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BCG The Boston Consulting Group
N o v e m b e r2 0 0 3 The European Insurance Landscape
Back to the Future
TThhee BBoossttoonn CCoonnssuull tt iinngg GGrroouupp is a genera l management consul t ing f i rm that is a g lobal
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CH-8008 Zür ich
Back to the Future
The European Insurance Landscape
November 2003
Thomas Luippold
Matthias Naumann
Gunther Schwarz
Elmar Wiederin
Lukas Ziewer
A Discussion Paper by The Boston Consult ing Groupwww.bcg.com
3
ABLE OF CONTENTST
PREFACE 5
SUMMARY OF KEY FINDINGS 9
THE GOLDEN NINETIES 13
THE RULES HAVE CHANGED 19
KEY SUCCESS INITIATIVES: BACK TO THE FUTURE 25
Focus on attractive markets 25
Build local leadership positions 29
Exit marginal activities 32
Achieve operational excellence 36
Realize group advantages 37
Develop a performance culture 40
A RESHAPED LANDSCAPE WILL EMERGE 43
HOW TO DESIGN CHANGE 47
APPENDICES 51
Top Insurance Groups 51
Local insurance landscapes 52
Steeply declining stock prices and lingering low bond yields have driven the European insurance industry intoa deep state of crisis. Recent capital market developments have revealed structural weaknesses in the industrythat the "extraordinary" investment returns of the past once covered up. Many insurance groups are feeling theeffects of the high financial risks they took during the booming nineties, and of underestimating the com-plexities of multidimensional business expansion.
A consequence of these conditions is that the rules for profitability in the industry have fundamentallychanged. The solvency of more than a few major players is in jeopardy. In order to clean up balance sheets andgenerate adequate returns on capital, many insurers must dramatically improve technical performance in theircore businesses.
How companies go about pursuing this goal will shape the European insurance landscape for years to come.Management teams that quickly understand the new rules, set the right targets, and persistently address the keyinitiatives for future success will emerge as winners. Companies that wait too long before they act will lose out,or at worst disappear.
This Discussion Paper addresses the management of international and local European insurance groupsaround five core issues:
1. How did the "Golden Nineties" transform the European insurance landscape?
2. How did the recent capital market developments change the rules for profitability?
3. What are the six key success initiatives for building a healthy future for the industry?
4. What are the principal characteristics of the emerging new landscape?
5. What questions must senior managers answer in order to design change proactively?
"Back to the Future: The European Insurance Landscape" is the first integrated publication based on compre-hensive research activities by The Boston Consulting Group's Insurance Landscape team. It draws on a system-atic analysis of all major European insurance markets and insurers, as well as on our experience in advisingmany industry leaders. The report covers:
5
REFACEP
■ the nine principal Western European insurance markets: Austria, Belgium, France, Germany, Italy, theNetherlands, Spain, Switzerland, and the United Kingdom. Together, these markets account for about90% of total European premium volume.
■ the top fifty European insurance groups in terms of each life, non-life, and total premiums.
■ the leading insurers in each country, representing more than 80% of local life and non-life market vol-ume.
This Discussion Paper is representing an overall framework for existing as well as planned publications thatelaborate key success initiatives and answers to core management questions in more depth.
We hope this Discussion Paper will prove both informative and thought provoking in these extremely chal-lenging times for the industry. We also welcome your comments and suggestions.
6
AcknowledgementsThe authors would like to thank the many colleagues at The Boston Consulting Group who contributed to thisDiscussion Paper: in particular, Philip Crawford and Ellen Treml, for their help in preparing and editing thepaper, and numerous other colleagues for their insights, critical thoughts and helpful discussions.
7
Dr. Thomas L. Luippold, Vice President The Boston Consulting Group, Zurich
Matthias Naumann, ManagerThe Boston Consulting Group, Zurich
Dr. Gunther Schwarz, Vice PresidentThe Boston Consulting Group, Cologne
Dr. Elmar Wiederin, Senior Vice PresidentThe Boston Consulting Group, Zurich
Lukas Ziewer, Insurance Analyst The Boston Consulting Group, Zurich
The Nineties will be remembered as banner years for the European insurance industry.
■ After initial pressure caused by deregulation, insurers were able to significantly expand their equity base,increase profits, and generate great shareholder value.
■ Throughout the decade, players followed aggressive growth strategies along multiple dimensions."Extraordinary" investment returns were the great enabler, masking structural flaws in the industry.
Now, at the beginning of the new millennium, the industry has fallen into a state of crisis. The rules for suc-cess have fundamentally changed.
■ Most insurers were not prepared for the precipitous decline of stock markets and the continuation oflow bond yields.
■ Many groups suffered large losses in equity holdings and reserves. Major players have been forced toslash dividends and turn to investors to raise money. Rating agencies have downgraded the financialstrength of most of the industry.
■ Layoffs have been common, and senior managers have been fired. Confidence in the industry, frominside and out, is waning.
■ The likelihood of far lower levels of investment return in the future means that insurers must vastlyimprove technical results. More fundamentally, insurers have to radically change the way they run theirbusinesses.
The next decade will require a broader set of skills. Six key initiatives should be on top of senior managementagendas:
■ Focus on attractive markets. Earning potential is highly dependent on the attractiveness of individualinsurance markets.
■ Build local leadership positions. Scale and focus create competitive advantage and serve as a base forsuperior profitability.
■ Exit marginal activities. Too much capital and management attention is still devoted to areas in whichcompetitive advantage will likely never be achieved.
9
UMMARY OF KEY FINDINGS S
■ Achieve operational excellence. Assuring productivity along all elements of the value chain is critical inorder to compensate for lower investment returns.
■ Realize group advantages. Adding value across countries requires a common logic across businesses andclear core competencies at the group level.
■ Develop a performance culture. Making the right decisions and motivating management requires a rig-orous financial framework and consequent performance steering.
A reshaped European insurance landscape will emerge within the next decade
■ Insurers will increasingly focus on areas where they can achieve competitive advantage.
■ Managements will have to decide whether they want to compete in life, non-life, or both. They must alsochoose their countries of principle focus, and determine which functions should be outsourced.
■ Large groups that are not yet clearly positioned—about half the total—will have to redefine their busi-ness portfolios.
■ Life and non-life entities in various countries that are subscale—about two thirds of the total—will haveto be either grown by acquisition, merged, or sold.
Senior managers must position their companies in the new landscape before the actions of competitors do itfor them.
