The route to success

he time has come for insurers to stop waiting for the market to grow on the back of the economy and government-led market reforms.

Winning firms need to think in terms of actively growing the market beyond its traditional boundaries and standing out from the crowd by creating genuine, sustainable differences in their businesses. So says Arjun Singh from PA Consulting, who has analysed the challenges facing the insurance industry in the UK and Europe.

One of many warnings that he puts forward is that insurance companies need to reinvent themselves. “Non-life needs to reinvent itself to renew customers’ interest and reinvigorate processes and products that are becoming increasingly tired. The key will be to think creatively, looking to improve the customer experience in such critical areas as claims management and offering ancillary services that genuinely add value. This is an imperative for non-life companies.”

He also warned that growth in the insurance sector is likely to slow. “Lower levels of claims, the low cost of capital and sound economic development have helped the European non-life market grow profits over the past couple of years, but that trend is running out of steam. Growth is expected to slow in the coming year.”

Singh listed four issues to tackle:

• Fixing the business model

• Capitalising on structural change

• Seeking new growth opportunities

• Gaining sustainable competitive advantage

“Fixing the business entails getting the basics right – increasing customer loyalty, building consumer confidence, managing risk effectively and driving productivity. If these fundamentals are not in place, then growth aspirations will go unfulfilled and any business won will be short-lived, unprofitable, or both,” says Singh.

Driving productivity

He also was frank about how negatively insurance is perceived in the UK. “Existing and potential customers mistrust the industry and consequently begrudge buying insurance. Repeated allegations of misconduct, in the UK for example, continue to damage customer confidence.”

On driving productivity Singh pointed to the fact that most large insurers have already been through a period of intensive costcutting. “But there will continue to be relentless emphasis on improving productivity by containing costs and increasing operational efficiency,” he says.

Singh also noted that managing risk across the enterprise will continue to feature near the top of the agenda for most, if not all, insurance companies.

“The single biggest challenge for European insurers will be to go beyond their traditional boundaries and increase the market's overall growth rate

Arjun Singh, PA Consulting

One reason is awareness of the potential for serious consequences from a whole range of risks that haven’t necessarily received enough combined attention.

It has been said many times before that the industry is poised for a wave of structural change, much of it propelled by regulatory and legislative initiatives.

“Over the next few years, the harmonisation of European insurance markets will encourage consolidation, while the distribution system is likely to be revamped substantially. Astute, ambitious players will achieve profitable growth by capitalising on these changes,” says Singh.

Narrowing margins, coupled with the desire to grow internationally and exploit the increasingly harmonised regulations across Europe, will doubtlessly initiate a wave of consolidation, new alliances and partnerships in the years to come.

“We have already seen M&A activity in the insurance sector. Within the broker space, we are seeing rapid consolidation in the UK, fuelled by private equity investment and broker consolidators,” he says.

Singh notes than many European insurers are facing saturated domestic markets, while there is unfulfilled demand in eastern Europe and further abroad. “International expansion may not be on every insurer’s wish list, but large European players will continue to make acquisitions in the US and Asia.”

Climate change challenge

For Singh, climate change poses both a threat and opportunity for the European insurance sector. The threat arises from the growing frequency and severity of natural catastrophes (such as flooding), which challenges standard operating assumptions that range from pricing models to exposure analysis.

“The opportunity is for insurers to develop and offer products that mitigate the effects of climate change – either actively, by offering cover against catastrophe hazards, or by altering the design of existing, relevant products. Insurers have so far been slow to react, but are now becoming more proactive in understanding and managing the risks,” he says.

The final challenge is perhaps the biggest and most difficult – but is eminently worthwhile.

“There is advantage to be won through early adoption of the measures detailed, but over time this edge will be blunted as others catch up. The alternative is to create distinct value and service propositions that in turn generate significant and sustainable competitive advantage over rival providers.

“The single biggest challenge for European insurers will be to go beyond their traditional boundaries and increase the market’s overall growth rate. The entry into the markets of non-traditional players leveraging well-known brands already puts pressure on market share and this will be exacerbated by regulatory change.”

Insurers, Singh says, will have to learn to co-operate both with rival firms and with other product or service-led organisations to grow the market

“The challenge for European insurers is to prepare for these changes – which bring opportunities, as well as risk – rather than being blind-sided by them,” says Singh.