CurrentStrategicIssuesinInsurancePart1

1、current strategic issuesin insurance part 1current strategic issuesin insurancepart 1prof derek atkinscass business school 2012market forcespart 2part 16.new entrants1.demand7.regulation2.supply8.technology3.globalisation9.nature of risk4.consolidation10.reputation5.boundaries of insuranceit is a to

2、ugh market place21 demandworldwide premiumtotal $4.4 trillion (57% life: 43% non-life)insurance still growing in real terms?gwp increases with gdp more economic activity to insure?stalled in 2009 but resumed (+2.7%) 2010-11?insurance penetration varies between countries?growth moderate in mature mar

3、kets (+1.7%) but robust in emerging markets (+8%) on averagesubstitutes:?captives growing long term, but vary with the u/w cycle?some self insurancebut reduced since 911?some competition fromart (cat bonds, sidecars etc but impacted by credit crunch)insurance is huge -7% of global gdp3top 10 world i

4、nsurance markets (2010)rankcountrytotal premium us$ bn1usa11662japan55761%3uk3104france2805germany2396china2157italy1748canada1159south korea 114 10netherlands974concentration in large mature economiesgrowth potential for insuranceaverage gwp (1999-2009) = 3.5%average gdp (1999-2009) = 3.0%future de

5、mand growth :?emerging markets( e.g. china , india, brazil, e. europe )?longevity risks(demographic change)?severe weather events( climate change)?islamic (takaful) insurance?great potential but big challenges5s-curve pattern in the growth of national insurance marketssuppliercustomerpowerpowerdevel

6、opmentof nationalmature insurancemarketsmarket(higherspending emergingas % of gdpmarketson insurancemiddle class growsand higherspending per head)underdevelopedmarketslevel of economic development(e.g. gdp per head) companies are attracted to the emerging markets to exploit the growth potentialsourc

7、e: r. carter and g. dickinson6comparing selected insurance market penetrationtotal insurance premiums (life and non-life) as % of gdp in 2009uk 12.9%s. korea 10.4%insurance france 10.3%switzerland 9.8%premiumsjapan 9.9%united states 8.0%7% was the global % of gdp weighted averagecanada 7.4%germany 7

8、.0%singapore 6.9%india 5.2%malaysia 4.4%poland 3.8%thailand 4.0%china 3.4%brazil 3.1%russia 2.5%greece 2.0%indonesia 1.3%nigeria 0.5%countriessource: gerry dickinson7growth of non-life (p &c) insurance product diversity:credit and financialinsurances for businessesnon-motorgrowth ofaccident,

9、 health and disabilityliability insurancesnon-life insurances for individualsfor individualsproductbusiness interruptiondiversityinsurancesliability insurancesfor businessesmarine andcommercialproperty insuranceother trade-relatedpropertyfor small businessestransport insurancesinsurancesand individu

10、alsproperty insurance for largemotor insurancegovernment projects(comprehensive)motor insurance (3rd party liability)level of market developmenttrend over time for non-life market to broaden from the protection of physical assets to the protection of income and financial assets (e.g. liability, busi

11、ness interruption, credit etc)8source: gerry dickinsongrowth of life insurance product diversity:a generalised pattern as individual countries differpersonal annuities(incl. variable annuitiesuniversal-lifetype productspersonal pensionsgrowthlinked-lifeplans of lifeproductsproductgroup pensionsgroup

12、 pensionsgrowth ofdiversity(insured schemes)(self-administered schemes)differentclasses ofpersonalnon-lifeendowmentinsuranceand with-profitwithout -profitpoliciesterm and whole lifegroup life insuranceinsurance market developmentlife insurance markets starttrend over time from products emphasisingmo

13、re slowly than non-life life insurance (death benefits) towards thoseinsurance, markets due to loweremphasising saving, especially retirement savingconsumer awareness and individual income constraints.trend over time towards unbundling of protection andsaving and with less investment guarantees offe

