The high-performance insurer of the future

By Hendrik C. Jahn, Alexandra Gazendam and André Schlieker Contents

Contents 2 The changing face of 26 competition Executive summary 3 1. The return of the broker 26 High-performance insurers of 4 2. The rise of the aggregator 26 today 3. New players 26 4. From payer to provider 26 Five forces shaping the industry 7 The new normal 28 Shifts in growth 8 1. Slow GDP growth 28 Aging populations 9 2. Low long-term interest rates 28 New infrastructure investments 9 3. Increased regulation 29 Rising middle class 11 4. Commoditization 29 Low-income rural communities 11 5. Stronger role of intermediaries 29 Attractive growth markets and segments 12 Impact of the new normal 29 Consumerization of IT 16 High performers need agility and 30 flexibility 1. Going mobile 16 2. Digital marketing 17 The high-performance insurer 31 3. Analytics 18 of the future Market-related requirements for high 31 Increase in risk and regulation 20 performance 1. Increased frequency of catastrophic 20 Business models for high-performance 32 events 2. Risk inherent in the lucrative 21 Industrializers 2.0 33 emerging middle classes Value Pickers 35 3. Demographic shifts in core markets 21 Global Conquerors 36 4. Uncontrollable social media attacks 21 Emerging Titans 37 5. Increased regulatory intervention 22 Risk Masters 39 6. Increase in cyber crime 23 Brokers 2.0 40 Changes in consumer behavior 24 Success not assured 40 Loyalty on the decline 24 Different models: common principles 42 Clear channel preferences 24 Conclusion and outlook 43 Heterogeneity in emerging markets 25 Multi-dimensional view of customer a 25 necessity

2 | The high-performance insurer of the future Executive summary

The last decade has been quite opportunities for insurers as they are usher in a “new normal”, and determine successful for the insurance industry. to pose a threat—are shifts in the which strategies are likely to be Across the globe we have seen relatively sources of growth, changes in successful in the future. stable growth rates in all lines of consumer attitudes and behavior, business, and profitability levels higher and the consumerization of IT. Using this analysis, we have developed than in many other industries. High six business models which we believe performers have yielded returns on The key question for insurance will help insurers make progress in equity of 20 percent and above over companies worldwide is how to their journeys toward high performance a long period of time. take appropriate counter-measures over the next few years. Each model is to improve costs and profitability, made up of several dimensions, such However, times have changed. With generate growth, and stay on course as operating model, governance and the financial crisis the pressure on to achieving high performance under defining capabilities, allowing insurers growth and profitability has risen changed market conditions. to compare their current model with and will increase over the next years the ideal state represented by the through slow gross domestic product The ongoing Accenture High Performance different models. Of course, given the (GDP) growth, commoditization, low Business research initiative recently five-year horizon, none of the models long-term interest rates, intensifying concluded specific research into the represents an exact recipe for success, competition from intermediaries, insurance industry. Building on that but they do act as clear indicators and an increase in regulation. As a research, we have analyzed which of direction. consequence, insurance will be less forces will shape the industry over attractive to investors. the coming years and how they will This report provides a broad overview affect competition and performance of the major trends and forces affecting Other factors that are likely to have a in different regions and different lines the insurance industry, and offers some profound effect on the industry—but of business. These forces will change possible models for future success that which are as likely to create new the rules of the game quite dramatically, can open up a very fruitful discussion within the senior management team.

3 High-performance insurers of today

What does high performance mean Figure 1. Metrics for high performance in insurance and how can organizations increase their chances of becoming high- Criteria Definition Period performance businesses? Growth Total premiums Three years compound annual growth rate These are the driving questions behind Total premiums One year an ongoing Accenture program of Growth in capital Three years compound annual growth rate original research that is now entering its eighth year. Accenture is monitoring Profitability Return on equity after tax Three-year average more than 6,000 companies across all Return on equity after tax One year industry sectors to understand what Return on equity forecast One year it is about some organizations that Return on equity forecast Two years enables them to achieve consistently Market Perception Total return to shareholders Three years compound superior performance over a sustained annual growth rate timeframe, across business cycles Credit rating Current and industry disruptions and cycles Capital Strength Solvency ratio: premium/surplus One year of CEO leadership. Solvency ratio II: surplus/assets One year Cash Cash/total assets One year We define “high performance” as Consistency Consistency of premium growth Three years enduring or sustained outperformance Consistency of return on equity Three years of peers as measured by a set of widely after tax accepted financial metrics. These Consistency of total return to Three years/two years/one metrics each define a core and distinct shareholders year aspect of performance, and together they portray a comprehensive picture of business performance. The methodology Figure 2. Leading life insurers: profitable growth matrix (2006-2009) for measuring and identifying high Median: 1.1% performance businesses across industries 20% Aflac China Life Insurance encompasses six measurements of Great-West 15% Nationwide Life Lifeco Mediolanum high performance, namely growth, Insurance Unum Prudential profitability, market perception, capital 10% Principal Financial CNP Group Financial Financial Median: strength, cash and consistency. ROE 8.0% ING Sun Life (3-year 5% MetLife Financial New York Life Insurance When applied to the insurance industry, average) Aegon 0% we define these metrics as shown in Storebrand figure 1. -5% Legal & General

As part of the Accenture High Performance -10% -15% -10% -5% 0% 5% 10% 40% 45% Business research program we recently Premium Growth (3-year CAGR) defined the high-performance insurer. Sources: Accenture Research based on ISIS, Bloomberg, company data This study1 analyzed more than 70 leading carriers across the 15 key performance indicators listed in Figure 1, and gives the most up-to-date perspective on how the economic crisis has affected insurers, and how it has changed the market itself. In order to enrich the analysis, we included

4 | The high-performance insurer of the future operational metrics such as combined Figure 3. Leading life insurers: premium growth and expense ratio (2006-2009) ratios and expense ratios in our Median: 1.1% analysis of the carriers. Our analysis 0% is shown in the graphs alongside for Nationwide Life Insurance life, property and casualty (P&C) and 10% CNP Aviva Swiss Life multiline insurers. Principal Financial Mediolanum Life 20% Prudential Plc Expense Great-West Lifeco China Life Insurance Median: If we look closely at the high performers Ratio 26.8% 30% Aegon Aflac mentioned, we can observe that they (3-year Legal & General Storebrand average) ING Unum are very different in terms of their Group New York Life Insurance 40% geographic footprints, products and Manulife offered, and strategies. Never- 50% theless we identified a set of five key -15% -10% -5% 0% 5% 10% 40% 45% attributes common to all: Premium Growth (3-year CAGR) Medians: premium growth includes all the peers, while Life expense ratio excludes MetLife, Old Mutual, Principal 1. Effective customer-centric Financial and . distribution. Sources: Accenture Research based on ISIS, Bloomberg, company data This distribution model includes the sophisticated use of data to analyze Figure 4. Leading P&C insurers: profitable growth matrix (2006-2009) and segment markets, and to create Median: 1.0% the right products. It also includes the 30% Sampo development of multichannel distribution 25% SulAmerica QBE strategies that give insurers a powerful Travelers 20% TrygVesta advantage in the marketplace. , Chubb Porto 15% ACE RSA for example, has distinguished itself in W R Berkley Seguro Median: ROE Progressive 13.3% this area, securing a leading position (3-year 10% average) Insurance Australia in the top right quadrant of Figure 6. 5% PICC Property CNA Financial and Casualty Mutual It has achieved this through effective 0% Automobile Insurance branding (giving it 79 percent unaided Affirmative Insurance -5% brand awareness in 2009), an efficient XL Capital tied agent network in which 90 -10% -15% -10% -5% 0% 5% 10% 15% 20% percent of new agents contract Premium Growth (3-year CAGR) themselves to the insurer within Sources: Accenture Research based on ISIS, Bloomberg, company data a year, and a string of successful bancassurance alliances.

2. Responsiveness to the market. Figure 5. Leading P&C insurers: premium growth and expense ratio (2006-2009) Median: 1.0% Companies with this capability are 80% good at spotting opportunities and risks before anyone else. They are 85% Chubb quicker to get into or out of markets, TrygVesta QBE 90% to launch or modify their products, and P&C Travelers W R Berkley RSA Combined XL Capital ACE to take advantage of new technologies. Ratio 95% Progressive SulAmerica Median: This approach has enabled Aflac to (3-year Sampo Porto Seguro 96.1% average) 100% become the market leader in the niche Allstate Insurance PICC Property Australia and Casualty medical products segment in Japan, State Farm Mutual 105% while QBE has concluded 125 successful Automobile Insurance Affirmative Insurance Liberty Mutual acquisitions in 25 years by focusing on 120% niche and targeted acquisitions which -15% -10% -5% 0% 5% 10% 15% 20% are share price accretive in short order, Premium Growth (3-year CAGR) and by displaying superior skills at Medians: premium growth includes all the peers, while Life expense ratio excludes CNA Financial. both identifying valuable targets and Sources: Accenture Research based on ISIS, Bloomberg, company data completing the transactions successfully.

5 3. Operational excellence. Figure 6. Leading multi-line insurers: profitable growth matrix (2006-2009)

Many high-performance insurers Median: 4.0% 40% demonstrate operational mastery, Bradesco Seguros with an operating platform that is 30% simple, standardized and superbly Topdanmark Mapfre 20% Talanx integrated. They are highly automated Generali ZFS Groupama and they measure everything. And they ROE Bâloise-Holding Uniqa (3-year 10% Assurant Vienna Insurance Median: are never satisfied: they are continuously average) Ergo 9.7% Societa Cattolica improving their systems and processes, 0% Premafin Finanziaria Eureko Hartford and developing their workforces. At Metlife, for example, a consistent -40% operating model, the convergence AIG -50% of processes, and continuous IT -15% -5% 0% 5% 10% 15% 20% improvement are helping to deliver Premium Growth (3-year CAGR) a targeted $400 million reduction in Sources: Accenture Research based on ISIS, Bloomberg, company data operational expenses.

4. Relentless pursuit of cost reduction. Figure 7. Leading multi-line insurers: premium growth and expense ratio (2006-2009) Another attribute of high-performance Median: 4.0% insurers is their unwavering commitment 80% to minimize costs. This entails not only Topdanmark Uniqa cost-cutting, but focusing on margin, 85% Ping An Insurance on cost of service, and on changing the P&C 90% Vienna Insurance cost model, particularly switching from Combined Ergo Mapfre fixed to variable costs. It also means Ratio Allianz AXA Eureko 95% Median: (2006/ 95.6% being open to all opportunities to 2009 Bâloise-Holding Generali Talanx average) AIG ZFS reduce costs through sourcing models 100% Societa Cattolica and offshoring. Progressive, for example, Unipol Groupama 115% in 2009 reduced the combined ratio for Assurant its commercial auto line of business by 120% 8.9 points. It achieved a ratio of 85.8 -5% 0% 5% 10% 15% 20% by, among other things, improving its Premium Growth (3-year CAGR) handling of high-exposure claims and Medians: premium growth includes all the peers, while P&C combined ratio excludes AGEAS, Bradesco Seguros, Hartford and Premafin Financiaria raising its operating efficiency. Metlife Sources: Accenture Research based on ISIS, Bloomberg, company data has optimized its cost structure and established a culture of high performance, enabling it to improve its auto and Although we find that high-performance The aim of this report is to develop a home expense ratio to 25.0 percent. insurers demonstrate all of these forward-looking perspective of high 5. Focus on risk management. characteristics, our analysis shows that performance in the insurance industry. they generally excel in at least two. First we will paint a picture of the Most high-performance insurers take These spikes of excellence depend on insurance landscape in the next five risk management very seriously. Their the circumstances they face, their years by describing the forces and focus extends beyond underwriting risk objectives and their strategies for challenges which we believe will to include investment exposure, control achieving competitive advantage. fundamentally shape the industry. of financial flows, enterprise risk and Using this description of the future the protection of customer privacy. The attributes identified above certainly insurance landscape, we will then help to explain high performance today, proceed to develop business models, but the question is whether they operating models and capabilities will be sufficient to guarantee high which we believe will support high performance in the future. Accenture performance in the future. strongly believes that high performance is by no means a stable state.

6 | The high-performance insurer of the future Forces shaping the insurance industry

The insurance landscape is constantly • Shifts in growth from mature to in flux and the forces shaping the emerging markets. industry in the next five years will • Increases in the development and differ from those that shaped it over consumption of technology. the past few years. • An escalation of both risk and In our analysis, we identified a set of regulation. forces which we believe will challenge • Changes in consumer behavior. the current strategies of insurance • Changes in the competitive landscape. carriers. Although these forces might not be completely new, what is new is These forces will create a sea of their intensity and the speed at which challenges in which today’s high they will take effect. These forces are: performers, and those that are aspiring to be high performers in the future, will need to navigate.

7 Shifts in growth

The insurance industry has not been Figure 8. Evolution of market capitalization hit as badly by the financial crisis Total market capitalization of leading insurers* in US$ trillion as the banking industry. The market $2.5 Highest point was October 2007 capitalization of insurers has improved gradually since April 2009, and although the worldwide growth $2.0 in premium volume is negative our research has shown double-digit $1.5 growth rates in most emerging markets and recovering growth rates in $1.0 mature markets. +61%

$0.5 Although the current performance of Lowest point was February 2009 the industry indicates a recovery, we believe it will be very challenging to $0.0 Jun- Oct- Feb- Jun- Oct- Feb- Jun- Oct- Feb- Jun- attain the level of performance that 07 07 08 08 08 09 09 09 10 10

prevailed prior to the financial crisis. Note: market capitalization at month end; *global panel of 60 leading insurers Previous research by Accenture2 looked Source: Accenture Research based on Bloomberg into the global expansion strategies of leading international insurers, and found that BRIC and emerging Asian Figure 9. Key insurance markets countries feature prominently in their 2009 insurance density in $ vs. 2009/2008 growth in percent, 2009 premium growth aspirations. The insurance volume in $ billion executives interviewed confirmed that these regions are the top target markets 2009 Premium Volume = 500 $bn 30% for global expansion of both their life Italy India and P&C operations. 20% China* 2009/2008 It is our opinion that joining the gold 10% Brazil Germany Growth of Sweden France rush in emerging economies which have Premium Turkey South Korea Russia Netherlands shown high-growth potential will not Volume 0% Japan Worldwide (LC, %) Spain Canada Growth be the only way for insurance carriers in USD UK = -3.7% to achieve their profitable growth -10% US objectives. Our research has shown Poland that there is also the need to address -20% $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 the untapped potential in established 2009 Premiums per Capita ($) mature markets. An Accenture *China does not include Taiwan and Hong Kong analysis estimates a premium growth Source: Accenture Research based on , Economic Research & Consulting, sigma No. 2/2010 potential between 2010 and 2015 of $400 billion to $600 billion in mature markets and $650 to $900 million in emerging markets.

