Reinventing a business at risk

Reinventing a Business at Risk

June 2011

If the situation in France is any indication, the party’s over for the European insurance industry.

Recent Accenture research in Europe’s second-biggest insurance market shows that after 10 years of double-digit returns on equity and annual growth rates three times higher than GDP, a combination of powerful regulatory, demographic and competitive forces will make the next decade considerably tougher for France’s big insurers.

A sluggish economy and anemic population growth are already leading to saturation in some sections of the Gallic insurance market—notably in property/casualty but also in health and in personal accident and sickness. The life sector, meanwhile, which faces the likely loss of government tax incentives, is battling to maintain rapidly dwindling fee income in the face of mounting competition from new, pure-play providers whose online business models allow them to offer innovative products at significantly lower cost.

Indeed, as French consumers become increasingly value-conscious and Internet enabled—, for example, the French equivalent of the United Kingdom’s popular price-comparison site, was launched in January 2010—traditional insurers across the industry are finding it more and more difficult to compete.

How French insurers react to these challenges will offer important lessons for others striving to preserve profitability in similarly saturating mature markets well beyond the borders of France (see sidebar).

Accenture’s recent study of the French insurance market set out to investigate the likely impact on market participants as macroeconomic changes and developments in consumer behavior steadily alter the rules of the game. The study involved an exhaustive statistical analysis of some 60 relevant variables and their impact on insurers’ operating models and financial structure. It also included a more subjective exercise that sought to identify potential future shifts by examining what happened to insurers in other countries when, for example, the government withdrew from healthcare provision (see sidebar).

Four scenarios
Our investigations enabled us to develop four predictive scenarios for the industry in France, looking out to 2020.

These scenarios are not mutually exclusive. Indeed, they paint a picture of market situations that could quite conceivably coexist—an insurer implementing a low-price strategy in its property/casualty business, for example, and a customized, high-end strategy for its life business. In other words, the same hypothetical insurer could mix and match solutions across scenarios. The predominance of one scenario over another, and the impact of the transformations proposed for each scenario, will depend on the individual characteristics of each insurer.  Click to Enlarge    
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Scenario A: Price war

This scenario assumes (as a recent report for the French government has suggested) that GDP growth will be weak—hovering around 1.3 percent. French consumers, reluctant to spend, will consider most insurance products commodities and favor the cheapest providers. The result: a price war similar to the one that occurred after deregulation of the French supermarket sector between 2004 and 2010, when operating margins were halved.

We believe this scenario to be the most likely for the bulk of the French insurance industry. In the United Kingdom, after all, where car owners now obtain an average of four online quotes before taking out a new auto insurance policy, both prices and premiums tumbled after online price-comparison sites became popular. Price, indeed, is the predominant concern for the overwhelming majority of consumers buying insurance products in the United Kingdom, Europe’s biggest insurance market.

Confronted with similar pricing pressures, French insurers will have little option but to offer minimum coverage at low cost, and they will still struggle to maintain satisfactory margins. In fact, ROE could fall into the red for non-life players and struggle to climb above 1 percent in the life sector—unless the industry moves to a low-cost business model.

For most, that will mean major restructuring. We estimate that in order to survive a price war, an insurer will need to slash 20 percent to 30 percent from its administrative costs and as much as 40 percent to 50 percent from the cost of acquiring each customer or policy.

Some insurers are starting to make moves in this direction, relocating or pooling their back offices and investing in digital technologies that facilitate direct selling. French insurance giant AXA, for example, which is a major global player, has been offshoring part of its contract management for its French health insurance and savings products in Morocco.

Covéa and SFEREN, meanwhile, are mutual insurance groupings that operate under French law as a type of joint venture and represent attempts by some half dozen major French insurance brands to pool such back-office functions as claims control and IT to enhance economies of scale. SFEREN’s three insurance brands contract jointly for postal and computing services, for example.

We estimate that by 2020, restructuring efforts like these could boost profitability for personal and property and casualty insurers to nearly 7 percent, and that life insurers could expect to post profits of almost 6 percent. As consolidation intensifies, some smaller players may well go out of business.

Scenario B: An improving economy—but ongoing price pressure

This scenario assumes that with more robust GDP grow—2.5 percent to 3 percent—consumers will have more to spend on insurance products—but that the continuing, Internet-driven “industrialization” of the insurance market will still push prices inexorably downward.