14、red by life insurers. 9source: gerry dickinson models are different in the mature marketsgwp / gdp?price competition/cost cutting?complex products?consolidation?globalisation?disaggregation of the value chain?customer relationship management?reputational risklevel of economic development(e.g. gdp pe

15、r head) are all developing markets going to go the same way?10top 10 emerging markets 2008p&c marketslife marketsrankcountryp&c premium rankcountrylife premium $ us billion$ us billion1china109.21china53.92south korea57.42russia43.63india57.13south korea34.54taiwan52.24brazil24.05sou

16、th africa28.75taiwan11.46brazil24.76mexico9.77hong kong20.37south africa8.28singapore9.18poland8.09mexico7.79india8.010thailand6.210turkey6.7growth slowed with the recession11bricsbrazil russia india chinaemerging marketsexpected to be dominant by 2050but you must choose the right products“developin

17、g economies tend to move from very simple products into more sophisticated offerings” (jose robeiro, lloyds 2009)one size does not fit all insurers must approach every emerging market differently depending on the regulatory and demand landscape (morgan stanley, 2010)are the brics starting to buy mat

18、ure economy insurers?ping an, china's second-largest life insurer, lifted its stake infortis to 4.99 % (international herald tribune, 2008)before 1800 china and india produced 50% of the worlds totalgdp. is the old order being restored?12the growth of services in maturing marketsemployees b

19、y sector in the eu, %100services8060will emerging markets follow industrythe same path?4020agriculture0source: mckinsedemandglobal economic cyclecurrent cycle?began 2002 after 911?driven upwards by strong us demand, chinese economic boom, artificially low interest rates (central banks)

20、and reckless bank lending?cyclical slowdown started 2006 and led to credit crisis 2008-9 ?deep global recessionwith public intervention to support demand and lower uncertainty in financial marketimf forecast?the global economy is expending again but the pace of recovery is slow, and activity below p

21、re-crisis levels?the balance of economic power is shifting and emerging economies are part of the solution to global problems141 demand -global economy imf (sept 2011)15china and india lead the worlds gdp growthinsurance in economic down cycles?demand for insurance is depressed-less economic activit

22、y to insure-asset values lower-customers want premium cuts?investment income is reduced-stock markets provide lower returns-reserves weakened-pensions liabilities rise?claims may be higher-more fraudulent claims + arson-less money for risk management-defaults on credit insurances?solvency falls-redu

23、ced ability to write new business-vulnerability to financial failure -need to raise capitalwe saw most of these in 2008 -916credit crisis: insurers less affected than banksinsurance is not the same as banking. the insurers most impacted were those who started acting like banks e.g. aig and fortis. (

24、patrick liedtke, 2008)theinsurersbusinessmodelisnotsoaffectedbyliquidityaslongastheysticktoinsurancetheyarepre-fundedbyarelativelystableflowofpremiumstheydonotrelyonshorttermmarketfundingtheyreducedtheirexposuretoequitiesearlierinthedecadethe crisis should encourage insurers to remain focused on the

25、ir core business of risk underwriting171 demand demographics driving structural change?mature economies offshoring work to areas of lower labour cost -india, mexico, china, etc?migrationto europe and usa affecting cultural mix and crime?more women in work forcedriving demand for flexible working pat

26、terns?new segmentationand distribution is required, taking account of culture, interests, lifestyle, uncertain careers, longer life spans and greater affluence. (generation x and y)?people are living longer. government welfare provision cannot continue in its present form creating demand for life, p

27、ensions, health insurance and long term careoecd projects in 2030 ratio of western working population to retired will decline from 3:1 to 1.5:118offshoring“as markets mature and margins decline, competition is heating up putting companies under constant pressure to cut costs. many financial institut

28、ions are restructuring to improve efficiency. two key factors are being deployed:(1) re-engineering onshorebusiness processes* (2) moving parts of the business to lower cost locations offshore”(deloitte research)70% of financial service institutions in us and europe have already moved some of their