This estimate is based on a set of growth drivers which we believe are particularly relevant to the insurance industry:

8 | The high-performance insurer of the future • Demographic changes (aging Figure 10. Projected growth of insurance populations and increased longevity CAGR 2009-2015 in advanced economies). (based on USD) • New infrastructure investments Total business driven by the shift towards a low- carbon economy and increasing World 3.9% Industrialized countries 2.2% urbanization. Emerging markets 11.4% • A burgeoning middle class in emerging markets. Life business • Untapped potential in the low- World 3.3% income population segment in rural Industrialized countries 1.6% areas of emerging markets. Emerging markets 10.1% Non-life business Aging populations World 4.3% The world is growing older. This trend Industrialized countries 2.5% is particularly pronounced in advanced Emerging markets 12.8% economies, where the United Nations3 Sources: Swiss Re Sigma, BMI, Accenture estimates estimates the median age will rise from 39.7 today to 45.6 by 2050. Not only will the population get older, This trend offers huge potential for the However, we do not believe this to be but with these changes entirely new insurance industry, as the demand for as strong a source of growth as in mature consumption and spending patterns financial and pension products such markets owing to the fact that consumers will emerge. An Accenture analysis as tailored equity release schemes and in these sectors in emerging markets of these demographics in the United elderly-care packages is set to rise with do not have the same buying power. States found that, by 2030, spending the growth of these age segments. We by the age cohort between 65 and 74 believe that life, pension and health New infrastructure years of age will increase by 85 percent insurance in combination with assisted investments while that of the 75-plus age group services such as home care will be the will almost double. key segments which will benefit from The quest for sustainability and the these demographic trends. Accenture shift to a low-carbon economy will be Another aspect of the aging population estimates that life and pension insurance a dominant trend in the next decade. is the increase in longevity. For business in mature markets will grow The pressure for change will be exerted example, the number of people aged by $200 billion to $350 billion over the by rising commodity prices, concerns 85 and above in the United Kingdom next five years, of which about $160 about energy efficiency, and natural will double over the next 20 years. billion will be generated by the old-age disasters and freak weather. The industrial Despite improved medical care and provisioning segment. The expected shift towards a low-carbon future living conditions, aging healthily will rise in demand for will necessitate dramatic shifts in the remain a huge challenge. The demand globally represents some $120 billion underlying infrastructure of economies. for community, residential and frail of premiums. At the same time, the Buildings, transport networks, energy care will increase rapidly. This demand demand for new assistance services sources, power generation and industry will further be fueled by an increase will grow in significance: worldwide will all need to be updated and/or in the number of single households coverage for automotive, travel, health replaced. To avoid significant climate and of women joining the workforce. and life care or other assistance services change by curbing carbon emissions, Household surveys show that women to insurance customers is estimated to the International Energy Agency tend to assume the responsibility for increase by about $12 billion over the (IEA)4 estimates another $500 billion care of the elderly. However, as women course of the next five years. will need to be invested annually in spend more time in the workplace the addition to the extra investment of supply of informal care will be reduced. This section would not be complete $10,500 billion needed from 2010 to As care has generally, in the past, been without mentioning the fact that 2030 to improve energy efficiency and provided on an informal basis, and has certain emerging markets also show boost low-carbon renewable energy, thus been unpaid, the private sector will a strong aging trend, especially China. among other initiatives. Worldwide need to step in to provide these services. cumulative investments in renewables

9 will add up to $1,707 billion by 2020 Figure 11. Urbanization is on the rise according to the IEA estimate. Number of cities with more than 1 million people and Industry analysts estimate that the population (million) number of hydro-electric plants planned for the next years exceeds Population Cities 1,500 500 Number of cities 2,000 worldwide. (RHS) 400 Population Investment on this scale cannot go 1,000 300 uninsured and will thus open up a new 200 growth area for insurers. However, 500 reliable data indicating the frequency 100 and severity of potential claims is not yet available for some of the new 0 0 1970 2010 2020 risks. For example, the susceptibility 1950 1960 1980 1990 2000 of trans-regional renewable energy Source: Accenture: New Waves of Growth in the Developed World (United Nations) networks to damage or failure is uncertain and needs to be explored Global urban population (billion) over time. Proper assessment and pricing 1980 Emerging markets of risks related to new investments will 1985 Developed markets therefore require a new skill set. Insurers 1990 will need to expand and refine their 1995 capabilities in gathering and integrating 2000 a greater amount of different risk 2005 information. Quickly transferring and 2010 leveraging insights gained through 2015 new underwriting and risk experience 2020 will become more important. Enhanced 2025 usage of more sophisticated, IT-supported 2030 predictive modeling may help insurers 2035 to expand and refine their traditional 2040 approach to risk assessment and pricing. 0 1 2 3 456 Increasing urbanization has become Source: Accenture: New Waves of Growth in the Developed World (United Nations) a major social, economic and political issue in emerging countries. According to the United Nations3 the total urban population of the developing world will more than double between now and 2050, increasing from 2.3 billion in 2005 to 5.3 billion. Furthermore, the size of cities in emerging markets is growing by the day. The number of cities with more than 1 million inhabitants is set to rise from 300 in 2005 to 479 in 2025, and the number of people inhabiting these cities will rise from 863 million to almost 1.5 billion. The rapid influx of new inhabitants is placing a strain on basic services such as public transport, roads, electricity and water, creating a pressing demand for investments in infrastructure. This new infrastructure will in turn need to be insured.

10 | The high-performance insurer of the future insurance in the form of a card which has lifted 400 million people out of Rising middle class is valid for one year, an innovative extreme poverty. The rural multiplier product that was developed and effect is what excites policy makers Rapid growth is fuelling rising employment launched by GTZ, a German development and business leaders alike. For every and incomes in emerging economies, organization, and Asuransi new opportunity for a villager to use creating a burgeoning group of potential Wahana Tata, a local insurer and risk his mobile phone to protect his crops, consumers. The global middle class is carrier. The growth of the Chinese there is a knock-on opportunity for expected to grow from 1.7 billion to and Indian economies in the 1990s him to purchase a small refrigerator 3.6 billion between 2010 and 2030. or a motorcycle. China is now the world’s biggest car market. Indian retail sales are expected Spotlight: Islamic insurance to record annual average growth of 5 The last decade has seen Islamic insurance increase transparency in the fragmented percent a year for the next five years, products and services to the middle classes and competitive takaful market. This may compared with less than 1 percent in rise in significance, mostly in emerging result in consolidation and strengthening Western Europe. markets. Muslim consumers remained of the local market and support the UAE conscious of the fact that conventional in its ambition to become the capital of This trend provides a host of new insurance is not acceptable in Islamic Islamic finance. Swiss Re estimates a $1.7 opportunities for the insurance industry. law. As pointed out by Swiss Re5 recently, billion premium volume already written Although much of the demand generated roughly 1.5 billion Muslims around the in 2007 under takaful schemes worldwide, by this growing middle class will be for globe are underserved by insurers. The showing an impressive growth rate of 25 low-cost products, this is likely to change market potential seems huge, keeping in percent over the course of three years. as incomes rise and the demand for mind that Muslim countries account for Malaysia—which too has become a leading more sophisticated products grows. about one fourth of the emerging markets’ international player in Islamic finance— Throughout this growth trajectory GDP. Takaful is an answer to growing demand Indonesia and Saudi Arabia are the markets for insurance-like coverage for retail with the biggest potential for Sharia- there will be an increasing demand customers in Muslim markets. It developed compliant insurance services. Despite the for insurance products, especially as a Sharia-compliant system of risk sharing global financial and macroeconomic crisis, health, motor insurance and small and has been practiced for centuries. It is Swiss Re estimates that takaful will grow property insurance. These may seem similar to mutual insurance concepts, exists at 17 percent per year (inflation-adjusted). to be familiar product categories, but in various models and is nowadays increasingly Global takaful markets therefore could reach insurers must keep in mind that the demanded by Muslim customers. The su- up to $7 billion by 2015, with the Middle new middle class is totally different pervisory authorities of the relatively small East, northern Africa and some eastern from traditional customers in the but fast-growing United Arab Emirates Asian markets showing the highest potential. recently announced specific regulations to mature economies. Not only are the Source: Swiss Re, press, Accenture Research volumes smaller but channel preferences and buyer values are also vastly different. One of the key buyer values is brand Spotlight: Insurance in rural India consciousness and affinity. Insurers One of the emerging economies with a represented by the growing rural market. should use this knowledge either to significant rural portion of the population However, the company learnt that this build a strong brand or team with is India. There is no question that India’s growing niche market has its own specific a strong brand to create traction in rural markets are becoming a powerful requirements. For example, rural customers these markets. economic engine. The rural market in India expect products and policies to be fairly contributes more than half of the sale of simple. Also, products need to be flexible Low-income communities, fast-moving consumer goods, clothes and enough to allow customers to withdraw durables, 100 percent of agri-product sales their money in an emergency with little especially in rural areas and nearly 40 percent of automobile sales.. or no penalty. Developing sales channels The poorest people in the world are In the last few years, the biggest growth that are close to customers is critical, most in need of the security that in the Indian mobile telephony market but challenges remain when cooperating insurance brings. They have little has come from the hinterland where 175 with third-party organizations like non- million connections have been sold. This governmental organizations. The case of access to health services and they number is expected to rise to 440 million Max New York Life shows that tapping the are most likely to live in areas which by 2012. Half of all life insurance policies huge potential of an underserved market are prone to floods or natural disasters, are also sold in India’s rural villages. means more than just tweaking or trans- a situation aggravated by climate planting urban products to the rural areas. change. Inhabitants of certain areas Max New York Life, one of the top 10 Source: Accenture analysis of Jakarta are being offered flood Indian life insurers, refocused its business model to tackle the new growth opportunity 11 There is a growing realization that Figure 12. Sweet spots in mature markets global investment and growth Attractiveness of selected mature geographies (preliminary results) will increasingly come from rural populations, as their savings translate into consumption.

Germany A&H France A&H Attractive growth markets Spain Life High Spain P&C and segments projected UK A&H US P&C growth Based on these identified growth UK Life areas, Accenture performed an in- UK P&C Netherlands A&H US A&H depth analysis to determine the size US Life of the opportunity for the various Germany Life insurance segments in mature and France Life Italy Life emerging markets.

France P&C Italy P&C Accenture believes that attractive Low Germany P&C growth opportunities in the emerging projected markets are widely spread across growth global regions. These emerging markets Low attractiveness High attractiveness are of varying sizes and levels of Bubble size indicates premium volume in 2009. “Attractiveness index” based on market concentration. Positioning of development, and offer opportunities markets on the graph is relative to peer markets. to local and global insurers. Among the Source: Accenture Research (based on Swiss Re Sigma, BMI, Accenture estimates) most promising of these markets one finds the “usual suspects” like China Spotlight: United Kingdom and Brazil, which are already closely High volumes of switching, fueled by the could also be a way for insurers to grow monitored by international players. The commission-based independent financial their share of this market. A history of sheer scale of their populations and advisor model, have historically lead to an diversification has produced complex economic growth rates will continue to overstatement of the UK life market, with financial conglomerates in the UK life make these markets attractive over the the impact of new regulation in the form sector, and consolidation is expected to course of the next few years. However, of the RDR (Retail Distribution Review) be a major driver of change. legal constraints will make it difficult expected to reduce new business churn. for foreign players to seize growth While recent economic conditions have led The mature UK property and casualty opportunities quickly in markets like to declines (new business volumes fell by market remains very competitive, especially 19.5 percent in 2009), a return to growth in the retail sector where the continued China and India—a situation that is not is expected at 4.5 percent compound growth of aggregator websites is adding expected to change soon. annual growth rate up to 2015, but will competitive pressures and changing the remain unpredictable as the impact dynamics of the industry. The market is Among the more buoyant markets, the of the RDR is not clear. showing clear signs of saturation, requiring growth potential of Russia and Turkey insurers to innovate for growth. However, remains to be discovered. Taking Russia Opportunities exist for providers in the more-demanding consumers and increasing as an example, the non-life segment new regulatory environment to take pressure on price (driven by escalating (and especially the health insurance advantage of distribution channels such fraud and bodily injury costs) are making segment) is rapidly growing, fragmented as bancassurance and the possibility of it difficult to do so in certain sectors and open to the participation of foreign tie-ups between providers and distributors. such as personal and motor insurance. players. On a slightly lower level, The launch of NEST (National Employment Opportunities exist for insurers leveraging fairly mature South African and South Savings Trust, a pension scheme being new distribution models, such as aggregators, introduced by the government) from sophisticated pricing and cost control to Korean insurance markets still show October 2012 could also lead to an influx take advantage of M&A opportunities as sizable growth opportunities. However of new investment into the market and the market returns to growth from 2011. their overall attractiveness might be thus improve growth prospects beyond Consolidation in the market is expected reduced given their established market 2012. NEST will require all UK employers as major insurers such as RSA and Allianz structure and dominant local players— to enrol employees automatically into a have announced their ambitions to grow all barriers to entry for foreign players. “qualifying pension scheme” which could market share in the UK property and be either an existing scheme or NEST. A casualty market. move back to in-house asset management Source: Accenture Research

12 | The high-performance insurer of the future With regard to mature markets, Accenture Spotlight: Spain believes that attractive business The growth potential of the Spanish Spanish insurers were strongly affected opportunities are spread across different insurance market ($86 billion premium by the macro-economic turmoil and are countries and segments, with life volume) is reflected in its low insurance facing pressure on profitability through and some health insurance businesses penetration rate (5.5 percent compared increasing competition, reduced growth typically showing higher-growth with the 8.6 percent average for Western and an increase in claims. A modest prospects. The enormous US insurance Europe) and a low premium per capita two percent increase in total business is market, which is built on the world’s level of $1,092 (as compared with the expected for 2010. From a medium- to largest consumer market and commercial average of $2,922 for Western Europe). long-term perspective, the fact that Spain and industrial business volume, remains is the world’s 10th biggest economy means that it will continue to offer significant an attractive growth proposition going The market shows sustained high profit levels: for example, the average combined potential for growth. The Spanish market forward. Stronger growth in the gross ratio over the last few years is about 90 is attractive to foreign players, given that domestic product will enhance the US percent. Although Spanish insurers utilize the insurance market is fragmented (the market’s attractiveness, while recent all distribution channels, low-cost channels top five players have only 27 percent of the US legislation may also support the are still under-used (only 0.5 percent market) and its robust historical premium insurance sector’s prospects. Though of premium income is generated via the growth (more than seven percent in the impact of healthcare reform Internet). In the life sector, which represents savings-type life and in non-life products). remains to be seen, insurance companies about 50 percent of total market premium Other opportunities could be generated could significantly benefit under some volume, products are mostly sold through by the need for local banks to sell off their scenarios. National investment in very dense banking branch networks (73 life businesses in response to Solvency II, physical infrastructure and the growth percent of new sales). Savings products from as well as the restructuring of the savings of biotech and alternative energy banks provide strong competition for insurers, bank and mutual bank sectors. while health products and services are businesses may play a role in the Source: Accenture Research covered by the social security network. relatively strong growth forecast for the US property and casualty market. Figure 13. High-potential emerging markets Although the accident and health Attractiveness of selected emerging markets (preliminary results) business segment shows strong growth rates in general, future opportunities need to be carefully considered by insurers given specific local frameworks and market conditions. In many mature Turkey Russia markets, private insurers play a role India Brazil within the social security network (for Thailand High example, health insurance coverage projected in the Netherlands and Germany). The growth overall accessibility and attractiveness China of the market segment may be impacted as a consequence. Smaller markets South Korea like Spain will also produce attractive business opportunities for foreign South Africa insurers as they return to growth Low and undergo a phase of consolidation projected and market restructuring. growth

Low attractiveness High attractiveness

Bubble size indicates premium volume as of 2009. “Attractiveness index” based on weighted parameters that indicate, e.g. competition level, burden of financial regulation, or ease of doing business in the market. Positioning of markets on the graph is relative to peer markets. Source: Accenture Research (based on Swiss Re Sigma, BMI, own estimates)

13 Spotlight: Russia By most standards, the Russian non-life Two macro factors influencing the insurance segment is large ($30 billion in 2009) and business are the low life expectancy of rapidly growing. The increase in consumer Russians and the economy’s dependence wealth in the 2000s coupled with Russians’ on oil and gas, whose prices are volatile. adoption of a consumer lifestyle is driving The Russian insurance market is open to demand for car and property insurance. participation by foreign firms. Although Infrastructure insurance is also a growing there are over 700 insurance companies segment as new assets are built to enhance in Russia, the market is consolidating and the security of the country. On the other already the top 10 companies account for hand, demand for life insurance is very 40 percent of the market. low (density of $4 per capita) because Source: Accenture Research ordinary Russians are focused on short- term needs. Also, life insurance is usually influenced by government regulation but the Russian government is inactive in this area. The lack of support for the aged and those injured in accidents will have to be addressed, but the life insurance business is an opportunity only in the long run.