Companies that maintain their market share in these circumstances could expect rates of premium growth of 1.9 percent in the p/c sector, 4.3 percent for those offering personal accident and sickness, and 4.8 percent for life insurers. But without heavy restructuring, by 2020, they would see ROE drop to 4.5 percent in the property/casualty and personal sectors, and to 5.1 percent in life.

If, however, they were to reduce acquisition and administrative costs by taking steps to optimize physical networks and switch to direct distribution channels, ROE would almost double for the first two sectors and would likely reach 8.1 percent for life insurers.

The streamlining and standardization of IT processes will be a major driver of price competitiveness in this scenario—as in all the others. But so will the optimization of distribution networks. And we anticipate the spread of distribution partnerships that sell bundles of insurance products, as some banks and retailers are starting to do. Cetelem, for example, a brand name of BNP Paribas Personal Finance, is packaging consumer credit and home loan products and marketing them via both its own bank-branded credit cards and through private-label versions that feature the brand names of its retail partners across Europe and beyond.

Scenario C: An improving economy—and increasingly discerning consumers

In this scenario—the most attractive—an economic recovery drives more optimistic consumers to seek personalized insurance products and advisory services. Insurers would be able to differentiate themselves by offering high-value, customized products and the sales skills to market them effectively to secure customer loyalty. As a result, we estimate that by 2020, ROE could soar to 11.6 percent for property/casualty and personal insurers and almost as high (to 10.2 percent) for life companies.

First, however, insurers will need to invest heavily in distribution skills. This won’t necessarily be easy. When you’re dealing with consumers who won’t tolerate mistakes, there’s a danger that costly and complex products and expensive networks of specialist salespeople will eat into operating margins—in which case, ROE could slump significantly in all three insurance sectors.

Insurers looking to make the most of this scenario could look at examples such as Barclays Premier UK-based bank’s initiative to double its “mass affluent” French customers (those with minimum assets of €50,000) within two years. The bank is hiring highly experienced financial advisors to provide personalized advisory services for such customers—it expects to have 850 of them by 2013—either via the Internet or by appointment in exclusively designed offices in mid-sized French cities where Barclays does not have a traditional branch presence.

Scenario D: A declining market—and consumers still demanding more

This may well be the nightmare scenario for many insurers: consumers seeking competitively priced, “anywhere, anytime” products that answer specific needs and whose duration can be adjusted, in real time, according to their fluctuating fortunes in a tough economy.

We believe that in such a critical situation, property/casualty and personal insurers could struggle to achieve ROE of 4.7 percent, and life insurers would be lucky to achieve 4.6 percent.

If, however, insurers responded to mounting pressure by investing in on-demand capabilities and reinventing their actuarial practices to assess client risk in greater detail, they would be able to build up personalized policy subscriptions, in real time and across all communication channels—online, by telephone and through agencies. In that case, we estimate, the ROE outlook would improve considerably by 2020, to 7.6 percent for non-life insurers and 6.5 percent for life companies.

The recent experience of pure-play providers offers some intriguing innovation options. For instance,, the online brand of Groupama, France’s sixth-largest insurance company, has successfully launched a “pay as you drive” auto insurance product—drivers pay only when the car is actually used—that costs half as much as traditional products.

Regardless of which scenario plays out, it’s pretty clear that French insurers will need to take radical action to stay profitable in the face of intensifying pricing pressure and ever more demanding consumers. Their experience, moreover, is likely to be replicated in other parts of Europe facing similar challenges. Indeed, each of our four scenarios could play out elsewhere—though with significant variations depending on specific market conditions.

In all scenarios, a significant reduction in administrative and acquisition costs will be crucial to maintaining profitability going forward. But each insurer’s specific response will depend on its particular business lines and individual characteristics. The key to success will be to define a coherent strategy and evaluate the transformation and restructuring effort necessary to win.

Sidebar 1 | About the research
Accenture’s four predictive scenarios for the French insurance market in 2020 are based on an exhaustive analysis of some 60 variables—economic, social, demographic, technological and regulatory—that correlate historically with the three segments of the French market: property/casualty, accident and health, and savings and retirement (or life).

The correlation between population growth and GDP and the revenues of property and casualty insurers, for example, was nearly perfect. GDP and population aging correlated very closely with those of accident and health players (93 percent and 94 percent, respectively). The correlation for life insurers depended on a combination of household living standards and financial market variations.