■ For most groups, significant change can no longer be a gradual process or an option. It has becomemandatory if companies want to return to adequate solvency and profitability.
■ Raising essential questions and developing company-specific answers is a basis from which to proactive-ly design the future of each organization, and initiate change.
10
The Nineties were very attractive years for the European insurance industry. The decade will be rememberedas one of significant growth for all stakeholders: more premiums, more commissions, higher bonuses, greaterpolicyholder benefits, and higher shareholder returns. After initial pressures caused by deregulation, mostinsurers were able to appreciably increase their equity base, lift profits, and create significant shareholder value(Exhibit 1). Several basic trends contributed to a very positive environment:
Booming Investment Markets. Insurers strongly benefited from extremely attractive investment returns. At thebeginning of the decade, high interest rates generated a stable cash flow on fixed income assets. Then, as inter-est rates went down, stock markets provided "extraordinary" gains. Most insurers continuously adjusted theirasset allocation, sharply increasing their share of equities. Investment results became the essential lever foroverall performance, with insurers able to pay high returns to life policyholders, reduce non-life prices, and stillgenerate high returns on equity.
13
HE GOLDEN NINETIEST
THE NINETIES WERE EXCELLENT YEARSSample of 10 Major European Insurance Groups
(1) Market capitalization at year endSource: BCG Insurance Database
Equity (index)
Equity and net income Profitability and market value
1990
100
1×
1995 2000
160
605
2.5× 10.5×Net income (index)
Market valueEquity
(1)
Return on equity
3.5
3.0
2.5
2.0
1.5
1.0
0.5 5 10 15 20
2000
1995
1990
Exhibit 1
Increasing Long-Term Savings. In light of projected demographic developments, the financial crisis of publicretirement schemes became a hotly debated and politically sensitive subject in many European countries. Lifeinsurers benefited greatly from increased demand for their products, which was often supported by tax incen-tives. European life insurance premiums grew by 12%–14% per annum during the late nineties.
Greater Consolidation. Mergers and acquisitions became an essential tool for growth among many insurancegroups. Specific opportunities arose from a wave of demutualizations1 and large privatizations.2 By the end ofthe decade, it was almost impossible to find viable acquisition targets. Even operations with low profitability andmarginal market share were not for sale, or only at very high valuations.
Pressure From Analysts and Investors. Financial analysts gained significant influence on business strategy andthe setting of performance expectations. Without an inspiring growth story, it was all but impossible for sharesto be rated a promising "buy" candidate. Senior managers adjusted their strategies, projections and activitiesaccordingly, in order to please the markets.
Amid this environment, most insurance groups followed ambitious expansion strategies, often along the fol-lowing multiple dimensions:
■ Home market penetration. Many firms increased local market share through price competition, attrac-tive policyholder promises, new distribution platforms, and acquisitions. The leveraging of local skillsand the pursuit of scale advantages were underlying rationales.
■ International expansion. Premium volume was generated across many foreign markets by investing insubsidiaries or acquisitions. A strong belief in achieving cross-border scale and synergies drove interna-tional growth strategies.
■ Bancassurance. Companies built asset gathering and asset management capabilities that went beyondtraditional insurance activities. Achieving synergies between the (life) insurance sector and the bankingsector, both in distribution and in asset management, was the goal.
Between 1990 and 2000, Europe's top insurance groups achieved annual growth rates between 10% and 30%(Exhibit 2). The Swedish insurer Skandia, for example, increased its life insurance volume 11-fold through itslong-term savings strategy. The French group AXA evolved from a local mutual insurer into a global group,increasing its premium volume by a factor of 10 and buying into several demutualizations and into the privati-zation of UAP. The Dutch groups AEGON and ING strongly expanded their life businesses through acquisi-tions in the United States and the United Kingdom, and Allianz and Generali built strong positions throughacquisitions in selected European countries.
14
1 Examples: UK (Scottish Mutual and Scottish Provident Institution, acquired by Abbey National; Scottish Equitable, acquired by AEGON; London Life and NPI, acquired by AMP;Clerical Medical, acquired by Halifax; United Assurance Group and Scottish Life, acquired by Royal London Mutual; Scottish Widows, acquired by Lloyds TSB; National MutualLife, acquired by GE Capital; Scottish Amicable, acquired by Prudential; Norwich Union, merged into Aviva); Switzerland (Patria, merged into Helvetia Patria); Austria (Austria-Collegialität, merged into Uniqa).
2 Examples: France (AGF, acquired by Allianz; UAP, acquired by AXA; GAN, acquired by Groupama), Italy (INA, acquired by Generali).
Insurance groups created significant shareholder value (Exhibit 3). The market capitalization of public groupsincreased by an average of 25% per year between 1990 and 2000. Leading international life insurers increasedtheir market value by more than 30% per year.
1,100
1,000
900
800
700
600
500
400
300
200
100
INSURANCE GROUPS ACHIEVED HIGH GROWTH
(1) Premium growth in original currency(2) Life insurance business, onlySource: Annual Reports; BCG Insurance Database
Premium index(1)
1990 2000
Skandia(2)
Group
AXA
AEGON
Generali
ING
Allianz
ZFS
Winterthur
27%
Annual growth1990–2000
26%
20%
20%
15%
14%
13%
11%
The Equitable (US), Abeille Re (F), National Mutual (AUS), Victoire (B),UAP (F), Guardian Royal Exchange (UK), Nippon Dantai (J)
Állami Biztosító (HU), Scottish Equitable (UK), Providian (UK),Cj. de Previsión (E), Guardian Life (UK), Transamerica (US)
Familia (CH), Interunfall (A), La Estrella (E), Vitalicio (E), Fortuna (CH),La France (F), AMB (D), Migdal (IL), Athéna (F), INA (I), Assitalia (I)
Equitable Iowa (US), Penn Life (US), Reliastar (US), Aethna (US)
Fireman's (US), Vereinte (D), Elvia (CH), Lloyd Adriatico (I), MMI (AUS),Hermes (D), Berner (CH), AGF (F), Royal Nederland (NL), Athéna (F),Life USA (US), Zwolsche (NL)
Genevoise (CH), Saltiel (F), La Chilena (CL), MMI (UK),Fidelity & Deposit (US), Trygg-Hansa (US), Protector (N), BAT FS (UK)
General Casualty (US), Rhodia (F), DBV (D), Schweiz Vers. (E, I),Equitativa (E), Josi (B), CS Life (CH), Nicos Life (J), Colonial (UK), NIG (UK)
Major mergers and acquisitions
Exhibit 2
Market capitalization 2000 (B )€ (1)
10 20 30 40
MARKET VALUES ROSE APPRECIABLY
(1) Year end values(2) 1991–2000(3) 1997–2000Source: BCG Insurance Database
Annual market capitalization growth (1990–2000)(1)
50%
50 60 70 80 90 100
40%
30%
20%
10%
0%
Average = 25%
AEGONING(2)
Allianz
AXA
Generali
Aviva
Prudential
Fortis
Skandia
Bâloise
ERGOL&G
SwissLife(3)
RSA
Helvetia Patria(3)
W&WFondaria
ZFS
Exhibit 315
The strategies of the nineties clearly transformed the European insurance landscape, with most players grow-ing their life as well as international business. Many players increased their number of foreign markets, andsome even expanded their brand positioning. Corporate visions and strategic thrusts reached far beyond tra-ditional core markets to the pursuit of leading positions in international (or even global) financial services(Exhibit 4). Consider the following statements of purpose that were adopted:
■ AXA: "Aims to be the world leader in financial protection and wealth management"
■ ZFS: "A leading financial services organization providing financial protection and wealth accumula-tion solutions"
■ AEGON: "A global financial institution in the field of banking, insurance and asset management".