Spotlight: India Since the insurance sector was liberalized Over the next five years, the Indian insurance in 2000, India’s insurance industry has market is expected to continue growing at grown almost six-fold. Growth accelerated a double-digit rate, and eventually become with the entry of private players who the fourth-largest insurance market (by aggressively spent on marketing and total premiums) in Asia. However, the educating customers. Favorable demo- market is highly concentrated (the top graphics, increasing per-capita income and five players control over 80 percent of the rising awareness will drive future growth. market) and competitive, while customers There is still huge potential to increase life are spread out across the country. As a cover (most Indians are grossly under- result, doing business has been challenging insured), non-life penetration is still for foreign companies. only 0.6 percent of gross domestic product, Source: Accenture Research and sectors such as pensions and health insurance will see faster growth owing to a lack of social security and facilitating regulations from the IRDA (Insurance Regulatory & Development Authority).

14 | The high-performance insurer of the future Spotlight: China In tandem with robust economic growth, income, the dearth of attractive long-term China’s insurance market has shown a saving vehicles, a large population which is compound annual growth rate of 26 aging fast, an increasing rate of urbanization percent between 1990 and 2009.The life and the emphasis on insurance in recent insurance business has been growing pension reforms. The focus of life insurance fastest and accounted for 67.6 percent will gradually shift from death to annuity. of total premiums in 2010. Recently, Chinese insurance companies have embarked on Since China became a member of the World transforming their product mixes, focusing Trade Organization in 2001, its insurance their sales efforts on risk products, industry has opened up at a faster pace than especially individual life policies, while both banking and brokerage industries. Since reducing the emphasis on universal life 2003 wholly foreign-owned subsidiaries and investment-linked products. The trend of life insurers have been permitted with is likely to continue as companies pursue no limitation on business models, and all quality growth by selling profitable risk- geographic limitations have been eliminated. type products, and while regulators As a consequence, foreign insurers now promote such changes. account for more than half of all insurance companies in China—although they Bancassurance has grown significantly account for less than 5 percent of the and become the key sales channel for market. China’s insurance market is still insurance. Despite its impressive growth dominated by the three largest domestic record, China’s insurance industry is still life insurers, and state-owned insurers still in the early stages of development, with maintain a strong position in China, partly life insurance depth and density merely due to their ownership of established 2.2 percent of GDP and $74 per capital distribution networks and large customer respectively in 2009. The growth drivers and claims databases. for China’s insurance market will remain Source: Accenture Research strong in the medium term thanks to a number of factors: increasing household

15 Consumerization of IT

In the past couple of years we have The insurance industry tends to lag One of the most fundamental challenges witnessed unparalleled developments behind the leaders in this area. Based insurers are facing today is to remain on the technology front. In different on our experience with clients in the relevant to a consumer base that is ways, these have transformed the insurance industry we believe that the changing rapidly and fundamentally. insurance business—and continue to slow adoption rate has been due to: We believe that insurers must take do so. Investments in IT will be either account of three technology trends in important or critical for insurers, as • Inflexible legacy technology. order to sell more profitably. stated by the vast majority of insurance • Complex business models and equity analysts in a global Accenture processes. 1. Going mobile survey6. Reponses showed that analysts • A mindset focused on operations The proliferation of mobile and wireless see the need for insurers to invest in rather than innovation. two vital operational aspects: their technologies is a trend that cannot be operating efficiency and the impact of • IT budgets that are dominated by ignored by insurance carriers. There are aging IT systems. non-discretionary spend: analysts two aspects to this trend which we estimate that insurers spend only believe are particularly relevant to While the use of IT to improve efficiency 20 percent of their IT budgets on insurers. The first is the staggering will always be critical, investment in IT innovation. growth in mobile Internet use. The innovation will also play an essential role for insurers to stay ahead of market trends. We have moved beyond Spotlight: Amazon.com—using IT to sell more for less merely creating and communicating Amazon.com was launched to take five years (compared to Wal-Mart’s eight through computers to actively sharing advantage of critical efficiencies and percent). Amazon.com’s operating costs and collaborating on a real-time basis major structural cost differences which (all operating expenses excluding the cost through mobile computer devices. the Internet offered. Internet technology of goods sold) are currently running at 18 gave Amazon the scale, confidence and percent of revenue. This ratio is better than Consumers are now driving technology customer insight (through a powerful its retail peers: analysis suggests that other innovation by demanding more speed, analytic capability) to expand from books US booksellers have operating expenses access and collaboration. into an ever-increasing number of categories, of at least 27 percent of revenue—and producing a 29 percent average rate of probably higher. Based on Moore’s law, one could compound growth in revenue over the last Source: Accenture Research predict that in the next five years we will witness a proliferation of smaller computing devices, faster processing Figure 14. Mobile is on the rise in emerging countries speeds and lower prices. In addition, we believe that the convergence of Number of mobile cellular subscriptions (billion) information, technology and humans 1999 36% 64% Emerging markets will also have a huge impact on the 2000 41% 59% Developed markets sort of devices that are produced, and how they are used. 2001 47% 53% 2002 53% 47% Pure-play consumer Internet companies 2003 57% 43% have reduced their cost of sales 2004 62% 38% dramatically and raised user expectations relating to experience, collaboration, 2005 67% 33% mobile access and real-time 2006 71% 29% responsiveness. By contrast, most 2007 74% 26% corporations and public-sector 2008 77% 23% organizations have fallen behind. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

Source: International Telecommunication Union

16 | The high-performance insurer of the future second is the growth and proliferation Spotlight on insurance technology innovations: CUBISM of mobile devices embedded with Accenture’s solution, called Coaching Usage- situations will provide additional benefits semiconductor chips with the potential Based Insurance Service Model (CUBISM), to the customer and help insurers to market to transmit various types of information. enables real-time, seamless analysis of a unique offering. a customer’s driving behavior to make Mobile phones have become ubiquitous his or her risk transparent and allow for Using CUBISM, insurers can increase their across the globe. Driven by the individual premium discounts. In addition, profits through improved risk selection and development of wireless technology value-added services like real-time driver pricing and lower loss ratios, while growing as well as the introduction of ultra- coaching, vehicle theft tracking, a driver their revenues through improved customer low-cost handsets breaking down logbook or a mobile assistant in emergency loyalty and market differentiation. barriers to entry, the growth of mobile Source: Accenture Research phone subscriptions in emerging economies is staggering. Of the approximately 4 billion worldwide This type of technology opens up a host devices can also improve sales force mobile phone subscribers, 77 percent of opportunities for insurers to enhance effectiveness by providing real-time come from emerging countries. underwriting, sales and service. Innovative data to agents in customer-facing insurance companies are also starting situations. Open mobile applications Mobile Internet is one of the key to use location-based data to optimize allow independent agents to become applications used on mobile devices. risk selection and premium calculation productive more rapidly. According to Forrester Research7, mobile for motor insurance. Using this Internet adoption will continue to technology, the insurer can monitor 2. Digital marketing grow significantly, with users tripling and analyze driving behavior in real Internet penetration is high, and from 13 percent of Western European time while the customer’s privacy remains consumers are readily adopting new mobile users in 2008 to 39 percent protected. Actual driving metrics will media channels while traditional media in 2014. be used to discount individual premiums. are having less impact. Digital marketing has now come of age. It encompasses This is a tremendous opportunity for Mobile devices also give customers an established methods of digital insurance carriers as customers have, additional way to interact with carriers communication with the customer, through the purchase of a mobile for assistance following loss/accidents, such as e-mails, as well as video- phone, invested in an additional sales and to give first notice of loss. These stream advertisements and established channel. Carriers are now challenged services could be enhanced by using social interaction tools such as blogs to transfer current capabilities to location-based technology to improve and social networks. mobile devices and actively push service by increasing accuracy and speed. information and services onto these The key driver behind digital marketing devices. For the foreseeable future, Customers can also use their mobile is networking and communication digital and mobile channels will provide devices to share lifestyle data, thus through social media. Social media the most flexible, efficient and scalable enabling adaptive pricing and better- have passed the experimentation stage means to acquire, service and retain tailored business models. Mobile customers—and grow customer share. Especially in emerging economies, the mobile channel will be essential and Figure 15. Adoption of social media fundamental to low-cost distribution. Increase in adoption of social media activities via PCs, 2007 and 2009 Percentage of respondents The ability of mobile devices to support 53 52 2007 location-based services, whereby a 2009 40 customer’s location can be tracked on 38 37 32 31 a real-time basis, is one of the most 28 recent technological developments. 24 23 21 Forecasting a compound annual growth rate of 12 percent, the Berg Institute8 6 expects revenues from location-based services to rise from 2009’s total Social Networks IM Chat Rooms Video Sharing Photo Sharing Blogs of $270 million to more than $500 Source: Gartner: User Survey Analysis: Social Media Adoption Trends, June 2010 million in 2015.

17 Figure 16. Consumers are connected via social networks Insurers still have to catch up with Global number of active users, 2009 (million) their customers in the digital world. Established digital media such as Facebook 350 e-mails attract approximately 40 MySpace 260 percent of marketing spend, followed LinkedIn 55 by paid keyword searches. Online Twitter 50 games and social networks attract roughly 14 percent of the budget, with Source: Accenture: New waves of growth in the developed world (Gartner, Linkedln) blogs, podcasts, and wikis trailing in the single digits. Figure 17. Traditional marketing methods are losing ground For insurers, digital channels can play “In the next three years, do you think marketing’s effectiveness will increase, an important role in various areas of stay the same, or decrease for each of the following?” marketing. For example, building a Interactive marketing tactics strong brand can be supported online Created social media Online video by carefully-managed involvement in Search engine optimization (SEO) various kinds of social media, while Mobile marketing Paid placement in social media user-generated content can be steered Email marketing gently instead of leaving it to spiral Paid search listings Online classifieds or directory listings out of control. Social media can also Display ads through ad networks be used to reach clients more easily, Display ads through publishers and the selling process can be facilitated Traditional marketing tactics by offering an option to purchase online. Direct mail Television Magazines In addition, involvement in the digital Outdoor world gives insurers the opportunity to Telemarketing Radio gain a deeper understanding of their Newspapers customers and gather important market, Yellow pages product and customer information 0% 20% 40% 60% 80% 100% through access to click rates, browsing Increase Stay the same Decrease Not applicable Base: 204 marketers histories and so on. Source: March 2009 US Interactive Marketing Forecast Online Survey The fact of the matter is that customers will turn increasingly to digital tools and are now a significant communications industries. Nonetheless, insurers have for information, making each step of phenomenon. The usage of social an unprecedented opportunity to interact the consumer buying process susceptible media has doubled from 2007 to 2009, with consumers in the digital world. to the influence of a variety of while the popularity of smartphones marketing tools. is now driving their move onto Consumers will continue to move mobile devices. freely in the digital world and express 3. Analytics their opinions publicly. Therefore, The virtual world inhabited by an insurers have lost control of the content Ubiquitous computing and technology increasing number of customers is that describes their brand: much of capabilities, paired with the social extremely complex, and digital marketing this content is generated by customers, media consumer patterns as described will be needed to reach them. More employees and even members of above, have dramatically increased the than any other industry, insurance built the general digital public, who may volume of data at companies’ disposal. 9 its market through networking and not even have had any touch points According to research house IDC , the reputation. As a result, the potential with the insurer. Traditional brand digital universe grew by 62 percent to value of social media to insurers should management is no longer possible: nearly 800,000 petabytes in the last be quite extraordinary. On the other the user-generated input outweighs year. The estimate for 2010 is 1.2 hand, social media are still maturing, the company’s branding efforts million petabytes. This explosive growth and the risks to insurers are more and may even reverse them, if not means that by 2020, our digital universe significant than they are to many other managed carefully. will be 44 times as big as it was last

18 | The high-performance insurer of the future year. High-performance businesses will Spotlight: Analytics helps large US P&C insurer to achieve be distinguished by their ability to high performance create sense of the digital-information This insurer wanted to change the way it excellence within the company using SAS tsunami which is set to swamp us. collected and managed data, and to optimize Enterprise Miner, SAS Business Intelligence its business applications to become a more and SAS Grid Manager, to promote Deriving insights from this data will information-driven organization and push collaboration and easy growth for the be a key source of commercial insight business-improvement initiatives. To achieve insurer’s reporting and data mining needs. and thus of competitive advantage. its business intelligence vision, it teamed This allowed the company to manage and But these insights are reliant on better up with Accenture. Among other initiatives, prioritize analytics and reporting in areas ways of accessing, organizing and and with the assistance of SAS, Accenture such as claims management, fraud detection interpreting information. Insurers defined the strategy for the use of high- and risk management. end, grid-based analytic tools. SAS and need more than deep functional Sources: Accenture, SAS insights—they also must develop a Accenture built an analytics center of cross-functional view to enhance their ability to predict behaviors and In terms of marketing and sales, Insurance carriers already use analytics consequences. Driven by globalization analytics can be used to develop new throughout the claims process for and greater business complexity, segmentation approaches that are fraud detection or predictive modeling. analytics is moving up the sophistication much more granular than is possible We believe this practice will quickly curve. It has now become much more today. In conjunction with additional become widespread in the industry useful because it generates actionable analyses, this segmentation can be because of the enormous savings it insights rather than simply insight. used to create tailored campaigns and can generate. Crucially, the tools to process the huge detailed profiling. Analytics will also amounts of data and analyze it are play a very important role in churn We firmly believe that the consumer- now commercially available and are reduction, one of the key challenges ization of technology will be game- integrated into the latest enterprise facing insurers in mature markets. changing for the insurance industry. resource planning, financial and The opportunities to create value in customer relationship software. Analytics can be used extensively in key insurance functions are far too customer and behavioral profiling, big to be ignored, and consumers will Companies across all industries and information that can be used to increasingly demand that insurers use geographies are investing in business make product pricing and individual modern technology to provide them intelligence. The global business underwriting more accurate. In the with tailored, personalized products intelligence software market is future, analytics will be used to analyze and services. Those insurers that have estimated to grow by eight percent price elasticity and apply consumer- mastered and deployed these new annually until 2014. Better analytical goods-pricing techniques to the technologies will be the winners in capabilities to segment demand, insurance industry. the next five years. coupled with improved marketing techniques, will be critical to unleashing growth. Insurers can benefit from analytics across major parts of the value chain.