We also factored in possible future regulatory changes, such as radical pension reform, as well as consumer trends, including the shift to Internet and online subscription by comparing the situation in France with conditions in other European insurance markets. This exercise revealed some significant differences.

Cash-strapped governments across the continent are progressively withdrawing from welfare provision, for example—a development that might be expected to boost the revenues of private providers poised to pick up the slack. That’s certainly what happened when the German government introduced pension reform in 2001 and changed the law regarding taxation of pensions and pensions expenses: Premiums for German life insurers soared 10 percent year on year between 2000 and 2010—far higher growth than anywhere else in Europe in the same period. On the other hand, when the Swedish government recently opted out of healthcare provision, pragmatic Swedish consumers simply reduced their health coverage and the price of premiums went down.

Which is not to say that the French will behave like the Swedes, of course. Recent research indicates that the already worried French are becoming even more risk averse: 72 percent of participants in a 2009 Ipsos poll, for example, said that they were feeling increasingly insecure about the future of their jobs and income. If this anxiety translates into higher demand for health, pension and other personal protection products—particularly as the French state pulls back from providing this protection—it could translate into an expanding niche market for French insurers.

Finally, to shed light on the financial impact of those scenarios and help determine the key success factors for insurers in 2020, we analyzed a decade’s worth of annual reports. The success factors identified were then aligned with roughly 100 “maturity levels” associated with some 30 key skills, ranging from product design to human resources management.

Sidebar 2 | Europe: Common challenges, similar solutions
They may operate in widely divergent fiscal, cultural and social circumstances, but insurers right across the European Union still confront challenges—and opportunities—strikingly similar to those forcing much of the French insurance industry to restructure.

Intensifying competition and increasingly demanding (and informed) consumers have been features of the European insurance landscape ever since the industry began to deregulate more than 10 years ago. Meanwhile, from Poland to Portugal, a government pullback from both healthcare and pension provision is creating an opening for innovative providers of relevant substitutes.

Small wonder, then, that insurers throughout the EU have responded in similar ways to these challenges—albeit at a pace determined by their specific national market conditions.

Having opened up to competition earlier than most, the UK insurance market, for example, has already undergone a structural transformation similar to that facing France. The United Kingdom, moreover, which is home to about 20 percent of all Europe’s insurers, will likely continue to restructure as the ongoing government withdrawal from welfare provision widens the field for private providers.

Not that all governments react to budgetary crises in the same way, of course. In Central and Eastern Europe, by contrast, most governments—the Czechs have bucked the regional trend—are seeking to cut debt by rerouting workers’ contributions away from privately managed pension funds and into their own coffers.

In any event, with the exception of health, which remains dynamic thanks to rising demand from graying consumers confronting soaring medical costs, the economic slowdown has taken a toll on both life and non-life premiums just about everywhere. Indeed, with the exception of health, total European non-life premiums declined in 2009 (the last year for which full figures are available)—the first time in a decade that year-on-year growth at current exchange rates has been negative.

About the authors
Eric Véron, a senior executive in the Accenture Insurance sector in France, Belgium, the Netherlands and Luxembourg, leads the company’s insurance distribution transformation services in Europe. Mr. Véron, who is based in Paris, has been working in the insurance industry for more than 24 years and has advised major international insurance companies in their transformations programs. 

Khalid Lahraoui is a senior executive in the Accenture Insurance sector in France. For more than 12 years, he has managed and delivered several large business transformation programs for leading insurers in the life and non-life areas. Mr. Lahraoui is based in Paris. 

Laurent Floquet is a Paris-based senior manager in the Accenture Insurance sector in France. In his more than 10 years with the company, Mr. Floquet has led several major business transformation programs for insurers, including mergers, distribution networks streamlining and sales force optimization.

The authors would like to thank Frederic Bannier, Romain Caillet, Fabrice Gardette and Danielle Tohmeh for their contributions to this article.

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 This Article is Tagged: Financial Services
Reinventing a Business at Risk - French Insurance Agencies [Accenture Outlook] 
Plummeting profitability, tightening regulation, increasingly informed and demanding consumers, and new and nimble competitors—a perfect storm is hammering France’s big insurers. But they’re not alone: Throughout Europe, relevance in this industry will require radical restructuring.
french insurance market, accenture outlook
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