As we enter 2013, the global insurance industry has never faced such a combination of turmoil, economic uncertainty and opportunity.
Although the US Congress agreed to a deal that effectively softens the “fiscal cliff†(and several European countries are evading bankruptcy), relief may be only temporary–with a decline in consumer savings still a looming concern. This can be countered somewhat by consumers taking greater personal responsibility for their families’ financial well-being as trust reduces in national governments to protect them.
Furthermore, interest rates are likely to stay at record low levels for the foreseeable future and investment returns are likely to remain weak, compelling property/casualty carriers to improve underwriting margins. This will require difficult decisions on pricing and operating approaches.
Rethinking strategies
Technology remains a bright spot as insurers continue to improve operational efficiencies and invest in analytical capabilities that encourage business expansion and enhance the customer experience. Further automation of the value chain, new underwriting systems, rating engines and claim management solutions will entice more investment expenditures.
Unfortunately, we will see many more insurance jobs lost in Europe and North America as profit margins remain under pressure and companies exit product lines. Digital strategies and data analytics will become more important as insurers seek to boost returns from their existing customer base.
We will also see a greater emphasis on corporate governance this year as insurers seek to reassure regulators, analysts, shareholders, employees and their customers that the ever-increasing systemic revelations from the banking industry are not endemic in the insurance industry.
Non-executives will take more of a hands-on role in corporate decision-making and governance matters. Insurance boards will face further pressure ensuring that capital and risk management policies are firmly followed and that wider business operating controls are robust.
Diverse geographic landscape
European insurers will focus more on managing risks to capital and investments, identifying new growth opportunities and adapting systems and operations to address these critical challenges. Both US and European life insurers are responding to demographic, macroeconomic and regulatory pressures by transforming strategies, products and services for a sustainable competitive advantage.
Significant leaps in intergenerational wealth transfer and the “wall of money†that is now being inherited or earned by the relatively small but significant number of wealthier people across the globe will encourage innovation in wealth platforms and associated savings products.
Significant top-line growth opportunities exist in the Asia-Pacific region, with even greater possibilities in the emerging markets of Latin America. We have seen a dramatic expansion in agency sales forces in these regions (very similar to the situation in the 1980s in the western hemisphere) over the past few years, and can expect a greater shift during 2013 toward business partnerships such as bancassurance.
In these and other retail deals, insurers can receive more cost-effective and profitable access to a distribution channel that has greater certainty and control. Low consumer retention, poor persistency, high commissions and low cross-sales rates will start to affect these emerging market sales models, with new agency administration and customer value models created in response.
Lessons will be learned from Europe, as the UK and Netherlands seek to respond to new regulations that ban commissions for pensions and savings products, along with the implementation of tough professional adviser qualification rules.
Moving forward
With these complex challenges facing insurers, there are many opportunities to seek competitive advantages and thrive in an industry that is under-protected and that will face more natural and man-made catastrophes which generate insurance coverage at higher premiums. The most successful insurers will have strong corporate governance, the ability to quickly access and move capital and low-cost, flexible and agile operating models.
Market leaders will emerge from insurers that develop profitable business partnerships and serve customers effectively by integrating digital, direct and brokered distribution with seamless technology. However, this will involve brave–and perhaps surprising–new corporate partnerships with organizations previously ignored or undervalued.
We will see a huge split emerge between winners and losers in the global insurance industry in 2013. Yet one thing is certain: the market size of property/casualty, life and savings businesses will be larger at the end of 2013 than it is today.
The insurance industry must play a big role in the global financial recovery, and fortune will favor the brave.
By: ERNST & YOUNG