Meanwhile, several strategic plays started to become apparent (Exhibit 5). Many insurers grew both their lifeand non-life businesses internationally. Four (AXA, Generali, Allianz and ZFS) strove for global leadership.Some life insurance groups leveraged their skills internationally, while many (local) life insurers operated aspart of a bank. Three players focused on industrial insurance. Only a few of the larger groups stayed exclusivelywithin their home markets. Growth aspirations and international strategies were financed both by high profitsin home markets and by high investment results.
16
Global insurers Life groups
International business (%)(2)
10 20 30 40
STRATEGIES OF THE NINETIES CHANGED THE PORTFOLIO MIXES
(1) Life insurance as percent of total premium(2) Premiums outside home market as percent of total premiumSource: Annual reports; BCG Insurance Database
Life insurance(1)
50 60 70 80 90 100
AEGON
ING
Allianz
AXA
Skandia
ZFS
100%
80%
60%
40%
20%
0%
70%
50%
30%
10%
90%
Generali
1990 2000
10 20 30 40
Life insurance(1)
50 60 70 80 90 100
100%
80%
60%
40%
20%
0%
70%
50%
30%
10%
90%
International business (%)(2)
Exhibit 4
By the end of the decade, however, it was clear that many insurance groups had allowed themselves to be exces-sively exposed to financial risks. Many had also underestimated the challenges of multidimensional expansion.
17
SEVERAL STRATEGIC PLAYS EMERGED
(1) Life insurance as percent of total premiumSource: Annual reports; Company information; BCG Insurance Database
Life i
nsur
ance
(1)
10 20 30 40 50
AEGONING
Allianz
AXA
Skandia
ZFS
100%
80%
60%
40%
20%
0%
70%
50%
30%
10%
90%
Generali
Number of country positions1
RSAGerling
HDI
MapfreGroupama
Winterthur
Aviva
ERGO
Prudential
If...BUPA
MMA/MAAF
WienerStädtische
UniquaFortis
RBoSBâloise
Helv. Patria
R+V
BBVASwiss Life
Santander
MAIF
MACIFAzur/GMF
BNPCNP
Signal Iduna
Societé GénéraleStandard Life
Abbey Nat.
CéditAgricole
NordeaRoyal London
L&G
IL&P
La Mondiale
SanPaolo
AlectaPoste Italiane
Banca Monte dei PaschiFriends Provident
Banques Populaires
HBOS
GothaerUnipol
Toro
CLLloyds TSB
CéditMutuel
Rabobank
DEVK
Reale MutuaHUKCoburg
Bancassurance
Home market
Internationalinsurance
International life
Industrial insurance
Globalleadership
Eureko
SampoW&W
Exhibit 5
Interest rates declined steadily during the nineties, falling from 12% to 5% in the United Kingdom, 9% to 5%in Germany, and 6% to 3% in Switzerland. As a consequence, keeping promises to policyholders and compen-sating for technical losses by investing in bonds became more and more difficult for insurers. Conversely, equi-ties (including private equity) seemed to offer the required performance. Bullish stock markets were stronglydriven by optimistic economic outlooks and a continuing net inflow of money, much of which came from insur-ers (Exhibit 6).
But the precipitous decline in stock prices that began in the late nineties and the sheer persistence of low bondyields caught most European insurers by surprise. The industry began a tailspin, plummeting into the highlydistressed state that it finds itself in today (Exhibits 7 and 8).
19
THE DEVELOPMENT OF INVESTMENT RETURNS
Year
+25% p.a.(2)
FTSE(1) STOXX(2) SMI(3) DAX
-19% p.a.(2)
75%
50%
25%
0%
-25%
-50% 020100989796959493929190 99
15%
12%
9%
6%
3%
0% 020100989796959493929190 99
UK
D
CH
(1) FTSE All Share(2) STOXX 600(3) 1990–1993: SBC 100Source: BCG analysis
Ten year government bond yields in % Stock market performance in %
Year
Exhibit 6
HE RULES HAVE CHANGEDT
20
A DRAMATICALLY HIT INDUSTRY
(1) Sample of 14 major insurance groupsSource: Annual reports; BCG Insurance Database
Reserves and equity(1) S&P Financial Strength Rating
120AAA
AAA-
AA+
AA
AA-
A+
A
A-
BBB
BBB-
BB+
80
9074
92
100
90
78
64 64
87
Revaluationreserves
67
29
100
110
70
60
50
200220012000199919981997 Allianz ERGO ZFS RSA SwissLife
WienerStädtische
SAI Gerling
Shareholders' equity100 07/01 12/02
03/03
10/01
09/02
11/01
08/0211/02
12/0204/03
10/02
03/03
10/02
02/03
10/02
2000 = Index 100^
Exhibit 7
Reported net loss 2002 (B )€
MANY LEADING GROUPS ARE DISTRESSEDExamples
Source: Annual reports; Company information
Capital increase (B )€
Allianz: 4.4
ZFS: 2.6
Winterthur: 1.4
L&G: 1.3
Swiss Life: 0.8
Failures
Equitable Life (UK)
Independent (UK)
Mannheimer Leben (D)
ZFS: (3.2)
Winterthur: (1.6)
RSA: (1.4)
Swiss Life: (1.2)
Allianz: (1.2)
ERGO: (1.1)
Aviva: (0.8)
Generali: (0.8)
Skandia: (0.5)
Bâloise: (0.4)
L&G: (0.3)
Exhibit 8
Its current condition can be described thusly:
■ Most insurance groups have incurred huge losses
■ Reserves and equity positions have fallen drastically
■ Various groups have had to cut dividends or raise capital
■ Rating agencies have downgraded most insurers' financial strength
■ Life insurers have faced solvency issues
■ Some life insurers have stopped writing guarantees
■ Authorities, legislators and associations have had to define supportive measures1
■ Massive layoffs have been announced
■ Many CEOs and top managers have been forced to resign their positions
Clients and shareholders, accordingly, have suffered greatly. Policyholder dividends have been slashed, and theshare prices of many insurance groups have collapsed (Exhibit 9). Major public groups have lost almost twothirds of their market capitalization.
