PWC AUSTRALIA INSURANCE PRODUCTIVITY HOT TOPIC Fit for Growth How the world’s leading insurers are reducing costs while growing their businesses

New PwC research reveals how ‘best in class’ insurers are using multiple strategic levers to simultaneously achieve revenue growth and manage expenses. From unlocking labour productivity, to dialling up digitisation, there are numerous opportunities for general insurers to achieve profitable growth right now. It comes down to finding the right combination of levers and capabilities. The healthiest insurance businesses are shifting capital away from ‘bad costs’ into areas of strategic advantage, improving growth, expense and loss ratios and are being rewarded by outperforming their peers on the share market. PwC calls this being ‘Fit for growth’. No limits: geography and GWP growth A decade is a long time in any industry, but the insurance sector is almost unrecognisable compared to ten years ago. We have seen insurers invest in emerging technologies to personalise product and pricing, and/or provide consumers with a truly omni-channel experience. The rise of insurtechs and increased regulatory scrutiny has required the industry to reinvent itself and many insurers are looking healthier for the shakeup. Growing real gross written premiums (GWP) has been challenging for insurers in this environment. Outside of Asia, where GWP figures were supported by healthy gross domestic product figures, real GWP growth was in the low single digits. This low growth environment has placed added pressure on insurers to manage expense and loss ratios in order to achieve profit targets. At PwC Strategy&, we tracked the change in general insurance real GWP and expense ratio by selected insurers from 2009-19. We found that while Asia-based insurers were standout performers in terms of their gross written premiums (GWP) (partly due to healthy gross domestic product figures in the region); insurers across all geographies have successfully reduced expense ratios, even where they faced challenging growth environments. Several insurers were able to grow at the same time as reducing expenses, with Ping An Insurance (China), USAA and Chubb (North America) leading examples (see Figure 1).” FIGURE 1 Change in P&C Real GWP and Expense Ratio by Insurer1,2 % change, 2009 - 2019 % Change in Real GWP

500

PingAn 400

300

Admiral

China Pacific PICC 200 MS&AD Insurance Increased Real GWP W. R. Berkley

Progressive Talanx AG Chubb 100 USAA UnipolSai Assicurazioni AFG Sompo IAG Group Aspen Amlin Allstate Sampo Oyj QBE 0 Tryg Forsikring Intact Financial Co-operatorsAllianz Group SE AXA SA Suncorp Zurich AIG Loews ASR Nederland N.V. Aviva RSA Gjensidige Forsikring Direct Line

Reduced Real GWP Assicurazioni Generali Travelers Companies % Reduction in -100 Expense Ratio -75 -70 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30

Increased Expense Ratio Reduced Expense Ratio

Stable to negative impact on real profit = US$5b Asia North America 2019 GWP Oceania Nordics Medium change in real profit Strategy& | Fit for Growth Continental Europe United Kingdom High change in real profit 1 PWC AUSTRALIA INSURANCE PRODUCTIVITY HOT TOPIC

So, how did they do it? The answer lies in pulling multiple strategic levers simultaneously. The power of pulling multiple levers The world’s leading insurers have deployed a variety of strategies to achieve profitable growth. We set out to track how insurers used four specific strategic levers, and to quantify the subsequent effect of these on insurer’s revenue and expense ratios. What emerged was a clear picture of just how successful these strategies can be. Our quantitative review of global insurers, ‘Fit for Growth: A retrospective on property & casualty insurer expense performance over the past decade’, found that insurers who targeted structural cost drivers (such as labour productivity and tech investment) and inherent drivers (e.g. merger and acquisition synergies) achieved better expense ratios than those who focused on executional drivers (such as centralising supply chain functions). Take Ping An, for example. The insurance giant pulled two of the four levers (labour productivity and tech investment), and reduced expenses (expense ratio by 6%) while also growing revenue (GWP up 618%). In fact, a host of insurers delivered real growth and cost efficiencies by investing in labour productivity and technology in parallel (including USAA, Progressive Corp and Admiral) (see figure 2). Interestingly, those insurers that outperformed their peers did so by pulling multiple strategic levers. One lever alone rarely led to growth and cost cuts. FIGURE 2 Change in Global P&C Insurers’ Expense Ratio driven by Four Expense Management Strategies (%, 2009 & 2019)

Insurer Labour Tech2 M&A3 Cost ‘19 Exp. %∆ GWP % Reduct. Productivity Culture4 Ratio Exp. Ratio

MS&AD Insurance 31% 98% 9%

Sompo 32% 58% 7%

Asia PingAn 39% 618% 6%

PICC 33% 268% -%

China Pacific 38% 302% (4%)

Suncorp 21% 7% 22%

IAG Group 24% 33% 19%

Oceania QBE 30% 17% (3%)

USAA 21% 131% 13%

Travelers 30% 33% 7% Companies

Loews Corp. 34% 6% 5%

W. R. Berkley Corp. 32% 94% 4%

Chubb 29% 82% 3%

AFG 33% 94% 2%

Allstate Corp. 24% 41% 2% North America Progressive Corp. 21% 176% 2%

Co-operators 33% 15% (1%) Group Intact Financial 29% 109% (2%) Corp.

