 By Hugh Morris, Vice President, Business Development Banking, EMEA at Genpact
As we move into 2013, the rates for general insurance look set to remain soft in an increasingly competitive market. Significant downward trends across the most common areas – commercial lines, fleet, commercial liability, motor and household illustrate the growth pressure for the industry over the coming 12 months. Such indications can be seen to good effect in the Acturis Premium Index, which highlights “there is very little good news” to report in its latest quarterly figures.
This generates an urgent need to increase business competitiveness in 2013.Those looking to succeed need to both cutcosts to maximise already reduced profitsand to identify more efficient ways to generate growth, whilst retaining customers.The question is, how do insurers go about this in tough economic times.
The insurance industry is known to be inherently cyclical with peaks and troughs in rates. The relatively low barriers to entry, combined with the market’s ability to be cash flow positive from day one, with premiums generally arriving before claims, make it attractive. This scenario has meant that when rates were last hard (several years ago now) new entrants flooded the market.
Although trading conditions have played out competitively to affect the number of providers, the shakeout has not been severe enough yet for sufficient capacity to withdrawand for rates to harden substantially. In fact, some underwriters believe the statistics are not a true reflection and that premiums will actually grow in 2013, which can only suggest increased, or at least maintained, capacity. With unappealing returns elsewhere, insurance still looks marginally attractive as a market in which to deploy capital. This adds to the situation, with an excess of capacity chasing the available business.
At the same time, the only thing really keeping premiums as high as they are is claims costs. British general insurers pay out £22billion each year (Association of British Insurers, ABI) and the cost of claims remains historically high – at least in part driven by some questionable practices, such as courtesy car provision, and fraud which costs over £1 billion per annum.
Traditionally, underwriters have been able to rely on substantial returns on investment income to improve their overall results. The current recession, with the Bank of England keeping interest rates low, is producing very low returns. This effect from the current economic climate is combined with some adverse underlying demographic trends. The baby boom generation is now reaching retirement age and therefore saving no more, but starting to cash in their investments and take either lump sums or annuities from their pensions. This means that over the next decade and beyond there will be an imbalance between buyers and sellers of investments, with the sellers outweighing the buyers. It is predicted that in 10 years’ time in the US, for every new worker entering the labour force, there will be 10 people retiring. This points to a long term sell side overhang on the financial markets which will dominate any short term fluctuations. This is affecting general insurers who have traditionally used investment returns on the cash they receive in premiums before they have to pay it out in claims to improve corporate results.
Such a landscape signifies a returning trend of cost reduction as the squeeze on investment income continues, with profits therefore remaining under pressure.
Reducing costs is one thing: achieving it at a time when many measures have already been adopted is another. To succeed, it needs to be more than just a cost cutting exercise: insurers need to think about smarterenterprise process and being a business that is agile and innovative. This is about implying a methodology that intelligently manages costs by optimizing end-to-end business processes. If companies were to apply this thinking across the business,sales and distribution, policy issues and premium processing, claims, reinsurance handling and enterprise costs, such as finance and human resources, could all be addressed and significant cost efficiencies made.
Beyond cost cutting, there are ways to improve the top line. Using smart processes, insurers can begin to become ‘intelligent enterprises’ – organisations that have the power and agility to outpace their competitors, adapt to the changing global environment, and become innovative in their approach. It’s not just about cost saving.
The key to this philosophyis the use of customer data - or rather, making better business decisions by using the right metrics and industry benchmarks.Many insurers have vast quantities of data on existing customers – but not all are extracting maximum value from it by using smart processes.
Examples include:
• Identifying which customers have a propensity to buy more than one product, how could they be targeted and when?
• Improving customer service processes by using data performance metrics to maintain customers at renewal time. At the moment over 40 per cent of UK motor insurance customers change insurer each year.
• Being able to identify ever more sophisticated fraud through intelligent pattern recognition, especially before a claim is paid out.
Smart processes help insurers plug value leakages by reducing costs and increasing operational performance.More customers buying more products for longer periods of time will lead to an improved top line performance. Add to this administrative and claims cost controls and the bottom line will improve.
Insures with a lower cost base and more insights into their customer behaviour and buying patterns will fare better than others as we move into 2013. To get there, businesses need to think about operating as an intelligent enterprise - one that looks at smart processes and intrinsically uses data to generate best practices.In a slow market, those insurers who can adapt to meet this competitive challenge will be ones still here and thriving in 2014.
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