21
1 Examples: Guarantee pool "Protektor Lebensversicherung" (Germany) or "Auffanggesellschaft BVG" (Switzerland); legislative changes that allow deferring recognition of assetimpairments (Germany); increased recognition of future profits as "solvency credit" (UK).
(1) Sample of 23 major insurance groupsSource: BCG analysis
INSURANCE VALUATIONS HAVE COLLAPSED
Market capitalization in B€(1) Change in market capitalization (2000–2002)
1999
450
2000
580
-64%
2001
402
2002
206
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%
-60%
-70%
-80%
-90%
Uniqa
Wien
er St
ädtis
che
Unipo
lFo
rtis
CNP
Irish
Life
& Pe
rman
ent
Catto
lica
ERGO
L&G
Fond
iaria/
SAI
W&W
Gene
rali
Prud
entia
lAv
ivaIN
GHe
lvetia
-Patr
iaAX
AB
loise
â AEGO
NAll
ianz
ZFS
RSA
Swiss
Life
Skan
dia
Samp
o27
%
2%-6
%-1
4%-1
7%-2
5%-2
7%-3
0%-3
7%-4
6%-4
6%-5
3%-6
0%-6
1%-6
1%-6
2%-6
5%-6
8%-7
1%-7
6%-7
6%-7
9%-8
5%-8
5%
19%
+29%
Exhibit 9
Indeed, margin dynamics, and therefore the rules for profitability in the industry, have fundamentally changed(Exhibit 10). Low interest rates and reduced risk-taking capacities—leading to low equity exposures—com-bined with generally lower stock-market performance will result in significantly reduced investment returns inthe near and mid-term.
These conditions are a far cry from those of the nineties, when many life insurers operated in effect as "lever-aged hedge funds". With up to 20 times their own equity as policyholders' assets and a typical allocation in somecountries of 25% in stocks, they were leveraging their own equity at a ratio of 1:5. Although they shared theupside with policyholders, the downside was fully borne by shareholders. Once investment returns got belowthe guarantees, insurers started to burn significant amounts of equity.
Non-life insurers made up for technical losses and high costs with superb financial gains. With a 10% invest-ment return, a typical insurer could operate at a combined ratio of 115% and still achieve a 15% ROE. For thesame ROE with a 5% or 3% investment return, the combined ratio must be improved to 100% or 95% respec-tively.
Today, however, the shortfall in investment returns must be compensated for by massively improved technicalresults, and by adjusted policyholder participation models in life insurance. More fundamentally, insurers musteliminate historic weaknesses and radically change the way they run their businesses. There are specific stepsthat can, and must, be taken.
22
MARGIN DYNAMICS HAVE CHANGED
(1) Illustrative exampleSource: BCG analysis
Non-life(1)Life(1)
115%
110%
105%
100%
95%
90%0% 1% 2% 3% 4% 5% 6% 7%
Combined ratio
Investment return
Return on equity5% 10%
++
0
Investment margin
Investment return
Policyholderguarantee
+ ++
+
0
-
Insurer
8% 10%9%
15%
Policyholder
Exhibit 10
Most insurers face huge challenges in their quests to conquer the crisis and generate the kind of returns thatwill enable them to prosper under the new rules of the game. In our view, six strategic initiatives should be atopthe agendas of senior managers who wish to build successful futures for their organizations:
■ Focus on Attractive Markets
■ Build Local Leadership Positions
■ Exit Marginal Activities
■ Achieve Operational Excellence
■ Realize Group Advantages
■ Develop a Performance Culture
These endeavors are relevant to all European insurers, whether they are trying to maintain market leadershipor rescue themselves from looming insolvency.
Focus on Attractive Markets
The earnings potential of insurance groups clearly depends, to a large extent, on the attractiveness of their mar-kets. European markets differ widely in size and growth rates, but also—and more importantly—in terms ofproduct mix, distribution networks, consolidation level, competitive price pressures, policyholder expectations,and regulatory environment. These factors have a significant influence on the profit level that can be achievedin a specific market, and on the skills that are needed to be successful. Management must thus develop a thor-ough understanding of market characteristics, dynamics and own capabilities in order to successfully refocustheir portfolios. Circumstances also differ depending on whether the company is primarily focused on non-life,life, or both types of businesses.
25
EY SUCCESS INITIATIVES: BACK TO THE FUTUREK
Non-Life Insurance Overall, across Europe, market characteristics and profitability in non-life businesses have varied widely bycountry (Exhibit 11 and 12).
Germany is the largest European non-life market. It is characterized by relatively low historic growth, but has avery attractive price/loss profile. It is also a highly fragmented market, with few players having truly efficientoperations. Achieving necessary cost reductions will be particularly difficult for smaller German insurers, whilelarger players can create sizable value with a "market consolidator" strategy.
The small Swiss non-life market has also experienced low growth, and has an attractive price/loss profile. Butalthough the market is highly consolidated, its insurers are even less efficient than those in Germany. Marketleaders should leverage their competitive advantage and set new benchmarks for operational excellence, whilesmall insurers might join forces or become part of a market leader.
Spain, meanwhile, shows a very different picture. It has comparatively high growth rates, an extreme level offragmentation, and unattractive loss ratios. But it has the lowest cost ratios in Europe. The Spanish marketleader Mapfre, and smaller mutuals, have converted their structural advantages into comparatively low distri-bution costs. Despite recent premium increases in the market, foreign players that lack such advantages mayneed to reconsider whether doing business in Spain is viable.
