Posted on Jan 19, 2012 by Sergio Ulloa
Though saddled with ongoing global economic challenges, moribund interest rates and intense competition, insurance companies will need to focus on innovation, sound business practices and emerging market opportunities in order to generate growth and profits going forward, according to a new report from international consulting firm Deloitte.
Released today, Deloitte LLP's "2012 Global Insurance Outlook: Generating growth in a challenging economy takes operational excellence and innovation
," assesses the international insurance industry's prospects for 2012 and the decade ahead. The report identifies that persistent global economic turmoil, high unemployment, low interest rates and a slow housing recovery have created unique challenges for insurers operating in US and Western European markets, sapping both consumer demand and investment income simultaneously. While the US economy has shown recent signs of recovery in terms of consumer spending, given Europe's ongoing struggles with sovereign debt issues, Deloitte sees little respite for insurers on the economic front at present.
Despite these underlying macroeconomic concerns, there are still many things insurance companies can do for themselves to generate profitable growth and increase their market share. According to Deloitte, product development, distribution and customer service remain three key areas where industry innovation could reap sizeable returns almost immediately. Insurance companies in general must continue evolving their operations to improve margins and generate bottom line growth. They can do this by adopting new technologies and risk management strategies to squeeze out unnecessary costs and use their people and capital more productively.
According to Deloitte's market outlook, insurers involved in the property and casualty sector will likely benefit from increased top line prices due largely to 2011's unprecedented string of natural catastrophe losses and the subsequent rate hikes in reinsurance premiums. Other non-life lines will also be able to recover, as auto and general insures charge higher loss-driven rates while the pricing market in commercial lines appears to have bottomed out with both insurers and brokers reporting consistent premium increases on renewals. Meanwhile in the life and annuity market, Deloitte notes that while sales of variable annuity products are growing, products with structured guarantees will probably continue to struggle due to rock bottom global interest rates. Sales of traditional whole life insurance policies could also further improve if insurers update their marketing, sales and distribution systems to target a still largely underinsured market.
Deloitte lists several possible avenues for growth insurers could pursue in 2012 and beyond, the most attractive of which perhaps being to tap emerging insurance markets with faster-growing economies for sustainable premium growth. With mature market economies in the US and Western Europe unlikely to generate consistent growth prospects in the short-to-medium term, insurers may be able to offset any anticipated shortfall and find success by entering potentially lucrative emerging markets, with China, India and Brazil being particular highlights. The Deloitte report acknowledges that while doing businesses in these markets often comes with unique business challenges, including cumbersome regulation, poor infrastructure and distribution networks as well as cultural differences, the overwhelming demand for greater insurance coverage and financial security amongst these countries' expanding middle class populations will likely provided sufficient growth opportunities to international insurers with the resources to adapt and capitalize on them. According to Insurance Information Institute's 2010 statistics, the ratio of general insurance premiums to GDP is still just 1.5 percent in Brazil, 1.3 percent for China and only 0.7 percent in India. By comparison, the penetration rate is 4.5 percent for the United States, 4.1 percent for Canada and between 3.1 to 3.7 percent in the major European economies. These differences translate into a trillion dollar coverage gap between West and East, plenty of room for new insurance companies to set up shop and acquire a share of these still largely untapped markets.
Insurance companies can also expand through strategic mergers and acquisitions. Deloitte noted that m&a volume was up during 2011 although deals tended to be calculated bolt-on acquisitions with buyers adding new product lines, distribution channels, and international market share. Sellers meanwhile divested from underperforming business lines to shore up their bottom lines and left overseas markets where they lacked sufficient scale to thrive. The Asia-Pacific region has fast become the most attractive market for investment activity, accounting for 23 percent of global M&A insurance activity in the first half of 2011, up by 12 percent on fiscal year 2010. Deloitte say there is potential for an uptick in bigger deals in 2012, especially if organic growth in mature markets remains elusive. The international insurance market in fact remains ripe for more consolidation due to excess capital, bargain pricing and low returns.
As well as expanding outward, Deloitte mentioned several things insurers could do to pursue operational excellence at home, with adequate preparation for upcoming regulatory changes that could arise when the Dodd-Frank Act and Solvency II come into effect being one such requirement. The report adds that many insurers are improving the integration of enterprise risk management (ERM) and taking greater steps to prioritize good governance, infrastructure and disclosure over risk modelling into their standard operation procedures. Improving both recruitment and retention of industry talent has also become a major challenge facing insurers today.
Insurance product innovation and augmentation is also an area where Deloitte says individual companies can now exert greater control over their own destiny during these tough economic times. Going forward, insurers must use market research effectively to ensure that both new and traditional insurance policies remain relevant to the needs of consumers operating in our new global economic environment. According to the report, the predominance of international business supply chains pose new property and casualty risks which have in turn necessitated new types of insurance products, including cyber liability, green construction cover, nanotechnology insurance and global political risk cover amongst others. Meanwhile in personal lines, more hybrid products are coming to market which meet multiple needs, including long-term care benefits in life and annuity, private unemployment insurance, homeowner's value protection, and other products. Overall, it will be incumbent on insurers to continue and explore new niche markets and develop specialty coverage products to generate additional sales.
In addition to developing new products and entering new markets, Deloitte adds that perhaps insurers should take their social media marketing efforts more seriously. While most insurance companies already have a presence on prominent social media sites, like Facebook or Twitter, many have yet to analyze this massive dataset properly. According to Deloitte, these readily available analytics can offer valuable insights about buyer needs and can improve customer experience as well as the efficiency of their operations.
Overall, the report emphasizes that smart insurers should be able to weather current market conditions and potentially even thrive through sound, strategic investments that work to secure growth, achieve operational excellence and encourage innovation. Sam Freidman, Deloitte's insurance research leader, expalins that "while achieving growth, operational excellence and innovation in such a difficult economic and competitive environment might be easier said than done, opportunities are available for insurers that can seize the moment. There are many options insurers might consider to grow even in the toughest of economies if they can overcome the obstacles they face."
Deloitte is the world's largest private professional services organization. The consulting firm, founded in 1845, now has over 170,000 staff, working out of 140 different countries. Deloitte provides audit, tax, consulting, enterprise risk and other financial advisory services through its many member firms.