29、operations offshore with india leading (shillito)19demographic profilesimmigration may redress the age imbalancemagefmagefexcess ofolder peoplelack of young peoplenumbernumbermatureimmigrantpopulationpopulation201 demandthe demographic importance of life insurancepremium $bn30general biasbalanced25a

30、llianzaig20avivageneraliaxazfs1510life biasaegon5hartfordfortissafecost paulsing0afmet lifeskandiapremium 051015202530$bnpublishedstrategymajority of large companies are looking for growth 21through life business.generation x and y stereotypesxyborn after baby born after 1980boomers but before 1980w

31、ork aimsfreedom and money and lifestyleindependenceworkfeedbackhappy with regularwant constant and feedbackimmediate feedbackuse of conveniencepurposes integral to socialising and technologye.g. banking and workshoppingattitudeget on with their jobsindividualistic and focused on own interestsgenerat

32、ion x and y are expected to be targeted for insurance lead generation through social networking sites. (post mag 15 sept 2011)22some life companies are closing1995 2005 there were 67 closures of uk life insurance assets of closed uk life firmsfirms.150the firms that closed had the 130following chara

33、cteristics:11090?proprietary as opposed to 70mutual?bn50?lower solvency3010?higher costs-10199419961998200020022004?lower levels of new business(stephen diacon 2005)2010: life insurers currently experiencing competitionfrom other savings vehicles, lower investment income, higher capital requirements

34、and difficulty forecasting longevitydespite growth potential some companies find it too expensive to remain in life23generation x and ystereotypesxyborn before 1980bornafter 1980technologyused for convenience e.g. used to manage all aspects banking and shoppingof work aimfreedom, independencemoney,

35、lifestyle241 demandcustomers are more selectivecustomer expectationneed for crm“consumers expect claims to be as insurance penetration paidpromptly and generouslyincreases there are fewer and they are demanding higher first time buyers. standards of servicegenerally customers tend to be :than they h

36、ave been given in the ?better informedpast. the media have played their ?more sophisticatedpart by raising expectations and even teaching people how to ?increasingly willing to switch complain. supplier to satisfy their needsabove all, the consumer is retentionof existing customers increasingly expe

37、cting that more is more criticalof his premium money will be insurers are therefore looking to returned as claim paymentsand crm rather than less used to pay for the transactional marketingadministration of the business.”(in-touch associates)(prof ralph petty, univ of nottingham)in a mature market t

38、he customer has the power25demand radical innovations?insurance is quite good at improvingexisting products but is bad at radical innovation (mckinsey) you also have to carry the intermediarywith you when you introduce something new(ceo new york life)?main exception is geico / direct line model (dir

39、ect marketing + strong branding + telephone call centres + narrow segmentation + dynamic pricing)?but there are two recent ideas that have real potential to become radical: alternative risk transferusage based insurance(e.g. pay as you drive)pay as you drive?aviva provides you with comprehensive cov

40、er you will still get the cover you expect from a normal car insurance policy ?a gps (global positioning system) is fitted to your vehicle for free which allows aviva to work out how you use your car ?as standard an assistance button is included which gives you 24 hour access to help in case of a br

41、eakdown or accident 26demand art an insurance substitute?alternative risk transfer (art) an imprecise term for a range of mechanisms used by large corporations (or insurers) to transfer underwriting risk to a risk carrierother than by way of a conventional insurance contract.?usually designed to acc

42、ess funds from capital markets(especially hedge funds)?reasons for trend:recent series of very high catastrophe losses (e.g. hurricane katrina) exposed the inability of the insurance industry to respondconsequently, traditional catastrophe cover fluctuates wildly in capacity and pricethe scale of th

43、e capital markets mean capital exposures can be spread over a wider capital basethan the traditional insurance marketsmuch is based in bermuda where there is a sympathetic regulatory and tax regime27will it all survive the recession?art-finite reinsurance?similar to reinsurance contracts but with th

