the future of general insurance survey and report...
TRANSCRIPT
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A Marketforce special report
The Future ofGeneral InsuranceSurvey and Report2011
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We live in uncertain times and the insurance industry is
currently undergoing the biggest period of change we are likely
to experience in our lifetimes. While many of the headline
topics remain the same - such as underwriting discipline and
consumer engagement - the rules of the game have changed,
especially following the rewriting of the economics of
insurance models by Solvency II requirements.
Growing regulatory burdens combined with the challenging
economic environment, volatile financial markets and
increasing demands from a more informed consumer base are
placing margins under considerable pressure.
It is against this backdrop that Marketforce has produced this
report. We surveyed 370 industry professionals, including over
200 insurers and brokers, to discover expectations for the
coming years. We also interviewed key industry figures to
inform the analysis of these results and, where appropriate,
we have included quotes to showcase their insights in their
own words.
This report has been designed to inform the debate taking
place within the industry, and we hope that it will provide a
valuable resource for insurers and brokers seeking further
clarity on the future of this challenging sector. It is not intended
to be the final word on developments in insurance, but instead
focuses on the questions that have come up time and time
again in the conversations we have had with C-level insurers at
our industry events throughout the year.
We hope that by answering those questions, this report,
alongside our associated conferences, will provide some of the
insights you require to plan for the future.
foreword
introduction
01
Juliet Knight
Director
Marketforce
The Future of General Insurance Survey and Report 2011
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Following the recent economic turmoil, financial institutions across the board have faced a
reputational crisis, with consumer trust at an all time low. Many in the insurance industry rightly
point out that the sector has held up well during the crisis and continued to serve the needs of
both consumers and businesses effectively. However, public perception of insurance continues to
suffer - an issue that cannot be ignored when trustworthiness and reliability are such essential
ingredients of the insurance offering.
market trends
The initial fears that beset the insurance sector following the collapse of the
banks did eventually subside but there remains a risk that insurers’ exposures to
sovereign debt could see them once again in the spotlight. There is a clear demand
for transparency and openness and if the sector is to distance itself from the
failings of other financial institutions it would do well to reflect on how it might
better communicate its value and its financial robustness in a way that does this to
the satisfaction of the market and the public.
- Sandy Scott, CEO, The Chartered Insurance Institute
A Marketforce special report 02
“
”
The industry recognises the need to take action to better communicate its value, as is demonstrated by the
importance many of the senior insurers we interviewed attribute to initiatives such as ClimateWise and The
Aldermanbury Declaration. It is hoped that, by turning insurance into a profession, Aldermanbury will give the
sector’s status a much-needed shot in the arm. ClimateWise, meanwhile, not only promises to help insurers
address the risks and opportunities of climate change more effectively, but also positions the industry at the heart
of an issue dear to the public’s heart.
However, these initiatives alone are unlikely to be enough to transform the insurance sector’s reputation. The
transparent demonstration of financial robustness is at least as key. In this respect, the need to meet more
stringent capital requirements under Solvency II has some potential upside, albeit tainted by negative implications
for profitability at a time when margin pressure is already intense.
Against a background of economic uncertainty, the need to provide customers
with financial security and peace of mind has never been greater. Consumer
confidence in financial services has suffered immeasurably as a result of the last
few years and if insurers hope to rebuild the trust that they once had then it is
incumbent upon them to face up to the challenge laid down by consumers to
embrace ethical and professional behaviour.
- Sandy Scott, CEO, The Chartered Insurance Institute”
“
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Given the now more sensitive
nature of the customer
relationship, the heavy margin
pressure that has
characterised insurance
provision for the past few
years might be expected to
continue. Not even surge
events have caused rates to
harden as quickly as would
previously have been expected,
and the predictability of the
insurance cycle – once seen as
an incontrovertible truth – can
no longer be relied upon. The
cycle’s correlation with wider
economic trends has become
harder and harder to track.
That said, whilst it remains
unlikely that insurers will see
a full reversal of their fortunes
in the foreseeable future,
market developments suggest
their margins may improve at
least slightly before too long.
Brokers have to date fared better than insurers, particularly when margin trends are viewed across the long term.
Indeed their margins have doubled over the last decade1. But mounting pressure from both clients and insurers
means brokers’ margin growth now appears set to stall or even reverse.