26
REGIONAL CHARACTERISTICS IN NON-LIFE
(1) Premium (B , 2001)(2) Annual premium growth (1998–2001)(3) Average 1998–2001(4) Cumulative market share of top 5 local insurance groupsSource: ISIS; Swiss Re sigma; BCG Insurance Database
€
D
F
I
ENLCHBA
77.2
43.6
31.2
19.417.813.4
9.66.7
E
I
NLUK
CHF
8.3%
5.1%
3.6%3.2%
1.4%0.8%
D
NLIE
F
74.7%
82.2%
86.1%
EFNL
A
22.9%23.5%23.8%
36.6%
A
I
BUKF
NL
D
E
72%
64%
59%59%57%
49%
43%
38%
I 25.3%
D 26.8%
B 33.6%
81.4%81.0%
CH 29.5%UK 30.1%
B 79.2%
UK 77.5%A 76.8%
CH 74.8%
B 2.5%
D 0.4%A -0.2%
UK 74.5 CH 72%
Size(1) Growth(2) Loss ratio(3) Cost ratio(3) Consolidation(4)
Exhibit 11
Life InsuranceNational market characteristics and profitability patterns are markedly different in life businesses (Exhibit 13and 14).
The United Kingdom is by far the largest market, for example, while the small Belgian market has achievedone of the highest growth rates and the most attractive technical margins. Belgium is also highly consolidatedand efficient, and its market leaders will continue to use their advantaged cost position to penetrate clients andexpand distribution channels. Smaller players will have a hard time staying profitable.
In Spain, profitable growth has been captured almost exclusively by bancassurance players, which have lever-aged their distribution advantages. Further consolidation in Spain will likely be driven by the banking industry.
German and Swiss life insurers have long found it difficult to generate adequate returns. Contributing factorshave been high payout ratios to policyholders (driven both by competitive pressures and by regulation), as wellas high cost ratios. Insurers in these countries will need to adjust participation models and reduce costs signif-icantly in order to regain profitability. Insurers without multi-channel distribution will be at a distinct disad-vantage.
Overall, there is a wide range of market attractiveness and required skills in life insurance across Europe.
27
Combined ratio=110%
Average loss ratio75%
NON-LIFE PROFITABILITY HAS VARIED WIDELY1998–2001
Source: ISIS; Annual reports; National regulators/associations; BCG Insurance Database
Average cost ratio
40%
35%
30%
25%
20%
Austria
80% 85% 90%
Belgium
France
Italy
UK
Netherlands
Spain
Germany
Switzerland
Combined ratio=105%
Combined ratio=100%
Exhibit 12
70%
28
REGIONAL CHARACTERISTICS IN LIFE
(1) Premium (B , 2001)(2) Annual premium growth (1998–2001)(3) (Result life technical account/technical provisions), average 1998–2001(4) (Technical expenses/technical provisions), average 1998–2001(5) Cumulative market share of top 5 local insurance groupsSource: ISIS; Swiss Re sigma; BCG Insurance Database
€
Size(1) Growth(2) Technical margin(3) Cost ratio(4) Consolidation(5)
UK
F
D
INLCHEBA
173.3
85.3
63.1
47.124.422.322.013.6
5.9
IB
E
UKA
NL
D
CHF
22.2%21.0%
15.7%
10.2%10.0%
5.9%
3.9%
1.0%
B
NLIE
ADUKFCH
1.8%
1.0%0.9%0.8%
0.5%0.4%
0.2%0.1%
F
UKE
A
1.1%
1.3%1.4%
3.0%
CH
B
NLA
IF
UKED
79%
74%
67%66%
57%54%
46%43%41%
B 1.5%CH 1.6%
NLD 1.8%
I 2.4%
Exhibit 13
Circle size is proportional to premiumAverage technical margin(1)
A BROAD RANGE OF MARKET ATTRACTIVENESS IN LIFE INSURANCE1998–2001
(1) Result life technical account/technical provisionsSource: ISIS; Swiss Re sigma; BCG Insurance Database
Annual premium growth
25%
20%
10%
0%
Austria
1.0% 2.0%
Belgium
France
Italy
UK
Netherlands
Spain
Germany
Switzerland
15%
5%
1.5%0.5%0%
€25B
Exhibit 14
Build Local Leadership Positions
Virtually all European insurers need to increase profitability. Empirical evidence shows that sufficient scale andclear focus raise profit potential. Moreover, our research suggests that critical size for either a life or non-lifeoperation is about 5% in market share, or €1 billion in premiums in any given country. We have observed thatbuilding local leadership positions creates competitive advantage and enables superior profitability. Based onscale and focus, three distinct positions can be pursued and achieved (Exhibit 15):
■ Market Leader, with a dominant position in both life and non-life insurance
■ Life Producer, which exploits multiple distribution channels
■ Non-Life Mutual, which places its focus on pursuing attractive client segments
Market LeaderMarket leaders hold a dominant position of more than 5% market share in both the local life and non-life mar-kets. Their competitive advantage is based on superiority in marketing and pricing, a broad product range thatsupports sales force effectiveness as well as customer bonding, and economies of scale across products, distri-bution channels and clients.
29
THREE LOCAL LEADERSHIP POSITIONSBasic Strategies and Sources of Competitive Advantage
(1) Minimal share depends on respective market size and structure
Market sharelife
Market share non-life
2. Life producer 1. Market leader
3. Non-life mutual
~5%(1)
Product designMultichanneldistributionEconomies of scale
Market dominanceBroad product rangeEconomies of scaleand scope
Client focus
Low complexity/costAttractive products
High
Low
Low High
Exhibit 15
~5%(1)
Market leaders also achieve high brand awareness. They are attractive partners for banks and other distributionchannels,1 and preferred employers for top talent in management and staff. Market leaders typically converttheir advantages into lower combined ratios (Exhibit 16).
In the nine Western European countries we analyzed, 29 local insurers qualify as market leaders. They gener-ate about 30% of the total life and non-life premium volume, and belong to 19 different insurance groups.2
Life ProducerLeading life insurers are often "pure plays." They base their competitive advantage on several attributes: sleekproduct design for the benefit of policyholders and shareholders, access to efficient third-party distributionchannels (often banks), and economies of scale in operations, IT and investment management. They are high-ly focused and therefore achieve better transparency regarding true product profitability. These characteristicstypically translate into lower costs (Exhibit 17).