44、e risk transfer limitedin some way?policy limit only a small multiple of the premiums?usually multi-yearcontracts?pricing may be dynamic(i.e. adjusted during period of cover by additional premiums or profit commissions)?some retrospective contractspost-loss?some regulators are concerned as finite re

45、insurance distort resultsand should be accounted for as loans rather than reinsurancesome regulatorssuspect it can be used to obscure the insurers true financial position28art -reinsurance sidecars?idea developed from quota share treaties?created quickly in response to capacity shocks(katrina, 911,

46、florida legislation)?a company is set upbeside the insurer but not part of it (like a motorcycle sidecar)?shares in the sidecar are sold to capital market investors who take on the risk and return from a book of business?reinsurer cedes the premiums to the sidecar once investors place sufficient fun

47、ds to meet potential claims?liability of investors is limited to these funds?residual risk remains with the insurerregarded as a source of capital that can be switched on and off at will29art insurance derivatives?developed out of the derivatives/options marketwhere companies can protect themselves

48、from future movement in prices and interest rates. now applied to underwriting risk?a contract is purchased that will pay an agreed amount of money (or buy preference shares) once a certain level of loss occurrence is reached?often the trigger is an industry-wide level of loss as monitored by an ext

49、ernal agencye.g. pcs cat insurance options pay out on one of nine catastrophe indices published by the independent property claims servicesderivatives are the financial equivalent of weapons of mass destruction.(warren buffett 2008)many insurers bought into these without understanding either the ris

50、ks or where the ultimate exposure lay(pwc 2009)30art -insurance linked securitisation?securitisation is a long-established banking mechanismthat is now being applied to insurance?takes an asset (e.g. cash flow) and sells a security (bond) on the capital market. receives cash nowfrom investors in exc

51、hange for interest and future redemption.?can be used for:capital managementmassaging regulatory capital e.g. securitising embedded value-allows capital market to invest directly in risk without buying insurance shares (viewed as under-performing)risk transfercat bonds, exceptional mortality bonds,

52、longevity bonds-allows insurers to write more business on existing capital31cat bondscat bonds issued $mcat bond market is recovering after the credit crunch32how a catastrophe bond works?250m not worth doing for less than ?100mcatexposureissues bondhedgeinsurerispvfundpays cashno eventrepays x % fo

53、r yyears + redemptionevent occursbond forgiventimeinsurer may issue bond via an insurance special purpose vehicle 33(ispv) a trust keeps which takes the risk off balance sheetart current market views?we dont have sufficient capital to take on all the risksin the world there has to be access to the c

54、apital markets (stephen catlin ceo, catlin 2009)?market for ils was $4bn in 2010 (swiss re 2010)?ils has been talked about for years, but it has never really taken off. however, the higher capital requirements of solvency ii might put insurers under pressure and force them into ils(patrick liedtke g

55、eneva assoc, 2009)?the limitations of ils are the availability of conventional reinsurance and alternative investment opportunities for the market. for these reasons, ils will never be mainstream(jerry de st paer chairman, gnaie)?the downside for the investor is that insurers know more about risktha

56、n the capital marked does (urs ramseier, head of ils, horizon 21, 2009)?there is room for art but the transfer must be a real one (ceiops 2009)art is a useful addition to an insurers toolbox but is unlikely to dominate34captivestotal worldwide5000450040003500300025002000first established150010005000

57、192519501975198020052009a purecaptive (owners business only) is the original model. there are now 20 other types (a m best 2009)81% ftse 100 uk companies use captives90% uk captives are domiciled outside the eu35captives handle 38% of total us commercial premiumcaptivebenefits?reduce the cost of ins

58、urance programmesby mitigating commercial insurers admin costs, and capturing underwriting profits and investment income that would otherwise gone to the marketplace?direct access to the reinsurance marketwhich operates on a lower cost base ?earns investment incomeon unpaid loss reserves?base premiums on own loss experiencerather than the industrys?tax planningadvantages depending on the domicile (bermuda, d