AIG 34% (24%) (17%)

Strategy& | Fit for Growth 2 PWC AUSTRALIA INSURANCE PRODUCTIVITY HOT TOPIC

AXA SA 26% 25% 8%

Allianz SE 28% 6% 1%

Assicurazioni Gen. 28% (20%) (4%)

Talanx AG 29% 151% (10%)

UnipolSai Ass. 28% 4% (28%)

Continental Europe Zurich 32% (19%) (24%)

ASR Nederland N.V. 23% 3% (72%)

RSA 28% (21%) 7%

Aviva Plc. 33% (10%) 3%

Direct Line 30% (50%) (2%)

Admiral 24% 324% (3%)

United Kingdom Amlin Plc 33% 49% (10%)

Aspen Insurance 41% 67% (27%)

Gjensidige 15% 7% 22% Forsikring

Sampo Oyj 22% 33% 19% Nordics Tryg Forsikring 14% 17% (3%)

Legend: Expense mgmt. lever not used Expense mgmt. lever used

For example, Progressive Corp (USA) invested heavily in both labour productivity and technology between 2009-19. This included developing their data & analytics capability to inform their risk selection processes and investing in AI and machine learning to automate elements of quoting and claims. Fast-forward to 2021, and Progressive Corp’s investment has driven growth and led to a 139% index outperformance (see figure 3). The research suggests that Insurers should be use these principles across all four expense- management strategies:

FIGURE 3 Total Shareholder Return Index Outperformance by Insurer1,2,3 Index: 2009=100, 2009-2019

1. Total Shareholder Return = 300 ((current price - purchase price) + dividends ) ÷ purchase price. 200 TSR Index calculated using Local Currency Annual Open Prices and average Annualised 100 Dividend per Share from S&P Capital IQ between Feb 28 0 2009 and December 31 2019 (or earliest monthly date closest to Feb 28 2009 if February 2009 -100 data not available). 2. Market Index Values calculated -200 using monthly Total Return Gross between Feb 28 2009 -300 and December 31 2019 (or earliest monthly date closest to Feb 28 2009 if February 2009 Overperformance TSR & Index Value -400 data not available. AIG AFG RSA 3. Outperformance determined QBE PICC Aviva Aspen Zurich Chubb PingAn by subtracting regional Market Sompo Admiral AXA SA Index Values from each Total Suncorp Allianz SE Talanx AG Talanx IAG Group Direct Line Direct Shareholder Return Value. Sampo Oyj Loews Corp China Pacific

Source: S&P Capital IQ; Allstate Corp. Company Annual Reports; Forsikring Tryg Progressive Corp. Progressive

Strategy& Analysis. MS&AD Insurance W.R. Berkley Corp. W.R. ASR Nederland N.V. Travelers Companies Travelers Gjensidige Forsikring Intact Financial Corp. UnipolSai Assicurazioni Asia Oceania North America Continental Europe United Kingdom Nordics MSCI FM Asia Index: ASX 200: S&P 500: Euronext: FTSE Index FTSE Nordic: 185.3 221.8 451.3 174.6 198.1 343.6

Strategy& | Fit for Growth 3 PWC AUSTRALIA INSURANCE PRODUCTIVITY HOT TOPIC

1. Improved labour productivity Whether investing in upskilling, or redeploying labour into greater revenue-generating activities (such as frontline sales), an uptick in labour productivity can reduce overheads and boost your bottom line. Here, businesses should also consider consolidating operating models. Ping An increased labour productivity by a staggering 50% from 2009-19, partly by centralising operational functions, and empowering agents to cross- sell products when appropriate for their customers. 2. Investment in technology When Admiral implemented a price comparison website providing on-sell opportunities they saw a 70% increase in digital customer enquiries, reducing acquisition costs, and improving U/W performance. Meanwhile, USAA is collaborating with Google Cloud to transition to 100% touchless claims processes by 2022, partly as a cost-saving bid. 3. Realised merger and acquisition (M&A) synergies Over the past ten years, several insurers have successfully leveraged M&As to achieve efficiencies or growth, or both. Some achieved synergies by consolidating backend functions. (E.g. Chubb realised admin synergies to the tune of US$650m after the $28b acquisition by ACE in 2015). Meanwhile, AXA (Europe) used M&As to acquire for scale (e.g. US$15b acquisition of XL Group) and move from mature, low-profit western markets to high-growth alternatives such as Tianping (China) and Mansard Insurance (Nigeria). 4. Persistent cost consciousness in culture Embedding cost consciousness into your organisations culture and KPIs is critical to sustaining strong margins after large cost-out programs. Gjensidige (Norway) reduced absolute costs by approximately 20% by tying management remuneration to a KPI of 15% expense ratio, and all during a period of no GWP growth. Similarly, management at Australia’s IAG committed to efficiency targets via a AU$250 million cost-cutting program to be delivered over three years. Insurers seeking productivity improvement over the next decade must critically examine the levers they are using to address their cost base, shifting capital away from ‘bad’ cost and into areas of strategic advantage. Using these four cost-reduction strategies or levers, it’s entirely possible to manage costs while simultaneously focusing on growth. In fact, we believe it’s the best way to achieve healthy results.

Strategy& | Fit for Growth 4 Contact us to find out more about the levers you can use to achieve profitable growth over the next decade.

Bernadette Howlett Mahan Perera PwC AU Insurance Lead Director, PwC AU Financial Services +61 438 294 402 +61 434 685 644 [email protected] [email protected]

Nathan George Abhijit Mukhopadhyay Manager, PwC AU Financial Services Global Insurance Advisory Leader +61 420 585 446 +1 (917) 485 9084 [email protected] [email protected]

With special thanks to Francois Ramette (USA), Paul McDonnell (USA), Keegan Iles (Canada), Andre Kopperud Gill (Norway), Yoshiro Makita (Japan), Jimi Zhou (China), Ashish Sharma (Australia), Qin Liu (Australia), Jenny Lynch (Australia) and Sophia Elliott (Australia)

www.strategyand.pwc.com

© 2021 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Mentions of Strategy& refer to the global team of practical strategists that is integrated within the PwC network of firms. For more about Strategy&, see www. strategyand.pwc.com. No reproduction is permitted in whole or part without written permission of PwC. Disclaimer: This content is for general purposes only, and should not be used as a substitute for consultation with professional advisors.