In such challenging times for insurers and brokers alike, it is not surprising that there is an expectation of further
market consolidation. 9 out of 10 of the insurers and brokers we surveyed expect further consolidation in the next
couple of years. Heightened regulatory scrutiny and a need to meet more stringent regulatory requirements will no
doubt add impetus to that trend. Although the extension of the Solvency II deadline to 2014 will reduce the pressure on
smaller firms, increased capital adequacy requirements in particular may prove a powerful driver for yet more
consolidation.
03The Future of General Insurance Survey and Report 2011
I think the insurance cycle will be much flatter than
the peaks & troughs we have seen in the past. Sadly,
however, recent experiences suggest that it might well
be the profitable ‘peaks’ that are trimmed off in this
flattening, with the troughs of unprofitability being as
prominent as they have been in the past. Insurance
cycles previously have been linked very closely to
wider economic trends; whilst this will remain the
case to a degree, the links seem less pronounced, with
insurance market factors and an excess of available
capacity blurring the connections.
- David Williams, Claims and Underwriting Director,
AXA Commercial Lines
“
”For insurers, I expect margin pressure will ease - it
couldn't have got much worse! The recent
improvement in private motor will not only help that
line but it also puts a 'floor' under other lines.
- Martin Oliver, CEO, Barbon Insurance Group
90% of the sector expects to see further consolidation in the
next two years
“”
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04 A Marketforce special report
However, any uncertainty about the potential for further
new entrants is outweighed by a staggering 95% of
personal lines insurers expecting to see a significant
increase in the market share of non-financial brands
over the next two years. Whilst banks and insurers are
suffering from poor levels of trust in the wake of the
financial crisis, retailers and other brands are able to
leverage their customer relationships and strong brand
images. Coupled with a higher level of insight into their
customer bases, non-financial brands are clearly well
placed to expand within the commoditised personal lines
market.
Overall, myriad challenges face the insurance sector but
there also exists an opportunity for insurers to improve
their stability and ability to effectively serve the needs of
their client base. Consumers and businesses alike have been hit hard by the financial crisis and are desperately seeking
the peace of mind that insurance provides during this period of economic uncertainty. Insurers must utilise both
existing and new approaches and channels to gauge consumer issues and then engage with them, if they are to succeed
in this challenging market environment.
95% of personal lines
insurers think non-financial
brands will significantly
increase their market share in
the next two years
In this environment, the industry is undecided as to whether or not new players will be tempted into the market. Only 49
per cent of those surveyed foresee new players entering the market within the next two years.
5% 7%
42%
46%
Highly likely
Unlikely
Likely
Highly unlikely
There will be more new players entering the market
Only 49% foresee new players entering the market
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79% of personal lines insurers believe that opting out of the use of aggregators is
not a viable strategy
AgreeStrongly agree Strongly disagreeDisagree
0% 20% 40% 100%80%60%
Personal Lines
Commercial and Personal Lines
London Market
Commercial Lines
05The Future of General Insurance Survey and Report 2011
There have been numerous revolutions in insurance distribution over the years, from the growing
use of telephone and direct-to-the-consumer approaches since the launch of Direct Line to the
internet boom at the start of the millennium. More recently, aggregators have begun to dominate
the landscape in certain product lines. Their success is clear: in our survey the majority of
personal lines insurers agree that opting out of aggregators is simply not a viable strategy in this
market.
While it is fair to say that the success of aggregators can be accurately described as the distribution revolution of the
last five years, it is social media that looks set to be the revolution of the next decade. 8 out of 10 insurers and brokers
expect the majority of their customers to consult social media or online reviews before buying a new policy within the
next five years.
This trend is not confined to the personal
lines sector alone. For example, 96 per
cent of commercial lines insurers and 93
per cent of the London Market also expect
to see most of their customers searching
for reviews or recommendations online by
2016.
As social media takes on a growing role in
driving consumer behaviour, it will
provide an interesting potential solution to
the challenge of commoditisation.
Insurers who effectively engage with
consumers online and manage their
reputation through social media channels
will undoubtedly benefit from the
increasing weight that consumers place
on the readily accessible opinions of their
peers. In so doing, such firms will be able
to compete on more than price alone.
distribution and marketing
81% of insurers think that, within the next five
years, the majority of consumers will consult social
media or online reviews before purchasing a new
policy
Within the next 5 years, the majority
of consumers will consult social
media or online reviews before
purchasing a new policy
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Mobile phones and tablet devices also look set to be a key area
for development in the coming years. 83 per cent of insurers
asked believe that mobile technology displays considerable
potential for use as a sales channel. On the whole though, the
insurance industry has not been a market leader when it comes
to adopting mobile. There have been a few exceptions in the UK,
such as the recent launch of a dedicated mobile site by
Swiftcover, and some notable examples from overseas, but
mobile is not yet a widespread distribution tool.
