behavioral propensities, churn rates, etc. Challenges exist,For the 2011 WIR, we focused on the “Front Office” however. Insurers have trouble, for example,and “Claims” links in the value chain. Each is critical to migrating customer data to a single platform after acustomer relationships and results, and has numerous merger or acquisition.levers influencing performance—providing significant 2. Distribution Channel Set-Up / Scale-Up. In this area,potential for improvement. Claims, however, is most insurers often have to deal with both long-standingrelevant to non-life insurers, while front office activities are and emerging customer preferences. For example,equally pertinent to life, health, and non-life businesses. customers in some geographies resist the use of non- traditional channels (e.g., German customers balkThere are six levers of front office agility: at buying wedding insurance via the Internet or pet health insurance from veterinarians). Logistics are1. Customer Needs Management. How well insurers also a challenge, and product-launch cycles can vary track the existing and potential needs of customers, enormously, depending on IT and piloting capabilities. and offer products accordingly. 3. Centralized Distribution-Related Support2. Distribution Channel Set-Up / Scale-Up. How Functions. Some insurers have fluid cross- effectively front offices design and roll out new network co-operation between the various available channels, how quickly they form alliances with distribution channels, while some go so far as to other distributors, and how well they identify the centralize intelligence for all distribution channels. right channel mix for target segments so as to Insurers centralizing their front office support maximize returns. functions manage to reduce redundancy, have a3. Centralized Distribution-Related Support better understanding of their customer base and can Functions. How well insurers reduce redundancy implement business decisions faster. and improve efficiency in support functions, such 4. Multi-Distribution Channel Optimization. as licensing, compensation, and knowledge, content Very few insurers are effectively utilizing multi- and lead management. distribution channels. In fact, for most insurers, at4. Multi-Distribution Channel Optimization. How least 60% of existing customers continue to buy efficiently insurers manage channels to ensure products from only one channel. Some insurers vary an integrated flow of communication, greater premiums by channel to account for the added value synchronization, and maximum customer satisfaction. of the personalized and professional advice from5. Self-Service Processing Capability. How well front brokers. Few insurers can complete all activities office teams service policyholders’ requests and through all channels, however. For example, process them in real time. endorsements requiring a pricing change often cannot be issued via phone or the Internet.6. Personalization of Services. How well insurers industrialize and/or standardize front office 5. Self-Service Processing Capability. Some insurers operations while customizing services and relations provide personalized entry services to high-end offered to a single client (e.g., personal service “affinity” group customers; some make a strategic through the direct channel). choice not to provide self-service capabilities to intermediaries. Portfolio management services areFRONT OFFICE AGILITy LEVERS ALL HAVE A among the self-service options more commonlyDIRECT ImPACT ON CUSTOmER SATISFACTION provided to retail customers in life insurance.Agility in the front office improves speed-to-market, 6. Personalization of Services. Insurers providingcustomer service and distribution capabilities, and personalization usually use two metrics: line oftherefore has enormous potential to enhance customer business and customer value. Some of the moresatisfaction and drive loyalty. For each lever in this technology-enabled insurers use a power dialer tosegment of the value chain, we researched the current enable telephone dialing direct from the CRM systemand planned actions of insurers and derived a business according to the specific customer type. 16
  16. 16. 2011 WORLD INSURANCE REPORT CHaPTEr 2Figure 2.1 Capgemini Insurance Business Agility maturity Framework COrE fuNCTiONS Policy administration Product Design front Office and underwriting Claims Regulatory Customer Needs Quote, Bind and First Notice of Loss Payout Options Responsiveness Management Printing Capability (FNOL) Claims Market / Competitive Distribution Channel Usage of Fraud / Litigation Performance Intelligence Set-Up / Scale-Up Automated Tools Management Analytics aGiLiTY LEVErS Centralized Distribution- Ease of Product Policy Life Reserves Related Support Case Assignment Configurability Cycle Management Management Functions Usage of Multi- Recovery Product Design / Distribution Channel Loss Assessment (Subrogation & Development Tools Optimization Salvage) Self-Service Processing Time Management Shared Services Capability Personalization of Services SuPPOrT fuNCTiONS Infrastructure & Finance and Accounts HR Functions Legal Asset Management Support focus areas for Wir 2011Source: Capgemini analysis, 2010Figure 2.2 Levels of Business Agility maturity for Front Office Levers LEVELS Of MaTuriTY Level 1 Level 2 Level 3 Level 4 Level 5 Customer Needs Customer database Single customer view Single view along with CRM system with BI CRM-BI applications maintained product-wise easy retrieval applications used for used for lead-generation/ Management up-selling / cross-selling referral analysis Distribution Existing traditional New products can New products can be New products can be New products can be channels can be scaled be launched through launched quickly launched quickly launched and scaled-up Channel Set-up/ up for increase in volume traditional channels through traditional through non-traditional quickly through non- Scale-up of existing products but time-to-market channels channels traditional channels is protracted