19 Increase in risk and regulation

Observing the other forces shaping the Figure 18. Insured catastrophe losses are unpredictable industry, we believe that apart from Insured catastrophe losses 1970-2009 Hurricane financial risk there will be six risks in USD billion, Katrina which the high-performance insurer indexed to 2009 et al Hurricanes must take particular care in negotiating 140 Ivan, Charley, over the next three to five years. 120 et al Attack on These are: World Trade 110 Center Hurricane Northridge Ike, earthquake Gustav • Increased frequency of catastrophic Winter 50 Hurricane storm events. Andrew Lothar 40 • Risks inherent in the lucrative emerging middle classes. 30 • Demographic shifts in core markets— 20 particularly the risk posed by the 10 aging of workforces. 0 • Uncontrollable social media attacks. 1970 1975 1980 1985 1990 1995 2000 2005 • Increase in regulatory intervention. Earthquake/tsunami Man-made disasters Weather-related natural catastrophies Source: Swiss Re, Sigma No 1/2010. Natural catastrophes and man-made disasters in 2009 • Increase in cyber crime.

1. Increased frequency of Figure 19. Number of catastrophic events (natural and man-made disasters) catastrophic events increased since 1970s Number of events 1970-2009 The increasing number of catastrophic events means that insurers are having 300 to foot an increasingly large bill for claims. Natural catastrophes and 250 man-made disasters cost society approximately $62 billion in 2009; 200 the number of such events has 150 increased since the 1970s. We believe that the incidence of catastrophic 100 events will rise even further, posing a great risk to insurers in the next 50 five years.

0 Dealing with this risk requires specific 1970 1975 1980 1985 1990 1995 2000 2005

skills from insurers. The attraction and Man-made disasters Natural catastrophes retention of experts in this field, as Source: Swiss Re, Sigma No 1/2010. Natural catastrophes and man-made disasters in 2009 well as the development of predictive models, are key requirements. Only a few insurers with a substantial capital base will be able to underwrite these risks profitably.

20 | The high-performance insurer of the future 2. Risk inherent in the Spotlight: US demographic trends and their impact on lucrative emerging middle insurance employers classes A “talent time bomb” is evident in the professional roles in key areas like claims United States. The gap between the number management at previous rates for two As the race to capture the growth of American retirement-age workers (55- mutually reinforcing reasons: experienced potential of the emerging middle class to 64-year-olds) and entry-level workers workers are leaving much faster than gets going, insurers put themselves at (20- to 24-year-olds) is rapidly widening. they can be replaced, and comparatively risk by applying the underwriting criteria Starting from a baseline of 390,000 workers unattractive entry-level salaries will of their existing mature markets to this in 1980, the gap is expected to expand to make it difficult to attract new talent new market. The realities of the local nearly 22 million by 2020. The insurance to the organization. industry will simply be unable to fill market cannot be ignored. The middle Source: Accenture, Rethinking claims, 2008 classes in emerging economies will only be lucrative for those insurers that understand how they differ Increased adoption of consumerist, 59. By 2030, 28 percent of Germany’s fundamentally from the middle class credit-fueled lifestyles also increases population, and 20 percent of those in in mature economies. the risk profile of the middle class in the United States, will be older than emerging economies. Once famed for 65, and 19 million people in the United According to a report by the World their frugality, with saving rates of Kingdom will be over 60. Health Organization (WHO)10 on road around 40 percent, the Chinese have accidents, compiled in 2010, low- now become profligate. The use of This risk is currently being significantly income and middle-income countries credit cards is growing rapidly, in line underestimated by global insurers. have higher road traffic fatality rates with the country’s economic growth, Most carriers in mature markets have (21.5 and 19.5 per 100,000 population, higher income levels and burgeoning an above-average-age workforce respectively) than high-income countries middle-class population. In 2008, and will lose a lot of experience and (10.3 per 100,000). Over 90 percent China had 104.73 million credit cards know how, currently “embedded in the of the world’s road fatalities occur in circulation, a 92.9 percent increase brains” of personnel who will retire in low-income and middle-income on the previous year. Saving rates over the next five to 10 years. They countries, which have only 48 percent among the urban Chinese young are will have to find ways to transfer this of the world’s registered vehicles. For now effectively zero. knowledge into the organization. example, road traffic injuries have now become one of the top 10 causes of Insurers operating in emerging markets 4. Uncontrollable social death and disability among Russians. will need to develop a strong local view on risk in order to identify and media attacks The number of people diagnosed with understand these emerging risks and Social media are a double-edged sword diabetes worldwide is drastically to develop prediction and prevention for the insurance industry because increasing, supposedly linked to life- methods rapidly. of its reliance on networking and style changes that drive obesity rates. reputation. Insurers have so far been According to the WHO11, the number 3. Demographic shifts in quite hesitant to venture into social of diabetics worldwide will have risen media. On the one hand, social media to 333 million by 2025; 80 percent of core markets such as Facebook, Twitter and Four- them will live in low- and medium- The workforce in many countries is square offer a “free” way to market, income countries. Increased affluence aging, and some industry sectors and advertise and promote the brand to appears to play a key role in this growth: geographies will begin to feel the customers online. On the other, social in industrializing countries, research impact of this aging in as little as five media can also provide the vehicle for indicates a correlation between diabetes to 10 years. Even more critically, this devastating attacks on an insurer’s rates and socio-economic groups. For is not a short-term problem. In fact, reputation and brands. example, India is expected to have the population of developed countries the largest population of diabetics by is expected to continue getting older Social media have become a powerful 2030—80 million people—with the over the next several decades. By and disruptive force that threatens highest prevalence among the affluent 2040, Italy, Japan and Spain will have insurers’ ability to control and develop urban socio-economic sector. as many people aged 60 or more as their brand among both customers and people between the ages of 15 and employers. Insurers do not own or run

21 the platforms and technology that may from calculating minor technical In China the insurance sector is still be used to launch online attacks from provisions to developing sweeping restricted. Life insurance joint ventures unsatisfied customers, or consumers new transparency capabilities. Solvency cap foreign ownership at 50 percent. in general. However, it seems insurers II will add to the pressures on existing Non-life joint ventures are initially have no choice: already customers are risk management capabilities. limited to 51 percent foreign ownership, using social media extensively to talk although this falls away after two about insurance. Approximately 1,000 Still, insurers expect Solvency II to years, following which there are no entries on insurance are being posted have a positive impact on the market restrictions on ownership. Understanding every hour. Google’s insurance blog has for those who look beyond compliance, the specifics of local market-entry received more than 300 million entries. and compete on the enhanced pricing regulations will be crucial to those and underwriting capabilities it enables. insurers that are intending to expand Accenture believes that insurers In the Accenture survey on Solvency II into emerging economies. cannot avoid this risk; they have to market readiness12, a full 75 percent of manage it. This means insurers need the large European insurers surveyed Consumer protection regulation to monitor online conversations with saw a positive business case in complying Each year the global economy adds customers and prospects actively. They with Solvency II. These forward- millions of new consumers of financial need to be present in social media thinking companies see the benefits services. Most are in developing forums, expressing their point of view, of integrating risk management into countries, where consumer protection and build up discussion forums them- their overall strategic framework. and financial literacy are still in their selves. To avoid (or to better deal with) The impact of this thinking will be infancy. Protecting the interests of social media attacks, insurers will need felt throughout the global insurance consumers has become an important to strategically rethink their approach industry as overseas subsidiaries of component of sound and competitive towards social media and implement European insurers fall into line with financial markets, particularly in those appropriate measures. Key elements their parent companies. countries that have moved from insurers need to address include creating state planning to market economies. an overall social media policy and Market-entry regulation Consumers in emerging markets lack building an ongoing monitoring capability Market-entry regulations could be a experience of sophisticated financial to track social media content that is serious barrier to entry, especially for products. Even in well-developed relevant and impactful to their business. those insurance carriers looking for markets, weak consumer protection growth in new markets. Regulations and a lack of financial literacy can 5. Increased regulatory range from imposed caps on foreign render households vulnerable to unfair intervention direct investment, set tariffs and and abusive practices by financial conditions, re-insurance monopolies institutions—as well as financial fraud In the aftermath of the global financial and restrictions on investments and scams operated by intermediaries. crisis, governments and their regulatory to low-return state and central authorities have recognized the government bonds. Next to more Improved consumer protection regulation importance of a healthy insurance operational hurdles such as the lack is being implemented in many emerging industry as a key pillar of a healthy of a local sales franchise or IT infra- markets. Policy makers are increasingly economy. Regulation is here to stay and structure, strict regulations potentially aiming to balance the country’s governmental enforcement will increase. thwart the market-entry ambitions of financial inclusion and participation We identified three types of regulations foreign insurers. objectives with consumer protection. which we believe will be relevant to For example the Insurance Regulatory carriers, especially for those choosing For example, Indian regulators still and Development Authority, India’s to operate in emerging economies. require foreign insurers to contract supervisory body, recently announced joint ventures with local firms, foreign several draft regulations for an open Financial regulation direct investment being capped at a market consultation, which aims The Solvency II Directive attempts to 26 percent stake in the joint venture. to reduce unfair practices and an provide the basis for a solid insurance A proposal to increase the foreign information gap in domestic insurance industry in Europe. This groundbreaking partner’s stake to 49 percent has in order to enhance market discipline revision of insurance law presents been pending for some time, with among carriers and protect policyholders’ European Union insurers with challenges no immediate sign of a decision. interests. Malaysia’s government is both quantitative and qualitative— planning to introduce a new Insurance

22 | The high-performance insurer of the future Compensation Scheme to enhance people’s bank details. According to protection for policyholders of life, the Internet Crime Report 2009 of the non-life and takaful (Sharia-based) US Bureau of Justice Assistance, the insurance. The proposal aims to protect reported losses from cyber crime in policyholders from loss of claims or the United States more than doubled insured benefits in the event of an in 2009, from $265 million in 2008 to insurance or takaful carrier failing. nearly $560 million in 2009.

Accenture believes that as these Business and consumers need to be emerging economies mature, consumer protected against these activities, and protection regulation will increase. many insurance carriers have started Insurance carriers will have to take to offer insurance against both identity this development into consideration fraud and Internet fraud. Cyber crimes when devising new products and pose a new set of risks which call for sales strategies aimed at underserved product innovation and underwriting segments of the market. skills to ensure that insurance carriers can profitably fulfill the growing need 6. Increase in cyber crime for protection against these types of losses. Cyber attacks and malicious activity continue to spread, and neither the economic recession nor geographic Figure 20. Complaints received by the US Internet Crime Complaint Center location has slowed cyber criminals. Cyber crime encompasses a host of 2009 336.66 crimes ranging from the non-delivery of merchandise after payment, 2008 275.28 advanced fee fraud, identity theft, 2007 206.88 credit card fraud, spam and the spread of computer viruses. 2006 207.49

2005 231.49 Internet penetration around the world continues to increase, and as developing 2004 207.45 countries gain broadband access, cyber criminals have more targets. 2003 124.52 Attacks have evolved from simple 2002 75.06 scams to highly sophisticated campaigns targeting some of the 2001 50.41 world’s largest corporations and 2000 16.84 government entities. In addition, the Internet is an international medium Source: Internet Crime Report 2009, US Bureau of Justice Assistance that lacks international law enforcement procedures and cooperation, which slows efforts to fight cyber crime on a global scale. The annual cost of identity fraud to the UK economy is estimated to be £1.2 billion (approximately $2 billion), while the cost of online banking fraud in the United Kingdom was nearly £60 million (approximately $97 million) in 2009 after a sharp rise in the number of criminals using malware to harvest

23 Changes in consumer behavior

There are signs of fundamental Figure 21. The Internet will grow faster than any other channel in all of the changes in consumer behavior, a surveyed markets factor which will affect all insurers. The proportion of insurance purchases/renewals online via insurers’ websites The accelerating shift of demographic and aggregators will increase structures and the rapid development of online and mobile technologies Question: How do you expect to purchase or renew insurance in the next 12 months? are among the major forces driving Insurance agent 49% changes in consumption patterns worldwide. On top of this, the recent Online (insurer’s website/aggregator) 43% financial market turmoil impacted the way consumers perceive their financial Bank 27% services providers. Insurance broker 18% Loyalty on the decline Insurance company telephone service 16% Recent Accenture research13 confirms Retailer 7% that customers are increasingly dis- Base size = Respondents planning to purchase or renew insurance product in the next 12 months loyal to their insurance providers. Only one out of two consumers who intend to purchase insurance ‘in the next 12 Channel behavior by country months’ is planning to purchase from Question: How do you expect to purchase or renew insurance in the next 12 months? his or her existing provider. Clearly, UK France Italy Germany Spain Brazil customer retention will be a major Insurance agent 17% 67% 76% 48% 64% 57% challenge for insurers in the years ahead. 30% 75% 80% 75% 69% 56% Online (insurer’s 70% 21% 38% 46% 33% 19% website/ 66% 13% 27% 30% 24% 13% Clear channel preferences aggregator) The online channel is taking over Insurance 19% 7% 14% 10% 20% 18% company 27% 8% 11% 9% 22% 20% as consumers increasingly consider telephone purchasing policies via insurers’ service Insurance broker 14% 8% 17% 21% 24% 28% websites or online intermediaries. 21% 10% 16% 21% 27% 25% As revealed by the above-mentioned Bank 14% 34% 20% 9% 34% 54% Accenture study, 43 percent of 25% 44% 22% 14% 42% 57% consumers who intend to acquire Retailer 5% 4% 9% 4% 7% 10% an insurance product in the next 12 9% 5% 8% 4% 8% 10% months plan to do it online. Numerous Internet price comparison sites and Next 12 months Previous years aggregators serve as starting points Base size = Respondents planning to purchase or renew insurance product in the next 12 months from which to hunt for the best offer. Usage of Web 2.0 applications, social Source: Accenture Multi-Channel Distribution Insurance Consumer Survey: Changing Channels (2010) networks and more mobile technologies change the way consumers interact, both with other users as well as with their service providers.