As insurance typically involves fewer points of customer interaction than banking, it is unsurprising that it has taken
longer for mobile technology to be adopted within the industry. However, despite the slow start, it is clear the market
expects an increase in uptake in the coming years.
With the expected growth of telematics, for example, the mobile channel could be embraced by consumers who want to
see real time updates on the amount of mileage left on a ‘pay as you go’ policy. The consequential increase in contact
between clients and insurers could create further opportunities for ancillary sales as well as strengthening the client
relationship. It is unlikely, however, that ability to purchase insurance via mobile will attract any significant increase in
primary sales. In our survey, respondents ranked distribution channels bottom out of five potential differentiators,
including price, brand, policy cover and service.
However, despite the widespread belief in the uptake of social media, it
appears the industry may struggle to keep up with this trend. Only half
of insurers surveyed expect their organisations to invest in social
media as a sales channel over the next couple of years.
06 A Marketforce special report
Mobile channels are seeing by far the highest trajectory of growth in usage. From both a B2C and
B2B perspective insurers need to consider mobile within all of their future IT platform and design work
if they are to accommodate the proliferation of new mobile devices.
- Paul Wishman, Group eCommerce Director, LV=
“”
One thing is for sure, the days of insurers having a ‘one-way broadcast’ – with full control of product/
brand messages – are quickly disappearing, giving way to ‘marketing conversations’ with our customers.
Those who listen and engage most effectively with their customer will increase the chances of success; my
one word of warning though would be a need to recognise levels of expectation will drastically change –
perhaps a case of be careful what you wish for! Customers would previously accept a 3-5 day timeframe
for a response to their complaint or query, but since the arrival of Twitter this has come down to a matter
of hours.
- Paul Wishman, Group eCommerce Director, LV=
“
83% agree that mobile
technology offers
considerable potential for
use as a sales channel
”
50% expect their company to
invest in social media as a sales
channel in the next two years
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Only 45% believe it’s pointless to differentiate on anything other than price
via an aggregator
07The Future of General Insurance Survey and Report 2011
0.96
1.54
2.16
2.28
3.40
0.50 1.00 1.50 2.00 2.50 3.00 3.500.00
Distribution
Price
Service
Policy Cover
Brand
In previous years2, it has been suggested that
brand is the strongest driver of insurance product
choice after price, but this seems to be changing.
Our survey found that brand is considered to be the
fourth most important factor, with service levels
coming in second and policy cover a close third.
If the markets’ view is accurate, this suggests that
consumers are paying more attention to service
and policy cover than previously. Such a trend can
perhaps be explained by the ease with which
information can be found and compared online,
allowing for much better-informed consumers.
This increased interest in the details of the insurance
offering, combined with the rise of social media, could
well mark the start of a decline in the intense focus on
price that has characterised the insurance market of
the last decade.
Of course, the blame for increased commoditisation
and cut-throat price competition within personal lines
has often been laid at the doors of aggregators, albeit it
is clear that this trend began long before aggregators
became a dominant force.
As aggregators have become more sophisticated, they
have started to enable comparison of policy details,
providing greater scope for non-price differentiation. It
remains to be seen, however, how influential a
differentiating factor policy details will become.
Less than half of insurers and brokers surveyed thought that differentiation on anything other than price when using
an aggregator was pointless – a finding which suggests insurers certainly have more scope to maintain their
margins when selling via aggregators than most commentators would have thought possible but a few years ago.
Service viewed as most
important differentiating
factor after price
Ranked importance as differentiators between
insurance policies
Our profession has focussed far too much on
price rather than on expertise - when was the
last time you questioned your lawyer’s bill?
I think brokers and insurers have learnt from
what has happened in personal lines and will
resist the temptation to dive into a repeat of
these mistakes. Having said that, a long recession
combined with the transparency that the internet
brings to the smaller end of the SME sector,
moves it into a more competitive landscape.
- Martin Oliver, CEO, Barbon Insurance Group
“
”
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In recent times, increasingly strained margins have prompted many insurers to put extra
pressure on their claims departments to find efficiencies, reduce claims costs and minimise the
amount of leakage from fraud. Although these have clearly always been aims for insurers, the
pressure has been multiplied as a result of the troubled economic climate, which has brought
with it a rise in both organised and opportunistic fraud.