30
Marketaverage
MARKET LEADERS CAN ACHIEVE SUPERIOR RESULTS
(1) Excluding non-life mutuals in D, F, ASource: ISIS; Annual reports; National regulators/associations; BCG Insurance Database
Rabo-bank(NL)
KBC(B)
Fortis(B)ERGO
(D)
Mapfre(E)
Bâloise(CH)
Unipol(I)
Allianz(I)
Exhibit 16
Non-life combined ratio relative to "local peers" (2001)(1)
WienerStädti-
sche (A)
Generali(I)
Allianz(D)
SMAP/OMOB
(B)
Toro-Capitalia
(I)
Allianz(A)
Uniqa(A)
Axa(F)
Generali(D)
Allianz(CH)
Aviva(NL)
Aviva(UK)
Fortis(NL)
0%
-5%
-10%
1 Examples: ERGO and Hypovereinsbank (Germany), AMB Generali and Commerzbank (Germany), Bâloise and TCS/UBS (Switzerland), Winterthur and Swiss Post (Switzerland),Aviva and Royal Bank of Scotland (UK), AXA and BNP Paribas (France), Unipol and Banca Monte dei Paschi (Italy), Mapfre and Caja Madrid (Spain).
2 See also Exhibit 26.
Currently, 22 life insurers across Europe have more than a 5% share in a local market, and they generate 29%of Europe's life insurance premiums. Roughly two thirds (15) of them belong to a bank.
Non-Life MutualNon-life insurers have often grown their businesses within specific population groups, and are still organizedas mutuals1. Their competitive advantage is based on narrow client focus (typically residents of rural areas, orcivil servants that provide better risk profiles and easier retention), low costs due to restricted overhead, andfocused distribution. The lure of their offerings often stems from lower prices, which are based on cost and riskadvantages (Exhibit 18). Although their prices sometimes lead to higher loss ratios, mutuals can more thancompensate for this through their low cost base and absence of dividend payments to investors.
Currently, 69 major insurers are organized as mutuals, generating 20% of Europe's non-life premiums.
31
1 The legal form "Mutual" varies across markets. Typical examples are "Versicherungsverein auf Gegenseitigkeit" (Germany), "Mutuelle" (France), "Mutua" (Spain) and"Genossenschaft" (Switzerland).
Marketaverage
Spar-kassen
(A)
BBVA(E)
AEGON(NL)
Bansabadel(E)
SanPaolo
(I)
Caifor(E)
SociétéGénérale
(F)
CréditMutuel
(F)
BNPParibas
(F)
CréditAgricole
(F)
Santander(E)
CNP(F)
HBOS(UK)
L&G(UK)
LIFE PRODUCERS ACHIEVE LOWER COST RATIOS
Exhibit 17
Competitive advantage in cost ratio (2001)(1)
(1) Cost ratio defined as technical expenses as percent of technical provisions compared to market averageSource: ISIS; Annual reports; Local authorities; BCG Insurance Database
0%
-0.5%
-1.0%
In summary, it is safe to say that not all local leaders have yet exploited their potential competitive advantages.Most insurers do not even possess any structural advantage. Only one third of Europe's local life and non-lifeentities command sound positions as market leaders, life producers or non-life mutuals that allow them toachieve superior results.
Simply put, this means that two thirds of all local insurance entities in Europe need to expend extra effort inorder to generate adequate returns. Otherwise, they will destroy value. These companies are either subsidiariesof international insurance groups or independent local players. Senior managers of such organizations mustreview their positions and decide whether they can compensate for structural handicaps. Pressure from poli-cyholders for operational excellence, and from shareholders for adequate returns, will influence their deci-sions and likely lead to further consolidation.
Exit Marginal Activities
The history of the insurance industry shows clearly that synergies from multidimensional expansion effortsrarely materialize. Achieving scale or added value across countries and/or different businesses is usually just avision that rarely becomes reality. Among the reasons are that portfolios typically involve a broad set of opera-tions that encompass different cultures and legal systems, and include a high proportion of sub-critical units.
32
Higher combined ratiothan market
Loss ratio relative to market average
-5% 0% 5% 10%
NON-LIFE MUTUALS ACHIEVE LOWER COST RATIOS
Source: ISIS; Annual reports; Local authorities; BCG Insurance Database
Cost ratio relative to market average (2001)
0%
15%
-5%
-10%
-15%
-20%
Provinzial Rhein (D)Cattolica (I)Oberöster-
reichische (A)
Grazer (A)VGH (D)
Matmut (F)
Macif (F)
Westfälische Provinzial (D)
LVM (D)
DEVK (D)
VKB (D)
NFU (UK)
Univé (NL)
VereinigteHaftpflicht (D)
MAIF (F)
HUK-Coburg (D)Higher loss ratioovercompensated by cost
Lower cost- and lossratio
Exhibit 18
In addition, most insurers run fully integrated business models in which virtually everything is done in-house.This creates enormous complexity, which is both difficult to manage and costly.
Therefore, it is only when companies focus their attention and capital on specific countries, businesses or activ-ities in which they already have competitive advantage (or in which they possess deep knowledge and experi-ence that can create advantage quickly) that they will be able to grow profitably and generate value for theirshareholders. Each link in the value chain must be challenged, even for core units. A fundamental question,one that is already posed frequently in many other industries, must be asked: Could an outside provider per-form this activity better or at lower cost?
Let us examine some of the ways in which insurers might refocus their businesses:
Exiting CountriesMost European insurance groups have international or even global portfolios. Most are also highly fragment-ed, consisting of many sub-critical country units that have severe structural disadvantages. Only six groups—Allianz, AXA, ING, Aviva, AEGON and Fortis—achieve more than €1 billion (combined life and non-life) inannual premiums per foreign market. And even these portfolios are significantly influenced by a few very largeoperations. Many groups such as Mapfre, ERGO, BNP, Groupama, Wiener Städtische and Uniqa operate in upto 20 foreign countries with below €100 million in premiums and local market shares under 1%. It is almostimpossible to manage such positions profitably, and the complexity they impose on corporate centers is enor-mous (Exhibit 19).