24 | The high-performance insurer of the future These technologies are creating a by a large, fragmented base of new Accenture firmly believes that winning new type of consumer that breaks consumers with low purchasing power segmentation strategies require a more the mould of the conventional middle and highly localized needs. These large holistic, detailed and expanded view class. This development is critical for populations are spread over a vast of the customer. For example, insurers insurers, because the middle class geographic area characterized by cultural must incorporate value assessments represents their most important target barriers and marked differences in such as cost-to-service and cost-to- market given its size and financial clout. lifestyle and language. For these reasons, acquire in their assessment of customer and in contrast to most mature markets, segments in order to become more In Germany, for example, measured by branding plays a major role in emerging efficient and profitable while seizing standard income levels, more than 60 markets. In a recent survey on growth opportunities. A deep percent of the population belongs to consumer goods, global information understanding of customers’ attitudes the middle class. This large group of and media company Nielsen14 identified (for example lifestyle, interests, risk people used to be characterized by a India amongst the top three most tolerance), needs (for example buying relatively stable set of consumption brand-conscious countries in the and usage drivers, and benefits sought) attitudes and purchasing behavior world. Upwardly-mobile members of and perceptions (for example of brands across Western Europe. Insurers the emerging middle classes wish to and beliefs) can help insurers develop could thus rely on settled preferences differentiate themselves in all areas of a more individualized approach that regarding products, sales channels and life, a strong desire that also applies to supports up- and cross-selling. marketing approach. In general, service the financial services they consume. and expectation levels used to be less Successful insurance carriers will use demanding within this customer base. Multi-dimensional view of actionable segmentation to serve customers more profitably and develop All this is changing as the age pyramid consumers a necessity better products—all while building a inverts and new consumer groups Markets are developing in many loyal customer base. form. In parallel we observe a trend different directions, with each market towards individualization as traditional segment increasingly differentiated. As family structures break down and an complexity grows, insurance carriers increasing number of people remain will need to develop a multi-dimensional single. According to the European view of their customers that supports Statistics Office, every eighth European more actionable segmentation and forms a single household, which in analysis. While demographic criteria turn causes a wave of individualization are widely used among insurers, in terms of purchase patterns and successful competitors will move product preferences. beyond mere standard socio-demographic segmentation along indicators like Heterogeneity in gender, age, education level, occupation or income. Insurers need to factor in emerging markets more sophisticated information to Emerging markets with their young, tackle growth opportunities in these economically active, increasingly diverse and complex markets. Insurers well-educated and upwardly-mobile must understand customer behavior populations are increasingly attractive and preferences, aggregate information markets for companies in other parts to know the breadth of their relation- of the world. However, a marketing ships with customers, and how customer strategy and operating model developed value metrics can be used. Most for mature markets will not readily insurers still lack a single view of their ‘travel’ to new markets, where consumers customers, reducing the effectiveness are culturally, economically and of their marketing, sales and customer demographically quite distinct from service investments. consumers in mature markets. Emerging markets tend to be characterized

25 The changing face of competition

Over the last decades, sales structures 2. The rise of the aggregator of entirely new business models, in insurance tended to evolve slowly. partnerships and alliances, online The rise of aggregators (for example, However, disruptive changes in some intermediaries may also serve as www.confused.com) in the UK market markets indicate that the pace of white-label platforms for new market since 2003 marks another, more change is likely to pick up dramatically. entrants or brandassurers. Ultimately, disruptive trend with regard to the Accenture believes that there are aggregators have the potential of ways in which insurers approach their four forces that will alter the face redefining what it takes to be an customers. Acting as price comparison of competition in global markets and insurance provider. platforms and online intermediaries, drive further change. aggregators have revolutionized the distribution of insurance in the United 3. New players 1. The return of the broker Kingdom. In the private motor business Joint-venture and partnering models Brokers are among the most significant segment, they doubled their market are changing the competitive landscape sales channels in mature markets. share in 2008 to about 45 percent across the world. Insurers are teaming Based on information from the CEA, within a 12-month period. Market analyst up with large non-traditional players the European insurance and Datamonitor15 suggests aggregator- or companies from other industry federation, Accenture estimates that instigated sales could rise to 64 sectors. Information from data provider brokers account for 20 percent of the percent by 2011. BvD suggests that both mature and European insurance market—testimony emerging markets find joint ventures to the fact that selling complex products Accenture sees aggregators as catalysts attractive: 40 percent of almost 400 to commercial customers is best handled of structural change in the insurance joint ventures in the insurance sector personally by a non-exclusive expert. industry, introducing a new distribution since 2000 were established in the Far dynamic. Aggregators will pose East and Central Asian region, with However, the strong traditional position significant challenges for insurance about 30 percent in Western Europe. of brokers has been challenged over companies as price awareness will the past years by other channels. For increase and customer loyalty will Accenture believes that joint ventures example in the German life insurance decrease; the resulting customer churn will grow in importance over the next market, which is dominated by tied will impact profits. Competition will few years for two reasons. First, in agents, brokers’ share of new business sharpen as online intermediaries facilitate these markets, gaining client access strongly increased to 32 percent in the entry of new market players, who is crucial to quickly establishing a 2005 and then stagnated. In the UK will not have to invest in sales power sustainable market position. In many personal lines property and casualty to gain market share. The rise of cases well-established non-insurance market, brokers have lost most of their aggregators will require established players, such as telecommunication foothold to the direct channel. To play insurers to make substantial operational providers, can provide this access to their core strengths, brokers had to changes. For example, they will need either through their own customer take bold action. Radical consolidation, to develop their online capabilities base and sales infrastructure or through professionalization of advisory services, to grab the opportunities opened up access to their sometimes extremely increased focus on segments, customers by aggregators. large employee bases. Second, we and products, and improved leverage observe increasing brand awareness of technology have helped them Insight-driven customer segmentation among the new middle class in emerging regain much of their former market will be a prerequisite to gain and markets. Apparently, brands are seen in many countries. Overall, we believe maximize customer value in this as a symbol of entry into the middle this trend will continue, especially in dynamic market. To take a larger share class and consumers are willing to pay continental Europe, which is currently of the insurance value chain, future a premium for them—another reason still dominated by tied agents. online intermediaries may take on for insurance carriers to look for policy/document fulfillment or claims attractive non-traditional partners. services. And to seize the opportunities

26 | The high-performance insurer of the future 4. From payer to provider Spotlight: Bajaj Allianz General Insurance Company Successful insurers will increasingly In 2001 the German Allianz Group teamed Bajaj’s enormous customer base, its well- differentiate through excellence in up with the Indian wheel manufacturer known and trusted brand and its widespread customer servicing, an area that Bajaj Group to form Bajaj Allianz General network of salesrooms across rural and Insurance Company. Based on an impressive urban India, enabled Allianz to gain a head Accenture believes will change the face average annual growth rate of 34 percent start in the local insurance market. of competition. While many European over the last six years, Bajaj Allianz achieved Sources: Bajaj Allianz, Accenture Research players try to position themselves as a market-leading position in its segments. “service insurers”, the definition of what a service is remains unclear. We believe there are three levels of service competitive advantage will require the to recommend it to friends. From a customers are looking for. capability to re-invent products and financial perspective, Mondial Assistance processes constantly. controls costs through tight management The basics of the provider network of mobile A recent Accenture survey13 among Convenience nursing services, breakdown services consumers in five mature, Western Successful insurers will not limit and so on. European markets and Brazil revealed their services to paying a claim but that consumers do not rate insurers to providing a solution to the problem Accenture sees the same business logic highly when it comes to service. the customer is facing. In this way applying to successful managed-care Consumers ranked “speed of problem they not only provide a service that organizations. In times of higher public resolution”, “accessibility anytime I is superior and difficult to replicate, and private health-care spending, top- need” and “knowledgeable and responsive but can control the claims process ranked US carriers like Aetna Health or phone support” as top criteria in their better, thus lowering claims costs. Cigna focus on delivering affordable, choice of insurance provider, but only Assistance offerings and managed quality-oriented health coverage to 25 percent would recommend their health care services stand out as two retail customers. Medical and health-care current insurance provider. We can major business models that show supply to enrolled members is limited conclude that even though many future growth potential. to the managed-care organization’s insurers have reorganized their service network of health-care facilities and operations to improve quality and An impressive eight percent annual professionals. A variety of mechanisms accessibility levels, the survey average premium growth rate over the help these organizations to control costs results suggest that this level of last five years testifies to the success (for example, by providing monetary service is not adequate to create a of “peace of mind” operator Mondial incentives to persuade health-care sustainable advantage. Assistance. The global market leader in professionals to select less costly forms its segment, Mondial Assistance serves of care) while serving their customers’ Simplicity about 250 million end-customers in demand for improved quality (for Insurance is widely seen as a complex the field of automotive, travel, health example, by checking if professionals product with extensive application and life, pursuing its “helping people, meet certain standards and requirements). forms, numerous pages of hard-to- anywhere, anytime” philosophy. Acting understand terms and conditions and on the challenges posed by an aging We believe that this field offers the a claims process that is sometimes customer base, the company develops most promising opportunities for bureaucratic. Some insurers are innovative products and services in insurance carriers to actually compete accordingly positioning themselves such areas as dependency assistance on service. A key challenge for them as “the easy way to do insurance” with and chronic disease prevention. will be to decide and develop the a reduced set of products, simplified Mondial Assistance differentiates optimum means to provide this service: processes and terms and conditions, itself from traditional carriers in the through cooperation, joint ventures or and a growing number of self-service customer service process. The company through their own operations. Industry options. They target younger customer sees excellence in customer contact experience in auto repair networks segments with higher expectations of management supported by cutting- suggests that only a few larger players usability and a stronger desire not to edge technologies as critical to its will actually be able to build their own buy what they do not fully understand. success. The results speak for them- service networks to create a competitive While this is a relatively new and selves: the company’s 61 percent Net advantage. Consequently, non-insurance promising space, creating a sustainable Promoter16 score contrasts sharply service providers will become a much with the global industry average of 25 more important part of this industry. percent of consumers who are willing

27 The new normal

Given the forces that will shape the And this will only be achieved by strong correlation between GDP and insurance industry over the next five those that act decisively to respond global insurance premiums, coupled years it is easy to see that there will be to changed conditions. Insurers that with the assumption that economic no “back to normal” after the financial employ the same strategies as before, activity and demand patterns will not crisis. Much has been written already and fail to develop the flexibility and new simply return to pre-recession levels, about the so called “new normal” and capabilities that circumstances demand, constitute a clear warning signal for the implications are visible in the will be more likely to record ROEs of 5 insurers. In order to maintain positive marketplace. Growth rates have been to 10 percent. returns on equity over the next 10 slow in 2009 and 2010, and profitability years, they will need to implement levels are much lower than they We see five forces driving this major behavioral changes. once were. development. 2. Low long-term Accenture believes that the new 1. Slow gross domestic normal will be strongly characterized interest rates by significantly lower returns on equity product (GDP) growth The downward movement in interest than in the last decade—whereas The macro-economic view shows that rates is another major inhibitor of ROEs of 15 to 20 percent were not recovery scenarios will most likely both growth and profitability levels. too difficult to achieve prior to the be protracted and anemic. Both the An adverse interest and capital market financial crisis, in the next few years U-shaped and the L-shaped recovery environment will reduce investment carriers that deliver 10 to 15 percent trajectories project a much slower returns for both life and non-life will be pleased with their performance. recovery in GDP growth than the more insurers globally. Unfortunately, there optimistic V-shaped scenario. The are indications that this trend could

Figure 22. Perspectives on the new normal

Pre-Crisis Recession Recovery New Normal

2007 2008 2009 2010 2011 2012 2013

12 Extended recessionary/recovery period 'New Normal' unemployment rate decreases, stays at base Historical rate of 5.5-6.5% 6 GDP = 2.7% Non-discretionary ‘big-ticket’ 'U'–shaped spending drops recovery trajectory GDP -0 Growth 12 24 36 48 60 72 Recession 'New Normal' catalyst 'L'–shaped GDP = 1.5%-2.5% -6 Discretionary recovery spending drops trajectory

Unemployment Weakness in banks and credit markets -12 rate increases Government prevents re-stimulation of economy, stimulus and bank extending unemployment, creating lending stimulus ‘underemployment’ and forestalling recovery GDP growth Source: Accenture analysis

28 | The high-performance insurer of the future continue for some time. In addition, a Insurers elsewhere in the world have 5. Stronger role of capital market that is depressed and not escaped the implications of this intermediaries volatile will also affect the ability of trend. An abundance of new local life insurers to make new sales of regulations have been and are being Finally, independent intermediaries will unit-linked products. Because it will introduced to protect consumers and gain weight in the insurance business. be more difficult to generate investment investors, while global corporations Successful online aggregators in mature returns on policies with a capital often must comply with these regimes markets, for example, will try to grow guarantee, non-insurance retirement even if their head offices are located their share in the insurance value chain products will become more attractive far away. by providing additional customer-centric services or taking on what were once seen to customers. as core competencies for insurers, such

4. Commoditization as claims services. In the process they will 3. Increased regulation Property and casualty insurers will reduce the profits of traditional insurers. The introduction of the Sarbanes- be increasingly squeezed by price Oxley Act in the US in 2002 heralded competition that will intensify in a Impact of the new normal a tightening of regulatory restrictions low GDP growth environment. In this All these factors will shape the new on corporations that is being taken a environment, product innovation will normal for insurers, and threaten to level higher for insurers in the European be very rare and products will tend to further erode both the growth and profit Union by Solvency II. While this new become commoditized. This greater prospects of insurers globally. Their directive has been welcomed by many standardization will go hand in hand combined impact was analyzed in a EU-based carriers as imposing a set of with improved transparency and large-scale Accenture study17 conducted standards that will ultimately benefit sharpened price awareness, especially in a leading Western European country the industry, it is also acknowledged in personal lines. toward the end of 2010, and validated that it is likely to reduce their return by industry leaders in the country. The on equity, in the short term, by key findings were captured in a set of approximately 2 percentage points. four possible scenarios for the insurance industry over the next decade (Figure 23).