Whilst rises in the level of fraud detected can in part be attributed to impressive advances in fraud detection, rather
than an increase in fraud itself, our survey reveals the majority of the industry believes there has been a genuine rise in
fraudulent claims. Only one third
believes that the rise in fraud
figures is due simply to
improvements in detection.
A key driver in improving fraud
prevention has been the rise in
data sharing across the industry.
Insurers have widely supported
data sharing programmes and the
approach has been hailed as a huge success in motor lines with numerous high-profile convictions. However, despite
the progress made, the industry would like to see this work extended, with an overwhelming 87 per cent of those
surveyed saying that data sharing arrangements do not go far enough.
5
13% 17%
70%
Strongly agree
Disagree
Agree
Strongly disagree
08 A Marketforce special report
Only one third agree that the rise of claims fraud is simply a reflection of improvements
in detection
87% of insurers and brokers think that
current data sharing arrangements do not
go far enough
claims and fraud
Fraud prevention data sharing
arrangements do not go far enough
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Like distribution, claims is also the scene of a potential
revolution with the use of new consumer technologies.
Something as simple as the ability to use a mobile phone
to take photographs can have a transformative effect in
facilitating a claim. Also, with the expected growth in
telematics, insurers could even be automatically alerted
in the event of a motor accident, allowing them to contact
the driver in order to provide immediate assistance. In
this and many other ways, the claims experience is set to
change dramatically.
During surge events, social media has a similarly
potentially revolutionary role to play, with 88 per cent of
the industry saying it has the ability to transform
communication. For example, Twitter can be used not
only to communicate quickly and efficiently to large
groups of consumers and other third parties, but it can
also provide insurers with a timely resource to follow and
gauge the sentiment and issues of those affected by the
crisis.
09The Future of General Insurance Survey and Report 2011
Data sharing has been phenomenally successful to date and insurers would suffer
considerable losses if we didn't share data. However, data sharing is restricted to very narrow
areas in personal lines books. We have much to do to develop practices and improve the
efficiency of what we do.
Fraud management urgently needs to turn itself into a truly preventative process and the only
way to do this is by investing in front-end controls, leveraging the knowledge that the
industry can share about a customer.
- Richard Davies, Group Fraud Risk Manager, AXA UK and Deputy Chairman, IFB ”
“
11%1%
15%
73%
Strongly agree
Disagree
Agree
Strongly disagree
Social media could transform
communication during surge events
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Perhaps the most controversial area of claims this year
has been referral fees and the media outcry that
surrounded them. The move to ban referral fees has been
generally welcomed, although there are still concerns
that much the same practice may continue in other parts
of the claims supply chain that may escape the impact of
the legislation.
Referral fees have often been blamed for increasing the
cost of claims and wiping out margins in motor lines, yet
only 29 per cent of the industry think that banning referral
fees would make motor insurance profitable again,
highlighting that the sector has much work still do to.
Moreover, irrespective of whether referral fees have been
instrumental in pushing up claims costs, there are those
who argue that, if the ‘compensation culture’ remains
entrenched, the ban could even put further upward
pressure on motor premiums by depriving insurers of a
revenue stream.
10 A Marketforce special report
Social media tools offer a unique ability to communicate with large numbers of people quickly and
efficiently. The benefits of using social media platforms are never more apparent than when a widespread
event such as flooding occurs. Although engagement with social media can leave an organisation open to
direct customer criticism, there is a clear case to be made for its use at industry level, especially during surge
events, to inform policy holders. Indeed as the technology becomes more prevalent it is likely that there will
be an expectation from tech-savvy customers that the industry will interact with them in this way.
- Robin Stagg, CII New Generation Claims Group 2010
AXA is already using Twitter to raise awareness ahead of extreme weather events. Having better
prepared policyholders will obviously have a financial impact, but also the reputational impact of both
providing valuable information and using modern communications mediums should not be overlooked.
With call centres being inundated following a large scale event, it is better to get information out to
impacted customers via Twitter, rather than add to the burden on the phones with people ringing up
just checking what they need to do next.
Twitter is instant. Compare and contrast that with the old approach of changing a website, or worse
still having to create and post printed material. The only downside of this is that customers will expect
quicker service than they have had in the past, and insurers using Twitter and other immediate forms of
communication will simply reinforce that. And when of course we get things wrong, we can expect
news of that to spread far more quickly and widely than ever before!