33
AEGON
ING
Allianz
AXAAviva
Prudential
Fortis
SkandiaBâloise
Swiss Life
RSA
ZFS
Number of foreign countries
10 20 30 40
FOREIGN PORTFOLIOS ARE HIGHLY FRAGMENTED
(1) Per country unit, life and non-life premiums combined, 2001Source: Annual reports; BCG Insurance Database
Average premium ( million)€(1)
2,000
50
1,500
1,000
500
05 15 25 35 45
Generali
GerlingERGOMapfreBNP
GroupamaWiener St.Uniqa
Toro Eureko
San Paolo
Santander
Winterthur
HDI
Standard Life
If....
100
Exhibit 19
In most cases, foreign operations have been significantly less profitable than home-market activities, or haveeven recorded losses. In 2001, for example, AXA generated 76% of its premiums outside France, but only 41%of its profits. ERGO's foreign business (about 19% of its total) accounted for a mere 2% of its overall profit.And Allianz's foreign activities (about 68% of its total) lost money and reduced the company's overall profit by27%.
Ironically, now that many insurers have decided to sell their subscale subsidiaries, very few buyers have the cap-ital to acquire them. Some operations cannot be sold because the resulting write-off on book value would fur-ther deteriorate the capital outlook for the seller. Alternative ways to solve this dilemma may be mergers ofinternational groups or swaps of complementary portfolios to eliminate sub-critical positions and create newlocal leaders. In general, however, more players need to adopt strategies that concentrate on their core coun-tries (Exhibit 20).
Exiting BusinessesSimilarly, some companies have started to question whether they want to keep all existing businesses in theirportfolios. The main trigger points for these decisions are capital requirements, strategic fit, minimum size, andof course, profitability. For example, reinsurance and industrial insurance require considerable capital, andsubscale life operations have become a challenge for non-life insurers (just as subscale non-life activities areburdening some life players). Banking and third-party asset management require different skills and cultures.Many companies have begun to divest themselves of unprofitable, non-core businesses (Exhibit 21)
34
PLACING FOCUS ON CORE COUNTRIESSelected Strategies
Source: Annual reports; Company information
Aviva
ZFS
Winterthur
RSA
Fortis
Swiss Life
"We will ... concentrate on markets where Aviva can achieve a leading position"
"... is now focusing on core profitable markets in the US, Switzerland, Germany, Italy and Spain, and has dropped its plan for globaldominance"
"Focus on home market Switzerland and selected European countries ..."
"Our primary markets will be those where we already have a significant capability, presence, scale and solid reputation"
"Fortis' strategy is ... to develop growth platforms in Europe in selected activities in order to acquire leading market positions"
"Focus on core life units Switzerland, France, Germany, Netherlands, Belgium/Lux. Non core are ..."
Bâloise"...Bâloise will focus on the core markets Switzerland, Germany, Austria, and Belgium/Lux."
Exhibit 20
Outsourcing/Insourcing ActivitiesLocal market leaders achieve critical size and synergies across lines of business, client segments and distribu-tion channels to build competitive advantage along the entire value chain. They can benefit by offering theiroperational systems to other insurers through insourcing agreements. Players without scale or scope advantagesshould focus their attention on core activities and gradually start outsourcing in non-core areas.
Large life insurers, for example, can gain by focusing on their factory, utilizing the third-party distributionchannels provided by banks, brokers and other sales organizations. They can also produce "white label" prod-ucts that other players brand. Access to efficient distribution may require elements of control through part-nerships, joint ventures or ownership. Mutuals, for their part, should continue to produce their own non-lifeproducts, but increasingly insource offerings from life producers. They can also outsource their (typically sub-scale) asset management activities to banks or reinsurers. All of these scenarios concern a critical initiative intoday's climate: concentrating on core competencies (Exhibit 22).
Moreover, a set of new market participants will likely emerge that focus on only a small part of the value chain.Banks will increasingly sell (life) insurance products using their branch networks as (open) distribution plat-forms, or by leveraging their own insurance companies. Focused distribution organizations such as AWD(Germany), Mediolanum (Italy) or St. James's Place (UK) can gain significant market share based on theirbroad choice of products and marketing skills. Retailers such as Marks & Spencer (UK), Carrefour (France),Migros (Switzerland) and Tchibo (Germany) can use their regular contact with customers to distribute insur-ance products produced by cooperative partners. Asset managers that specialize in insurance assets can offerasset/liability management capabilities, as well as a full set of investment services tailored to the insuranceindustry.
35
EXITING NON-CORE BUSINESSESSelected (Planned) Divestments
Exhibit 21
ZFS
GENERALI
WINTERTHUR
GROUPAMA
BALOISE
W&W
ZFS:In Netherlands, CEE, Canada, France,United Kingdom, and United States(partly)
RSA:In United Kingdom (group life), Italyand Offshore
AVIVA:In Belgium, Spain, Portugal, Australiaand the United States
ZFS:In Baltics, CEE (personal lines),Scandinavia, Netherlands and France
PRUDENTIAL:In United Kingdom
SWISS LIFE:In Switzerland, France and Belgium
SKANDIA:In Scandinavia and United Kingdom
AXA:Donaldson, Lufkin & Jenrette
ZFS:Scudder, Gresham, Threadneedle,Rüd, Blass & Cie., Zurich Invest Bank
RSA:UK investment funds, Tyndall
SWISS LIFE:STG, Banca del Gottardo
SKANDIA:Asset management
Banking and third partyasset managementNon-life insuranceLife insuranceReinsurance or
industrial insurance
Source: Annual reports; Company information
Achieve Operational Excellence
Focusing on attractive markets, building local leadership positions, and exiting marginal activities are becom-ing prerequisites for success in the European insurance industry. But these initiatives are not all that is need-ed. The insurance sector must also become more efficient, and in certain aspects more professional. In orderto reduce dependency on capital markets and reach a technical break-even point, most insurers need to sig-nificantly reduce costs and adjust their pricing structures. This picture is shaded differently in each of the twomajor insurance categories: non-life and life.
Non-Life InsuranceAchieving a technical break-even point (a combined ratio of below 100%) typically requires cost ratios between20% and 25%. In 2001, average cost ratios in many countries were significantly higher: 28% in Germany andSwitzerland, 29% in the United Kingdom, 33% in Belgium, and 34% in Austria. The total cost saving neededto reach an average ratio between 20% and 25% for all players across Europe's core markets amounts to morethan €9 billion.
A few leading insurers, in fact, are well below the 20%–25% benchmark. Such players enjoy high profitabilityin today's high-price environment. But institutions above the benchmark—and there is a wide range of cost per-formance among players—risk becoming unprofitable if they do not reduce costs significantly (See Exhibit 23).