Figure 23. Four scenarios for the future of insurance

• Downward price pressure due to • Consumers value personal product commoditization advice and customized products Main • Growth due to a booming economy • Market driven by economic indicators up growth (GDP 2.5% to 7.5% 4.5% 5.1% 3%, financial 6.0% market B C increase, state debt under ROE: Non-life Life ROE: Non-life Life control). • Price war to sell commodity products • Demand for innovative and • Low growth due to stagnant market customized solutions to meet customers’ real needs at the right price • Sluggish economy creates A D budget constraints Slow market Macro-economic axis growth (GDP around 1.3%, financial 4.7% 4.6% market down, 1.0% harsh reforms to control debt). -1.1% ROE: Non-life Life ROE: Non-life Life Forecast market size

Consumer behavior axis

Insurance as a standardized, Insurance as a value-added product; non-differentiated product. customer seeks advice from insurer.

Source: The Western European Insurance Market 2020, Accenture November 2010

29 Two key variables were examined for will remain and the industrialization of This means that most insurers face a the scenarios. The first is the expected insurance processes will be essential similar imperative in the years ahead: buoyancy of the economy, which to address the need for low-cost, to fundamentally transform their cost is recognized as a major influencer standardized products. structure, not only to minimize the of premium growth. The other is likely decline of their ROE but in fact consumer preference for less costly, Even in scenario C, growth rates to remain viable—if not actually to commoditized products as opposed to will be lower than the industry is achieve profitable growth—in the face value-added personalized products and accustomed to: 2.7 percent, 5.0 of intensifying price competition. services. A shift along this continuum percent and 4.8 percent for P&C, has had a major impact on the retail H&PP and life carriers respectively. It is also clear that, given the rapidly- industry over the past decade, changing ROEs will be under pressure from the changing business, economic and the mix of products sold, raising price high cost of providing customized political landscape, the new normal competition and the need for promotion, service: 6.0 percent for non-life insurers is a moving target. Now, more than and slashing profit margins in half. and 7.5 percent for life insurers. ever, high performance is not a state Accenture’s survey indicates this trend to be reached, but a way of life. In fact, may prove to be as influential in the Scenario D is expected to make up a Accenture High Performance Business insurance industry. significant portion of the market of the research in the insurance industry future, and an expanding one as new during 2008 and 2009 showed that According to the survey, scenario A is Generation Y customers, accustomed many high performers did not keep likely to account for the bulk of the to social networking and its ability their titles across both years. We can market in the forthcoming years. Mac- to personalize interactions, grow in conclude that this churn in the leaders’ roeconomic forecasts in the mid-term number. This segment is likely to be group in insurance will continue. High- envisage little if any rise in insurance characterized by micro-segmentation performance insurers will have to activity. Compound annual growth and complex, costly products— become adept at identifying and gauging rates (CAGRs) are expected to decline customers will be creating their the forces shaping the industry, and sharply when the average for the past own personalized cover through a constantly adapting to a new normal decade is compared with the next: portfolio of temporary guarantees. that is perpetually in flux. from 4.0 percent to 1.2 percent for CAGRs over the next 10 years will be P&C insurers, from 6.3 percent to 3.6 relatively low (1.9 percent, 4.3 percent High performance thus becomes harder percent for H&PP carriers and from 6.4 and 0.5 percent for P&C, H&PP and life to define, and no longer only means percent to 0.5 percent for life insurers. carriers respectively) and the average operational excellence, or distribution The ROE for life companies is projected ROEs will be approximately half of effectiveness, or differentiation in the to drop to 1.0 percent, and for non-life their current levels: 4.7 percent for market. Rather, it becomes the shifting companies to -1.1 percent. The market non-life insurers and 4.6 percent for balance between a number of factors, will be characterized by price wars and life companies. including growth and profitability, structurally declining profitability. focus and diversification, simplification To avoid a decline in ROE, and sophistication. More than ever, The sizes of the grids for scenarios B high performance will depend on and C reflect the pessimism regarding high performers will need agility and flexibility. the prospect of a strong and imminent agility and flexibility economic recovery. In the former, the While these findings are specific to the CAGRs are still projected to decline, Western European insurance market, but not as sharply as in scenario A: many of the most influential trends to 1.9 percent, 4.3 percent and 4.8 and market conditions that have percent for P&C, H&PP and life carriers shaped the four scenarios are common, respectively. ROEs are likely to average to a greater or lesser degree, to most 4.5 percent for non-life companies developed markets. While the data may and 5.1 percent for life insurers. While differ, the broad direction and major the demand for insurance will grow characteristics that define the new under these conditions, price pressure normal are likely to be similar.

30 | The high-performance insurer of the future The high-performance insurer of the future

Market-related requirements In response to the financial crisis, the focus on sales and distribution for high performance many insurance companies have we believe that, post-crisis, insurance reverted to drastic cost-cutting, but companies in mature markets should At the beginning of this report we argued it will take more than this to stay move beyond mere cost-cutting to that there is not only a significant successful in highly saturated and accelerate all industrialization efforts. potential for growth in emerging commoditized mature markets. We Enter the age of Industrialization markets but also in certain segments believe that the ability to optimize 2.0, characterized by a relentless of mature markets. However, creating and industrialize the insurance value drive to reduce complexity, cultivate a presence in each of the identified chain will be key to high performance agile organizations and transform to high-growth spaces will not on its in industrial markets. In particular, the lean operations. own be sufficient to become a high optimization and professionalization performer—each market will require of sales and distribution will lead In emerging markets, the emphasis will a specific approach. In short, high the quest for growth. Taking sales fall on innovation and simplification performers will have to balance effectiveness to the next level through along the insurance value chain. Owing growth and profitability while taking the professionalization of the sales to the unique market dynamics of the into account the needs of each of the process will be decisive in capturing emerging economies we believe that markets in which they operate. the high-potential growth segments success will depend on a completely in mature markets. Counter-balancing differentiated approach.

31 Innovation will be essential to ensure Figure 24. Six business models likely to support high performance in the new normal low-cost distribution to remote areas, Business model Defining characteristics and simplification will be pivotal in designing affordable products for Industrializers 2.0 • Strong focus on mature markets. illiterate, rural and poor customers. • Explorative in emerging markets. For example, in order to sell a $3 a Value Pickers • Combined focus on mature home market with carefully selected year micro-insurance product profitably segments in emerging markets. requires lowest-cost distribution and • Agile, selective, entrepreneurial. straight-through processing at the Global conquerors • Balanced multi-polar footprint spanning mature and emerging point of sale. Products have to be so markets. simple that they can be understood • Multi-line business. by illiterate customers, sold on mobile devices and require no human inter- Emerging titans • Sole focus on emerging markets. • Strong cultural fit with chosen markets. vention to process, issue and service. • Limited or no presence in mature markets. Insurers unable to shed the dead weight of old-world insurance paradigms will Risk masters • Expert and niche play. not be able to compete in a market • Global presence with a niche focus on selected risks. requiring completely different products, Brokers 2.0 • Internet-based brokers with a strong focus on price comparison. prices and service models. • Specialization of value chain with sole focus on distribution and sales. Business models for high- performance insurance While we believe that high performers offers and, more importantly, how it So how should insurance carriers are most likely to use one of these positions itself and competes. best exploit new growth segments? six models, there is no guarantee Is merely expanding geographically that other models will not produce Operating model and venturing into new markets the high performers. The operating model describes the way silver bullet? Is it necessary to have the company operates along the value one foot in mature markets and the On the other hand, these business chain. This encompasses the organization, other in emerging markets to be models do not automatically generate processes, technology and people. successful over the next five years? high performers. Accenture High Performance Business research has Defining capabilities The number of strategic combinations revealed that the business model alone The defining capabilities describe what in terms of geographical span is myriad. is not enough; the operating model, a company is really good at and what We do not believe that creating a large defining capabilities and governance distinguishes it from its competitors. geographical footprint spanning mature must also be rigorously aligned to These are capabilities that are part of and emerging markets is the only way enable high performance. Each of these the DNA of the company: they are achieve growth, nor will blindly dimensions must be integrated into our widespread in the organization, venturing into emerging markets discussion of the high-performance repeatedly proven, and built, developed bring salvation. insurers of the future. and sustained on purpose.

An important first step in developing a Before we go through the different Governance business models in more detail we strategy to grow profitably in the next Governance is about how the company will provide a brief definition of these five years is to decide on a business is managed (whether centrally, regionally, dimensions: model which describes the strategic locally or in some combination). approach and targeted markets, Governance also includes the key geographies and segments. Accenture Business model performance indicators by which the identified six business models representing The business model describes the management steers the organization. different strategic and geographic markets and lines of business in which We will now have a closer look at the combinations which, we believe, an insurer operates, the services it business models which we believe will will be more likely than others to produce the high-performance insurers enable high performance in the short- of the future. to medium-term future.

32 | The high-performance insurer of the future Industrializers 2.0 models of Industrializers 2.0 encompass of the commonalities between their all aspects of the insurance value chain businesses in different countries, and Business model and strategy and multiple distribution channels. harmonize wherever possible. The only Industrializers 2.0 have a strong focus core insurance processes which would on their home base in mature markets. In the past, Industrializers focused require this proximity are distribution They create profitable growth by on the back office and IT; now they and, to some extent, customer service, continuously optimizing their business are applying the same Industrializer product development and underwriting. and operating models to fully leverage principles to the front end. They reduce All other core insurance processes such the remaining growth opportunities the complexity of their product range as policy administration and services, in their home markets. They mostly significantly by understanding the product development and claims are provide all lines of business through full costs of complexity, abandoning relentlessly industrialized and shared all of the important sales channels. In low-volume and low-margin products either across the whole group or addition they have a strong focus on and building a new range of modular regionally if that makes more sense. service, expanding their model with products which can be configured at Many of the larger European carriers additional services in claims either the point of sale according to individual have consolidated themselves with their own offerings or through customer needs. They use technology regionally, many of them in Ireland. cooperation with other service providers. to reduce time to market through centralized product configuration and Processes are simplified, standardized Industrializers have already successfully pricing engines, as well as Web-based and automated where possible. optimized much of their business, notably sales and agency systems. Customers are offered increased operations (policy administration, access and availability through front claims and underwriting) and IT. They Their underwriting approach is highly offices specialized in dealing with are now turning their attention to the analytical, using data and deep insight the most frequent requests for policy marketing and distribution space, using into customer behavior, risk profiles, administration and first notice of loss. segmentation, analytics, technology claims history and predictive modeling. Industrializers 2.0 use sourcing as and process standardization to move They focus strongly on value as opposed an active means to create even more insurance sales from an art to a science. to volume, and carefully execute synergies and critical mass for cost We believe that this characteristic will their explicit underwriting strategy benefits. Repetitive non-qualified be pivotal for enabling high performance which is based on highly professional processes such as scanning and indexing with this business model. risk management. are sourced out to service providers to further enhance profitability. Insurers that make the most of the In marketing and distribution they go Industrializer 2.0 model also explore far beyond the traditional approaches. Non-core insurance processes such as opportunities in emerging markets … Their segmentation and marketing HR, finance and accounting are either but cautiously. approach is highly data- and analytics- shared or sourced out to third-party driven, strongly linked to product service providers. This business model would be most development. They use digital marketing suitable to multi-line insurers with a extensively across all sales channels, The organization is skills-based rather turnover of between $15 billion and which they have integrated to provide than location-based. Instead of $50 billion. multiple ways to interact with customers replicating functions at each location, in sales and service situations. Their similar processes are centralized Operating model sales force is well trained with common and administered by employees with Industrializers 2.0 build operating processes for acquisition, advice and appropriate skill and compensation models that allow them to take their service. Sales people are strongly levels. For example, low-skilled current strong positions in mature supported by technology, with analytics employees are used to process simple, markets to the next level through tools for campaigns, customer acquisition repetitive tasks within a centrally- optimization and industrialization. and servicing. based service center serving multiple Their operating models are therefore locations and regions. Shared service based on principles such as Insurers that excel at the Industrializer 2.0 centers use team-based organizations harmonization, standardization, model only operate on a local level where which share joint responsibility for automation, management transparency, proximity to customers is a necessary the volume of work and which are outsourcing where practical, and requirement for selling business. They of comparable size to allow bench- continuous improvement. The operating have a very precise and strategic view marking and transparency in terms of efficiency.

33 Technology is based on a common The functional counterparts in each choices between group and local platform with standard components country are more focused on day-to- benefits. They acknowledge the fact of for all parts of the value chain, except day operations and implementation local differences, understand their root for distribution. Industrializers 2.0 see with curtailed decision-making powers. causes, align business models where distribution as a key success factor favorable, but know when to stop. They in disparate markets and cultivate a As a consequence the local senior view cost synergies as only one part strong awareness for local differences management consists of operators of the equation and also take account that are decisive for a market. rather than classical managers of an of the potential value of adapting to independent insurance company. The local requirements. However, they Their application development and only exception is at the front end, in relentlessly measure the results of this maintenance is either shared or marketing and sales, where Industrializers equation and change their approach central, and in many cases offshored 2.0 grant their local branches a higher if they do not realize these results. For or outsourced to a few strategic degree of decision-making in order to them, entrepreneurial autonomy is not providers. The same holds true for allow sufficient agility in responding to valuable in itself but something that is their infrastructure, which is highly the requirements of the local market. necessary only in certain situations for consolidated and outsourced specific roles. where suitable. Decisive capabilities Apart from the host of capabilities 3. Excellence in marketing On the other hand, Industrializers 2.0 which are in general necessary for and distribution can use a significant part of their IT high performance, we believe there are The most important capability of budgets for technology innovations three capabilities which are absolutely Industrializers 2.0 is their ability to that help them optimize their operating decisive for insurers that derive the professionalize the full process from model and processes. They assimilate greatest benefit from the model: segmentation to distribution and sales. new technology quickly, pilot it rapidly They view this process as a science in small areas, adapt it to their needs, 1. Excellence in operations rather than an art, and are best in class and roll it out consistently. Industrializers 2.0 will have the most in this field. sophisticated business model. They are Overall, Industrializers 2.0 have a excellent managers of complexity, with Accenture defines the “science” of sales holistic view of the value chain and a deep knowledge and understanding as the use of analytics to complement regard industrialization as an end-to- of the metrics that matter. They the instincts, judgment and experience end approach. measure all aspects of the process, of sales teams, enabling more effective understand how to influence costs fact-based decisions. The most common Governance and are value-obsessed. They align uses of sales analytics include mining Rigorous management is at the operating goals with individual targets of prospect databases and providing heart of the governance model for and incentives and they seek, attract agents with analytically-driven customer Industrializers 2.0. A single, central and retain the people who excel at segmentation schemes. We are authority manages the business through this approach. They see continuous convinced that the segmentation a cascade of well-defined business improvement as a way of doing things schemes currently used by insurers metrics. Metrics and performance and increasingly introduce innovations are not sophisticated enough to indicators are strong management from outside the industry, sometimes capture the heterogeneity of consumer tools and are used daily, and where through senior hires coming from the needs. To win as an Industrializer 2.0 possible on a real-time basis, to manufacturing industry. in highly saturated and commoditized monitor and improve industrialized markets, insurers will need to optimize processes continuously. 2. Excellence in business architecture analytical capabilities and make Creating cross-border operating models actionable insights available to their Industrializers 2.0 use a branch model that create value is one of the most sales forces. to manage their businesses. Key functions challenging tasks in the insurance like operations, claims, IT, HR and industry. Many companies have Industrializers 2.0 will also be strong in finance are based at group or regional moved in that direction, but few have a number of additional capabilities, but level where the strategic directions realized the value they were seeking. we believe that these three will make in these functions, as well as the Industrializers 2.0 excel at this because the difference. In short, while they will key investments, process models and they make deliberate and transparent be very strong in strategy they will be technology components, are decided. superb managers.