- David Williams, Claims and Underwriting Director, AXA Commercial Lines
“
”
Twitter in Claims
Just 29% think that banning referral fees will mark a return to profitability
in motor lines
“
”
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84% think that market
factors – as opposed to risk
factors – play too great a
role in pricing decisions
The concept of pricing for risk has been central to the insurance proposition since its inception.
However, the realities of market competition have made pricing for risk challenging, particularly
in commoditised product lines with high claims costs.
Worryingly, the overwhelming majority
of the industry feel that market factors
play too great a role in pricing
decisions at the expense of accurate
risk-based calculations – a view held
by 84 per cent across both general
insurance and the London Market,
rising to 93 per cent in commercial
lines.
Some insurers interviewed expressed
concern that, whilst there is
significant talent in underwriting and actuarial departments, the industry may have lost the habit of proper
underwriting and risk-based pricing decisions as a result of being in a soft market for too long.
It does look, however, as though a turning point in pricing may have been reached: 81 per cent expect a return to
more accurate pricing for risk as a result of increased capital requirements and falling investment returns. Whilst
this could mean greater pricing discipline in
future, for some insurers it could come at the
expense of market share, particularly in
personal lines where competitive pricing
plays such a dominant role.
At the same time, pricing for risk has been
made more difficult by this year’s EU gender
ruling, which removes insurers’ ability to make risk decisions based on gender. There is also the potential for other
risk factors – notably age - to fall foul of equality laws, raising further concerns about difficulties in long-term
forecasting. Similarly, postcode pricing has come under fire, after being criticised by Jack Straw in the House of
Commons in September.
Now the potential for unlawful discrimination has been established, discussions as to what counts as a legitimate risk
factor and what counts as an unfair bias are likely to become more prevalent in the years to come. All of these factors
are likely to have a noticeable impact on pricing of policies in the future.
0% 20% 40% 100%80%60%
Personal
Personal & Commercial
London Market
Commercial
Strongly agree DisagreeAgree Strongly disagree
11The Future of General Insurance Survey and Report 2011
pricing and risk
81% agree that capital adequacy requirements
and falling investment returns will drive a return
to risk-related pricing
Market (rather than risk) factors play
too great a role in pricing
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Regulatory uncertainty has been a key cause for concern throughout the year and, with the large
budgets being spent on Solvency II compliance, the call for further clarification is understandable.
In October, the FSA confirmed it is working on
the assumption that Solvency II requirements
will become effective for firms from January
20143. Whilst this announcement has at least
provided a degree of clarity about
implementation dates, there are concerns that
the increased period for implementation itself
creates greater scope for uncertainty. Some
smaller and less prepared insurers may
welcome the delay; however, many larger firms
who are already advanced in their
implementation efforts may fear further
changes in the regulations could challenge the
relevance of work done to date.
12 A Marketforce special report
the solvency II extension
Three quarters believe the extension of the Solvency II deadline
to 2014 will mean further costs to the UK insurance industry
Given the large amount of existing commentary available about the implications of Solvency II in general, we chose to
focus our research specifically on the impact of the recent delay and the likely implications for the industry. While this
delay has been reported as having been broadly welcomed across Europe, our survey revealed a less positive reaction
in the UK, where implementation is already more advanced than in most other EU countries. 74 per cent of UK insurers
and brokers thought the extended deadline would mean further costs to the UK industry.
Despite the insurance industry’s broadly
supportive stance towards Solvency II to
date, a concerned 73 per cent also think
that the benefits achieved will not justify
the cost of implementation.
Given the magnitude of the change
programmes involved, it is clear that
those with a good grasp of the impact of Solvency II on their business, and those who use their change programmes
simultaneously to improve efficiency and risk-based decision making, are likely to gain a considerable competitive edge
in years to come.
73% think that the cost of implementing
Solvency II will be disproportionate to the
benefits achieved
“
”
After such a lengthy period of
preparation, the prospect of a deferral to
2014 is unhelpful. At LV= we have decided
to press ahead and operate on an 'as if'
Solvency II basis from January 2013 in order
to sustain our focus on the programme and
to minimise costs.
- John O’Roarke, Managing Director, General Insurance, LV=(speaking shortly before the FSA’s revised
implementation assumptions)
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1 IMAS Top 50 Broker Report for the Insurance Times
2 At Marketforce’s The Future of General Insurance conference
3 FSA Revised Implementation Assumptions - October 2011
Footnotes:
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© Marketforce Business Media Ltd October 2011
Research devised and conducted by Marketforce
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