Centralized Operational functions for Some of the operational All the operational Shared operational Shared operational each distribution functions are centralized functions are centralized functions as well as functions, centralized Distribution- network operate in silos and shared across and shared across centralized intelligence- intelligence as well as related Support distribution networks distribution networks gathering process cross-network functions around customer, cooperation to serve the aGiLiTY LEVErS product, and pricing customers better Multi-Distribution Fixed distribution Multi-distribution model Multi-distribution model; Multi-distribution model; Consistent customer channels allocated to with flexibility; minor rate no rate variance but no variance in rates and experience across all Channel individual product lines variance varying capability to endorsements the networks Optimization process endorsements processing capability across the channels Self-Service Self-service not available Self-service available to Self-service available to Self-service available to All relations have full intermediaries intermediaries and B2B intermediaries and B2B access to information Processing customers; individual customers; individual directly related to them; Capability customers can self- customers can self- individual customers can service non-financial service MTAs and do financial transactions MTAs renewals like unit-linked switches Personalization Exclusive focus on Differentiation of the Differentiation of the Introduction of Personal services and product standardization level of customer service level of service by personalized processes customized product of Services or no personalized by product product and channel in non-traditional offered thought the service channels support of evolved CTI and quotation systemsNote: 1) Each level of maturity is incremental in improvement over the preceding one; 2) Centralized distribution-related support functions include IT, HR, operational finance,marketing, and commercial management; 3) MTA – Mid Term Amendments; CRM – Customer Relationship Management; B2B – Business to Business; BI – Business Intelligence;CTI – Computer-Telephony IntegrationSource: Capgemini analysis, 2010 17
  17. 17. SCALE PARTLy DETERmINES WHICH FRONT For most large insurers, however, synchronizationOFFICE LEVERS ARE THE FOCUS FOR INSURERS between multiple channels and access points is stillWhile the agility of individual firms varies enormously, an issue, so few rank highly in agility on multi-some distinct aggregate patterns do emerge linking distribution channel optimization overall.the scale of insurers to the maturity of their frontoffice agility. Notably, larger insurers across all regions Small and medium-sized insurers are more likely toperform especially well on levers tied to scalability, be highly agile in levers that impact customer-serviceincluding centralizing support functions and channel levels. For instance, 20% of small firms (GWP ≤set-up/scale-up (see Figure 2.3). For example: $500 million in 2009) are a maturity level 4 or more in customer needs management, personalization ofƒ Distribution channel set-up/scale-up is an area of services, and self-service processing capability. The maturity (level 4 or 5) for 73% of large insurers fact that large firms are still struggling to provide (GWP ≥ $1.0 billion in 2009). A few large firms can appropriate levels of customer service, despite having issue products through non-traditional channels larger CRM budgets than smaller firms, suggests there in as little as a month. Setting up non-traditional are inherent challenges with the scalability of their channels and scaling up traditional ones are the existing CRM applications. most important improvement priorities, according to 60% of surveyed large-scale firms. And looking on a regional basis, North Americanƒ 90% of extremely large firms (GWP ≥ $2.5 billion life insurers are more agile in personalizing services, in 2009) have an area of strength in each of the largely because they have invested heavily in business- following: distribution channel set-up/scale-up, intelligence-enabled customer relationship management centralized distribution-related support functions (BI/CRM) applications. Some of them, can, for example, and multi-distribution channel optimization. support computer-telephone integration (CTI), andƒ Around 65% of large firms are agile (maturity level some favor personalized services for high-value clients, 4) in centralizing support functions. The scale of though those services are not scalable at this point in their operations gives these insurers the incentive time. Insurers from Western Europe have the highest to centralize support functions, and centralization agility level overall in front office activities and perform has reduced operating costs by as much as 80% for especially well in customer-satisfaction areas such as some. Centralization of distribution-related support needs management and personalization of services functions is one area in which the average maturity (around 60% score 3 or above in these two areas). levels of the firms from different lines of business However, their score is average (2.9) in centralizing the are roughly concurrent irrespective of their size. support functions for distribution channels.Figure 2.3 Weighted Mean, Minimum, Maximum and Mode Maturity Score Distribution of of Large InsurersFIGURE 2.3. Weighted mean, minimum, maximum and mode maturity Score DistributionLarge Insurers (GWP $1$1 billion) for Front Office (GWP ≥ ≥ billion) for Front Office 5 5 5 5 4 4.1 4 4 4 Maturity Level (1 to 5) 3.2 3.2 3 3 3 2.9 4 4 2.4 2.1 2 3 3 3 2 1 1 1 1 1 Customer Needs Distribution Channel Centralized Multi- Self-Service Personalization Management Set-up/Scale-up Distribution-Related Distribution Channel Request Processing of Services Support Functions Optimization Capability Minimum Mode Weighted Mean MaximumNote: GWP – Gross Written PremiumsSource: Capgemini analysis, 2010, Executive interviews and survey results18