34 | The high-performance insurer of the future Value Pickers identify and execute on high-value can find difficult. Successful Value opportunities in new markets. This is Pickers address this challenge directly Business model and strategy the first and foremost objective of a and tend to move towards a hub-and- Value Pickers have a strong position Value Picker; creating synergies on a spoke model. However, such a change in their mature home markets and group level is second priority. is an extremely fragile and time- in selected segments in emerging consuming process. high-growth markets. They are the Value Pickers differentiate between perfect portfolio optimizers, leveraging the operating model used in their 2. Franchise their strong position in a mature home market and in emerging Accenture believes that a franchise market, mostly in their home country, markets. In their home markets, Value approach might produce superior results to quickly scan, select and conquer Pickers follow the same approach as for Value Pickers, as suggested by some high-growth opportunities in emerging Industrializers 2.0, placing a similar examples in the banking industry, such markets. Agile, selective and emphasis on standardization, automation, as Banco Santander. Successful Value entrepreneurial, they invest capital complexity reduction, professionalization Pickers will create re-usable and in those markets and products with of marketing and sales and so on. modular franchise models which the highest return and shortest Because this model is used in only the consist of common products, processes payback periods. home market, Value Pickers can be and platforms which can rapidly be even more focused on optimization deployed and configured to local They very specifically choose which than Industrializers 2.0. needs. Using this model, Value Pickers regions, lines of business and channels will only choose markets in which their they want to target, and rigorously focus Outside of their home markets agility franchise model can be successful and on establishing a leading position in is key for the operating models of they will not use all parts of the model their chosen segments as rapidly as Value Pickers. This can be achieved in all countries. Thus the attractiveness possible. They manage to attain top through two different models. of any particular market is determined market positions in all of the segments by how well the model is matched to in which they operate. 1. Autonomy it. Through these franchises the Value Some high-performance insurers have Picker will be able to attain the level of Value Pickers are not interested in used this model in the past. There local authenticity necessary for success building global presence for its own are two variants: either acquiring a whilst re-using the brand and modular sake, focusing strictly on generating local company, or using a greenfields operating model building blocks of the value in markets and regions which approach, often with little more than mother company. they deem to be of high potential. capital, some staff, and some products These markets are not necessarily and processes provided by the parent This franchise model is to some extent chosen using an obvious strategic company. The new company was similar to the cross-border model we logic. The link between them is that motivated by a strong desire to build described for the Industrializers 2.0. each market is attractive in terms up its own business with as little However, it is much more modular. In of growth rates, entry barriers and interference from the group as possible, the cross-border model, the operating competition; is receptive to the Value and relied heavily on local entrepreneurs. blueprint is either wholly or partly Picker’s specific capabilities and offerings; This model was quite successful in the rolled out in each country, while the and offers an opportunity to achieve a last decade, but its strong growth rates franchise model comprises several market-leading position quickly. have slowed considerably in recent alternatives depending on the lines of years. Slower growth rates mean business, the sales channels, the types This business model is most suitable that such operations must come up of products or the market’s level of for insurance companies (both life and with different ways to deliver value maturity. These modules can be combined non-life) of medium size (less than $50 to the overall group, often through to produce a model that is suited to a billion in annual premium volume). identifying and exploiting group-wide particular market. synergies. This approach represents Operating model something of a departure from the As for the Industrializers 2.0 group, The operating model of a Value traditional autonomy, and requires technology plays an important role Picker should enable the agility and a radical change in governance— for the Value Pickers. However, their entrepreneurship necessary to rapidly something that local management approach is less centralized. In the

35 home market, the IT function is fully Decisive capabilities to manage their portfolios and make centralized to create efficient and Having a geographical footprint across investment or divestment decisions. effective IT operations and systems. mature and emerging markets, Value Furthermore, they have built up a In their growth markets, Value Pickers Pickers must strike a balance between risk management capability that they use several platforms depending on the the optimization and industrialization leverage across all group companies. regions and markets they operate in. required in their mature home markets When it comes to delivery, Value Pickers and the innovation and simplification 4. Excellence in people management leverage their presence in markets that required for success in emerging markets. Running a dispersed portfolio in are also attractive for cost-efficient different countries requires the right offshore delivery. In terms of innovation, In particular, we believe Value Pickers type of management in the right Value Pickers use their growth markets that excel in the following capabilities places, especially under the franchise as pilot areas for new technology or are more likely to achieve high model. Value Pickers attract and retain new applications of existing technology performance in emerging markets: top local management for these roles and re-import successful elements into and manage to find the fragile balance their home market. 1. Excellence in strategic planning between autonomy and entrepreneurship Value Pickers are very good managers on the one hand and group benefits If markets are carefully selected, we and excellent strategists. They have a on the other. They lead their local believe this model will deliver better comprehensive and rigorous view of the management by incentives rather results than the autonomous approach markets in which they are interested. than directives, but react quickly when used in the past. Their portfolio analysis is very fact- targets are not met. They create a based and they have clearly defined culture of smart entrepreneurship and Governance thresholds based on value rather than visibly reward success. Value Pickers will choose a governance volume. These principles determine model that matches their operating whether a market is attractive or not, These four capabilities offer Value model. In their home markets they are and they will walk away from markets Pickers the most likely route to organized centrally, with strong directives that do not meet their criteria. achieving high performance. relating to processes, compliance and key performance indicators. 2. Excellence in mergers, Global Conquerors acquisitions and alliances Business model In their growth markets Value Pickers Value Pickers must excel in the full Global Conquerors have global reach, apply a different governance approach, gamut of M&A capabilities, from cover multiple geographies and engage leaving much more decision-making acquisition strategy, target screening in multiple lines of business. Although power to the local operations. and due diligence to post-merger this model is not completely new we Accordingly, strategic key performance integration. Accenture firmly believes believe it will continue to be successful. indicators, such as growth rates, market that Value Pickers can only be successful The Global Conqueror business model share development and profitability, if they focus on value and performance is complex, and requires operating are preferred. and not only on achieving a presence models and capabilities able to cope in an emerging market. Identifying the with multiple lines of business in In terms of this model, local companies value and growth opportunities, and multiple geographies. are connected to the parent group not then following through with an agile by directives but rather by their re- merger, acquisition or partnership will This business model is suitable only use of group assets. In this way, they set the scene for high performance in for large corporations with a premium maintain the entrepreneurial attitude these markets. that is pivotal for gaining market share volume that exceeds $50 billion. We believe that maybe one or two insurance and quickly achieving a leading position. 3. Excellence in risk management However, Value Pickers that use the companies will be able to become high Since they operate a portfolio of franchise model have zero tolerance performers using this business model. dispersed businesses in several regions, for deviations from the model without risk management is a key capability for very good and fact-based reasons. The growth dynamics for a Global Value Pickers. They deeply understand Conqueror differ from those of the risks associated with their markets other models. To sustain their large as well as the risks they underwrite in organizations they need to generate these markets. They use this capability substantial growth, but their size

36 | The high-performance insurer of the future makes it difficult to act rapidly and least to produce inferior performance decision-making power in order to nimbly. Their challenge lies in attaining compared to other models. However, balance central and regional synergies solid, sustainable and profitable the sheer spread over multiple regions with local requirements. They operate growth against a backdrop of scale and segments offers the chance of under a complex set of local market and complexity. stability through diversification in initiatives, regional programs and volatile global markets. global direction-setting. They are not Operating model dogmatic about centralization, delegating Owing to their complexity and scale, Governance to regions and local operations what we believe Global Conquerors can Finding the right balance between cannot be harmonized or does not only be successful by creating multiple central and regional models and create sufficient cross-border synergies. hub-and-spoke operating models. Re-use local market requirements is a huge and replication are central principles challenge—especially when one is 2. Excellence in asset development, in this operating model. They enter targeting all major and emerging and asset and resource allocation new markets using tried-and-trusted insurance markets. In order to master Global Conquerors benefit from operating models and processes, making this challenge Global Conquerors their vast pool of resources and their enhancements and adjustments only develop a multi-tiered governance model. financial ability to build assets that where absolutely necessary. can be re-used as often as possible. Strategic global objectives are set They ensure they have a transparent At the core of this network there is a centrally; these include all decisions view of their key resources (capital and central hub with central operations for relating to risk management, asset people), local needs and the return on a limited number of functions. These management and strategic IT. These these resources. Hence, they deliberately will include risk management, asset objectives are then cascaded down to and continuously redirect capital and management, some IT functions such regional governance structures where skills to the part of the organization as architecture, and the group level of the key decision-making takes place. where they can generate the most the remaining functions such as HR, This includes decisions relating to value. Furthermore, they constantly finance and controlling. Attached to market entries and expansion, all develop re-usable assets (platforms, this central hub are regional hubs, major investment decisions, the design products, technology tools, process each designed for the region the and roll-out of target regional operating models) and deploy them across the company operates in. They constitute models or common platforms as well entire organization to maximize value. the group level for local companies, as regional capital allocation. Global Conquerors must constantly encompassing all major functions and work to deal with the challenges posed decisions for that region. The local The local companies focus on day-to- by their sheer scale. Only a very few companies themselves will operate day operations. Global Conquerors will demonstrate under the branch model or under superior performance over time to the franchise model according to the Decisive capabilities become high performers. markets in which they operate. With their broad regional spread and their multiple operating models, Global Emerging Titans Global Conquerors put a lot of emphasis Conquerors must excel in a number Business model on asset creation and re-use. Given of the distinctive capabilities already their size, their growth ambition in described above in the sections on Emerging Titans are large-scale insurers absolute terms is much higher than Industrializers 2.0 and Value Pickers. that are solely focused on their emerging that of any other player. Hence, they However, we believe there are two home markets. They use their position need to be fast but efficient, which quite distinctive capabilities essential as incumbent to develop a business can only be achieved through common for Global Conquerors to master: model that fully exploits the growth models and approaches. They have opportunities in these markets. They global delivery centers exploiting the 1. Excellence in governance are growing fast in concert with their markets, and operate on a far larger benefits of labor arbitrage, they use Global Conquerors have to overcome scale than traditional players in shared services wherever possible, and the challenges imposed by the breadth the mature insurance markets. They they roll out their models forcefully. of their organization, balancing global, are dominant in their markets and Overall, the business model of Global regional and local demands. They leverage their installed basis primarily Conquerors is extremely complex and constantly revisit their governance in distribution. offers many opportunities to fail, or at models, adapting the allocation of

37 At least for the immediate future they for their expansion into other, more 1. Excellence in large-scale have limited or no presence in mature mature markets—something we are management markets. However, looking at other already seeing in other industries such Emerging Titans know how to operate cross-industry examples, we believe as consumer electronics and automobiles. at scale. They have the ability to develop that Emerging Titans are just beginning large-scale models and the rigor to to understand their competitive power Emerging Titans fully exploit the value implement and manage them. This in the global market, and expect of technology, and often benefit from includes the capability to constantly them in due course to become serious a smaller legacy in their IT operations. measure the relevant key performance competitors in other markets. They have a nearly scientific approach indicators as well as the ability and to doing business, using data extensively willingness to enforce compliance and This model would suit large corporations to improve operations and to better instantly deal with deviations. Emerging with a premium volume that exceeds understand customer needs. Titans are obsessed by the specific way $50 billion. “it has to be done”. While the operating models of Emerging Operating model Titans may appear quite simple, 2. Excellence in simplicity Emerging Titans have a centralized especially compared to the models Emerging Titans always find the easiest operating model, which they operate of Global Conquerors, they are in fact way to do business. Without a legacy at scale with a high degree of highly sophisticated when it comes to of complex products, processes and standardization and automation. managing data and using technology systems they master simplicity out This approach starts at distribution, to create competitive advantage. of the sheer need for low costs. This which is often based on leveraging includes a deep understanding of mobile channels and the Internet or Governance customer needs, product and process creating innovative and simple ways Emerging Titans are managed centrally design, as well as the extensive use to activate a broad base of part-time and top-down. In line with the sur- of technology. sales representatives in rural areas. The rounding culture, they are often very product range is simple, and easy to hierarchical and sometimes managed 3. Excellence in learning understand and sell. in a way that is almost militaristic. Emerging Titans are fast learners. They do not shy away from looking at other Likewise, their processes are very Despite this central, hierarchical places for new ideas, best practices or simple, standardized, highly automated organizational structure, these different approaches. They take what is and cost-efficient to adapt to the organizations are far from conservative. most suitable for them and adapt it to significantly lower average premium They contain dedicated groups that their needs. volume in these markets. Therefore constantly focus on innovation. These they use technology extensively either groups continuously analyze business 4. Excellence in low-cost distribution to allow for straight-through processing and operating models, look beyond Insurance distribution in mature from the point of sale onwards, or to their company or even industry to learn markets can be quite expensive— enable self-service. best practices and incorporate them something that emerging markets into their organizations, and keep a cannot tolerate. Emerging Titans have Their organization is hierarchical with close eye on technology trends and their always operated under these conditions a higher number of reporting levels application in business environments. and have developed a mastery of than at Western companies due to distributing at low cost. This includes the size of the organization. The Decisive capabilities electronic channels like the Internet organizational model is developed Despite the relative simplicity of their and mobile devices, but also large-scale top-down and allows only a little leeway operating models, we believe that part-time sales agent networks to in adapting to specific requirements. Emerging Titans excel in a number operate in rural areas. Despite the size of decisive capabilities that allow them of such an organization, Emerging Titans Low labor costs are leveraged to offer to become High Performers. Five of have managed to keep complexity— products and service more cheaply these capabilities are decisive in the and thus costs—to a minimum. than foreign competitors. These low quest for Emerging Titans to achieve costs also provide an important advantage high performance:

38 | The high-performance insurer of the future 5. Excellence in technology Operating model In addition, Risk Masters focus their Emerging Titans are strongly interested To be a high-performance Risk Master operating model on those areas that in new technologies and how they means, to a large extent, leveraging actually create value for their businesses. can improve their business. They spend specialized skills on a global level. We Administrative tasks, repetitive tasks a higher portion of their budget on therefore believe that Risk Masters need relating to data collection and IT innovation, experiment and pilot a a truly global operating model, in infrastructure do not add value and lot, and implement a new technology which all major operations are highly are consequently outsourced to quickly once they have taken the harmonized and standardized. Wherever specialist providers. decision to use it broadly. possible these operations will also be centralized. This will be true for most Governance Emerging Titans are one of the most of the functions that are not client- In line with the operating model, the fascinating potential high performers facing. Sales, underwriting and claims, governance model of Risk Masters is to watch. Their focus as well as their however, will be local because of the truly global. The company is structured size provides vast opportunities for required proximity to brokers and clients and managed according to specific further expansion. Once this happens and the need to accommodate local types of risk and key accounts rather they will become serious competitors conditions. Key account management, than according to local entities. Hence, for the incumbents in mature markets, however, will be increasingly global, most decisions are taken at the highest addressing a specific, price-sensitive reflecting the structure of many of the level because they are applicable to market segment with a highly- larger clients that Risks Masters serve. the total organization. competitive offering. IT automation plays less of a role Decisive capabilities Risk Masters than it does in other business models. For Risk Masters, four capabilities will Products and policy administration be decisive for success: Business model are highly tailored and the need for As we have described above, we large-scale IT support to increase the 1. Excellence in underwriting believe that big catastrophic events efficiency of repetitive processes is not Given the types and volume of risks will become more frequent and more as pronounced as in the other models. they will have to deal with globally, intensive in their effects. In addition, Risk Masters do use technology for underwriting and risk management are we expect that investments in large- process support in underwriting and clearly vital capabilities for specialty scale renewable energy will continue. for decision support on complex risks. insurers. However, Risk Masters, with We therefore believe that the global High performers in this field have a their specialized understanding of all demand for carriers specializing in scientific approach to underwriting dimensions of risk, have raised the bar these types of risks will increase. We that requires considerable data and in this area. Their understanding goes call these players Risk Masters. analytic capabilities. For this process beyond potential damage. They use Risk Masters use the latest technology— predictive modeling, statistics and other Risk Masters are characterized by a for example, in claims prevention, data to probe the underlying drivers very high level of specialization on an where sensor technologies are used such as market conditions, regulatory international level. This business model for preventive maintenance. requirements and long-term implications. can only be successful on a global scale. As specialists, they can call on a rich Risk Masters have developed a skills- pool of data to make their analyses There is demand for the services based model that attracts experts who more accurate. that Risk Masters offer in industrial receive the support they need to use markets, and when the right operating their skills and their experience to 2. Excellence in risk management model is used, we believe a small best effect. Standard processes and Underwriting these risks requires number of these insurers could achieve technology are used to generate a solid capital base and the right high performance. predictable results in similar situations allocation of capital to risk. Risk Masters while at the same time focusing the have developed highly sophisticated expert capacity on evaluation rather risk management systems which than on activities that add less value. provide real-time transparency of their actual risk (as opposed to

39 the risk estimated at the time of Both types of broker focus mainly on Governance underwriting), their allocated capital distribution, positioning themselves Because of their small number of as well as their profitability. This allows as independent sources of advice and employees and their focus on a small them to constantly model their position price comparison for an increasing number of countries, governance and to adapt it when necessary. number of customers who value models are relatively simple. IT and independence and are used to gathering key processes are organized centrally, 3. Excellence in people management information and comparing products whereas all marketing decisions are Risk Masters depend heavily on highly and prices using electronic channels. taken and implemented locally. Decision skilled personnel in practically all processes are short and agile and company functions. Therefore, they Operating model implementation starts almost instantly. have developed sophisticated models Brokers 2.0 generally use local operating The management is usually a mixture to recruit, train, further develop and models, focusing on distribution and of people with an insurance background incentivize highly-skilled people. In product procurement. They have and those with Internet experience. order to deal with the increasing developed sophisticated online global scarcity of such resources, Risk processes that address customers’ Decisive capabilities Masters have developed specific pro- needs for convenience, transparency Brokers 2.0 are likely to achieve high grams to recruit undergraduates early and individuality. performance on the basis of two and train them, including sponsoring decisive capabilities: relevant post-graduate programs. They use analytics, digital marketing, mobile technology and data management 1. Excellence in technology 4. Excellence in industry knowledge extensively in order to provide a To a large extent Brokers 2.0 are To ensure their profits, Risk Masters customized user experience. In line technology companies. They use highly need to really understand the industries with successful Internet players in sophisticated applications especially in in which they underwrite. They other industries, they are obsessed customer interaction, dynamic content therefore organize themselves along with customer-centricity and constantly management and data analytics. They industry as well as risk lines in order to rethink and adapt their customer are early adopters, experiment with keep abreast of industry developments, interaction models. (We even expect new technology extensively and the regulatory environment, new that some of the classic Internet pure- improve their model regularly. manufacturing techniques and new plays will increasingly use insurance types of raw material. products as a way to leverage their 2. Excellence in customer interaction existing customer bases.) Brokers 2.0 are successful because they Thus far, no high performers have really understand what their customers Brokers 2.0 continuously expand their emerged from this business model but, want and measure what their customers model, and have moved from price given the strong growth rates expected do. Customer segmentation, customer comparison to premium collection, in the risk sector, we are confident some analytics, digital marketing and the online advice and fulfillment services will do so in the not-too-distant future. full range of Web 2.0 technologies such as first notice of loss. are extensively applied by Brokers 2.0 Brokers 2.0 in order to serve one single purpose: In terms of product procurement, they providing a customer experience Business model increasingly use their market position that is as individually tailored to the The Brokers 2.0 model encompasses to influence insurance carriers in customer’s specific needs as possible. two basic types of broker. On the one product development and pricing. hand there are traditional brokers who As they develop their own brand, use electronic channels extensively, they sometimes also venture into Success not assured either to communicate directly with white-label products. As indicated at the beginning of this customers through an aggregator chapter, these six business models model or to establish Internet-based On the wholesale side they provide the do not automatically generate high wholesale models for smaller brokers, full range of brokerage services from performers. On the contrary, some are specifically in mature markets. On price and product comparison, advice quite difficult to master and in each the other hand, there are the rising support, application fulfillment, claims case a number of companies will fail aggregators, which we described earlier. fulfillment, document administration to implement the model successfully. and client administration.

40 | The high-performance insurer of the future Figure 25. Summary of the characteristics of the six high-performance insurance models Dimension/ Business model Operating model Governance Decisive Model and strategy Capabilities Industrializers • Strongly focus on • Optimize and industrialize • Have rigorous, single • Operations 2.0 mature home market across the value chain and central management • Business architecture • Optimize position and • Expand principles to front end through well-defined • Marketing & performance in mature • Leverage analytics, digital business metrics distribution markets marketing • Use branch model with key • Move from art to science • Share or outsource non-core functions (e.g. claims, IT) at in marketing & distribution processes group or regional level space • Run skills-based organization, • Have local operations and • Are typically multi-line centralized functions management focused on insurers with premiums of • Leverage common platform with day-to-day business $15 – $50 billion end-to-end approach Value Pickers • Are portfolio optimizers • Differentiate between home and • Are organized centrally in • Strategic planning with strong position in emerging markets home markets with strong • Mergers, acquisitions mature home markets, • Optimize and industrialize directives and alliances selective in emerging across the value chain in mature • Follow more decentralized • Risk management markets home markets approach in growth markets • People management • Run their business in an • Operate agilely outside their with use of more strategic agile, selective and entre- home market with either key performance indicators preneurial way autonomy or franchise • Are typically life or non- approach life insurers with premiums less than $50 billion Global • Have global reach in mul- • Create multiple hub & spoke • Set strategic objectives on • Governance Conquerors tiple geographies and lines operating model with re-use central, global level and • Asset development of business and replication principles being cascade through and asset & resource • Strive for solid sustain- key regions allocation able and profitable growth • Run central hub with • Make key decisions on against backdrop of scale operations for limited number of regional level (e.g. M&A, and complexity functions (e.g. IT) investments) • Are typically large insurers • Build regional hubs • Have local organizations with premiums more than • Operate local companies under focused on day-to-day $50 billion branch or franchise model operations • Build global delivery centers and use shared services Emerging • Focus on their emerging • Have a centralized operating • Manage centrally and • Large-scale Titans home markets only model top-down management to exploit growth • Run their business with a high • Are highly innovative • Simplicity opportunities fully degree of standardization and • Learning • Are dominant in their automation • Low-cost distribution markets and strong in • Are sophisticated in data • Technology distribution management and technology • Are typically large insurers use with premiums more than $50 billion Risk Masters • Specialize in specific types • Skill-based employment & • Run globally and aligned • Underwriting of risk internationally operating model with key clients and specific • Risk management • Run their business as niche • Centralize operations above all types of risk • People management experts and on a global for non-client facing functions • Take decisions at the • Industry expertise scale • Tailor products and policy highest level • Focus on industrial line of administration businesses • Attract highly-skilled experts • Outsource repetitive tasks in data management and IT to specialist providers Brokers 2.0 • Position as independent • Focus mainly on local business • Have fairly simple • Technology sources of advice and price in distribution and product governance model • Customer interaction comparison to customers procurement • Organize IT and key • Operate as aggregators or • Use technology like analytics, processes centrally as traditional brokers who digital marketing, mobile • Take and implement use e-channels extensively • Continuously expand their marketing decisions locally model to offer additional • Have mixed management functions to clients with industry and Internet background

41 Furthermore, we will see companies High-performance insurers use trying to move from one model to the technology extensively as an enabler other, for example from an Industrializer High performers regard IT not as a 2.0 to a Value Picker model. support function but as an enabling function and a source of competitive We also acknowledge that there is advantage. Consequently, they invest some overlap of models, and also that in new technology and derive the our descriptions of their operating maximum value from it through selling models, their governance and their more at a lower cost. decisive capabilities are neither exhaustive nor true for all players. High-performance insurers Nonetheless, we believe that in general manage complexity these models differ significantly in High performers have a deep the four dimensions we have used, and understanding of the implications provide a useful taxonomy of the of complexity for processes, costs and possibilities open to insurance companies consumers. They develop intelligent in pursuit of high performance. models to reduce complexity by providing differentiated products Different models: based on standardized modules. common principles High-performance insurers build Despite all the differences between the agile organizations business models we are convinced that all high performers in insurance share High performers build an organization a set of common principles. Hence, and corresponding infrastructure that regardless of the model, the following are agile, allowing for fast decision list of principles can serve as a check processes, rapid deployment of new list to determine whether a company is solutions and a strong mindset for change. on track to achieve high performance. High-performance insurers are High-performance insurers pick obsessed with value their growth markets very carefully High performers are not focused on High-performance insurers take a top-line growth or cost reduction alone. conscious decision to determine their They do nothing without a strong business sources of growth, either through the case and are obsessed with increasing markets and segments they operate the value they get out of their business. in or through the way they compete in low growth markets. This analysis High-performance insurers will allow them to decide the business execute faultlessly model they will choose. They aspire to High performers understand that only rapidly achieve a top position in each faultless execution realizes the value market, and will divest if this cannot that great concepts promise. be reached quickly enough. Many of these principles have been High-performance insurers constant requirements for achieving meticulously align operating high performance in insurance—but model, governance and capabilities sticking to them is materially more to their business model difficult in today’s markets. Some are High performers do not make deceptively simple. In fact, Accenture’s compromises. They choose their work with leading insurance companies business model deliberately and over the years has shown that only a meticulously align everything else few companies are able to adhere to to it. It is this alignment, rather than all of them constantly, and so attain simply the business model, that provides high performance. the basis for achieving high performance.

42 | The high-performance insurer of the future Conclusion and outlook

The next years will be both challenging Force Conclusion and interesting for the global insurance Shifts in growth from mature to Insurance today is much too complex industry. While the sector has not been emerging markets and complicated for insurers to benefit as severely affected by the financial fully from the strong growth in emerging crisis as other financial services markets industries, insurers will have to resign themselves to a significantly lower Increase in consumption and Those who master IT will be able to return on equity while at the same development of technology create a competitive advantage time adapting to a much higher degree Increase in risk and regulation Insurers need to move from compliance of change in the coming years. to competition to benefit from the regulatory changes At the beginning of this paper, we identified five strong forces that will Changes in consumer behavior Unlike in the past, consumers will drive shape the industry. Our subsequent change in the insurance industry over the analysis suggests some conclusions coming years that insurers should ponder (see table): Changes in the competitive landscape Insurers will have to move from being payers to providers to unlock additional value from claims services, and to differentiate their services

As a consequence, insurance will company needs to determine the most The industry is still financially attractive become less attractive as an industry suitable model for itself. Ultimately, it to those players that start to adapt to and for investors than it was in past is not the model that matters as much change now. This study could serve as decades. The trends driving slower as the skill with which it is implemented. the starting point for this journey. growth and lower profitability are already visible in the marketplace. We have described these business For more information about Accenture’s Insurers that fail to respond effectively models in detail, including the High Performance Insurer of the Future to the new normal can expect, at best, corresponding operating models, study, or any of issues discussed in a return on equity of 5 to 10 percent. governance and defining capabilities. this report, contact Hendrik Jahn at Our analysis suggests that, in the worst This allows insurers to assess their [email protected]. case, insurers that do not take appropriate current position in relation to their counter-measures risk losing most of chosen model, and to identify gaps their profitability over the next years. and areas for action. However, we believe there is still a lot of value potential in the industry Insurers need to act now. They need for insurers that identify the right to make clear and deliberate choices niche and/or business model. about where their growth will come from, and then align their operating We have therefore developed six model, governance and capabilities to business models which we believe their chosen business model. Even for will lay the foundation for high today’s high performers, change will performance over the next few years. have to be significant in order to reach They are not a recipe for success, but a profitability levels attractive to both useful map to identify the areas where investors and employees. the most value can be created. Each

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2. Internationalization: A Path to High 10. World Health Organization Bulletin: 17. Accenture: The Western European Performance for Insurers in Uncertain How Safe Are The World’s Roads? Insurance Market 2020, November 2010 Times, Accenture Research, 2009 October 2009

3. United Nations: World Population 11. Diabetes Voice: How Many Millions Ageing: 1950-2050 Have Diabetes? March 2005

4. C-Questor Newsletter: Clean-Energy 12. Accenture: Solvency II – The Sector Looks for Private, Public Help, Benefits of Going Beyond Compliance, Jeffrey Ball, 9 March 2009 2008

5. Swiss Re: Islamic Insurance, 2008 13. Accenture: Changing Channels – Multichannel Insurance Distribution 6. Navigating to Win in Turbulent Consumer Survey, 2010 Insurance Markets: How High Performers Earn Superior Evaluations in Uncertain 14. Nielsen: Trends & Insights – India Times, Accenture Research, 2008 Among the Top Three Most Brand Conscious Countries in the World, 7. Forrester Research: Western March 2008 European Mobile Forecast, 2009 to 2014 15. Datamonitor: UK Insurance Aggregators 2009 8: Biz Report: Mobile Marketing, 3 June 2010

Copyright © 2011 Accenture About Accenture All rights reserved. Accenture is a global management Accenture, its logo, and consulting, technology services and High Performance Delivered outsourcing company, with approximately are trademarks of Accenture. 204,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.6 billion for the fiscal year ended Aug. 31, 2010. Its home page is www.accenture.com.