36
Core competence
CONCENTRATING ON CORE COMPETENCIES
Generali
"Market leader"
Deutsche Bank Skandia AWD MACIF Fidelity
Bank "Life producer" Distributor "Non-life mutual" Asset managerValue chain
Outsourcing/partner
Life
Non-life
Life
Non-life
Life
Life
Non-life
Distribution
Product/oparations
Assetmanagement
Example
Exhibit 22
Life InsuranceBetween 1998 and 2001, the average return on equity in European life markets was 10%, based on a profit mar-gin of 0.6% at an assumed solvency margin of 6%1. Profitability in some markets—Belgium, the Netherlands,Italy, and Spain —was much higher. For the markets that performed less admirably, the cost saving required toachieve an average return on equity of 10 % amounts to about €6 billion (assuming investment returns andpolicyholder participation at the 2001 level).
A few leading insurers have adjusted their products, organized their distribution channels and shaped theirprocesses to achieve adequate returns. But as in the non-life segment, the majority of companies still have along way to go to reach a sufficient level of performance.
Realize Group Advantages
Despite European harmonization efforts, local insurance markets are still very diverse. Insurance is, for themost part, still a local business. And having many small positions in various markets does not usually add up to
37
45%
40%
35%
30%
25%
20%
15%
10%
5%
SIGNIFICANT DIFFERENCES IN NON-LIFE EXCELLENCENon-Life Cost Ratios of Local Insurers (2001)(1)
(1) Cost ratio defined as technical expenses/premiums written for local business unitsSource: ISIS; Annual reports; Local authorities; BCG Insurance Database
A
Uniqa
Market average
B UK CH D I NL F E
Dexia
AXA Vaudoise ERGO
Aviva
Allianz ZFS
Generali
Fortis
KBC
AXA
SMAP/OMOB
Aviva
ZFSCooperativeChurchill
Helvetia Patria
ZFSBâloise
AXAGenerali
Allianz
HUK-Coburg
Fondiaria/SAI
Unipol
Fortis
ING
Univé
Eureko
GroupamaAXA
MACIF
MAIF
Allianz
Mapfre
Wiener
AllianzGrazer
AXAGenerali
Allianz
AXAGenerali
Städtische
Exhibit 23
Generali
1 i.e., 1.5 times the minimum margin of 4% of technical reserves for traditional business
a sizeable group. There are few synergies in having, say, a property and casualty insurer in one country and alife insurer in another.
The fact is that most corporate centers today act as "financial holding companies" for their business units, andthere is little value added across countries. Accordingly, some head-office functions are finding it increasinglydifficult to justify their costs. Creating value across countries requires a common logic across businesses andfunctions as well as clear group competencies along the management of performance, risk, assets, processesand people. Today, many international groups seem to be unclearly positioned (Exhibit 24).
In our view, there are three strategic paths to creating value across country markets (Exhibit 25). One is tobecome a Multi-Market Leader, replicating in other core markets the life and non-life dominance that hasalready been achieved in the home market. Another is to become an International Life Group, leveraging keycompetencies across core life markets. A third path is that of the Industrial Insurer, serving corporate clients inseveral markets and achieving geographic diversification of risk.
Multi-Market LeaderOnly two insurance groups today have successfully realized the strategy of a true multi-market leader across theprincipal Western European markets: Allianz with five local market leader positions (and a significant presence
38
INTERNATIONALLY MANY GROUPS SEEM TO BE UNCLEARLY POSITIONED
(1) Life insurance as percent of total premium(2) Premiums outside home market as percent of total premium(3) Share of life insurance includes permanent health insuranceSource: BCG Insurance Database (2001 as basis)
Life i
nsur
ance
(1)
20 40 60 80 100
AEGON ING
Allianz(3)
AXA
Skandia100%
80%
60%
40%
20%
0%
70%
50%
30%
10%
90%
Generali
International business(2)
0
RSAGerling
HDI
MapfreGroupama
Winterthur
Aviva
ERGO(3)
Prudential
BUPA
MMA/MAAF
WienerStädtische
Fortis
RBoSBâloise
Helvetia PatriaR+V
BBVA
Santander
MAIFMACIF
Azur/GMF
Signal Iduna(3)
SocietéGénérale
Standard Life
Abbey Nat.
Cédit Agricole
Nordea
Royal London
L&G
IL&P
La Mondiale
San Paolo
AlectaPoste Italiane
Banca Monte dei PaschiBanques Populaires
HBOS
GothaerUnipol Toro
Cédit Lyonnais
Lloyds TSBCédit Mutuel
Rabobank
DEVKReale MutuaFondiaria-SAI
10 30 50 70 90
Swiss Life
Eureko
HUK Coburg(3)
W&WFolksamUniqa
LVM(3)NFU
BNP ParibasCNP
Friends Provident
Sampo
Cooperative
VHVUnivé
Agis
VKBCattolica
Mobiliar
Life producer
Non-life mutual
International life group
Multi market leader
Industrial insurer
Exhibit 24
If...
GjensidigeZFS
in all other markets), and Generali, with four market leader positions and two further significant country units(Exhibit 26).
A few other groups have a reasonably good base from which to grow into a multi-market leader: AXA, with twomarket leader positions and strong positions in three other countries, and the Swiss groups ZFS andWinterthur, with leadership positions in their home market and significant presences in some other countries.Aviva and Fortis, each with two market leader positions, will most likely focus only on life insurance acrossEurope.
International Life GroupsThree insurance groups focused on life products currently generate the majority of their premiums outsidetheir home markets: the Dutch insurers ING and AEGON, with strong subsidiaries in Europe, the UnitedStates, and other overseas markets; and Skandia of Sweden, which has numerous integrated international units.
Aviva and Fortis could potentially join this group if they exit international non-life activities. A few other lifegroups generate a significant share of their premiums outside their home markets: Prudential (UK), whichoperates in Asia and the United States; Swiss Life, which focuses on five European markets; and the Spanishbanks BBVA and Grupo Santander, which participate in Latin American bancassurance.
The majority of international life insurers operate small foreign subsidiaries or branches without significantcross-border added value, but typically with high management complexity.
39
THREE BASIC STRATEGIES TO GO INTERNATIONAL
Home market
Life producer
Non-life mutual
Home marketleader
2.International
life group
1.Multi market leader
3.Industrial insurer
International expansion
Integrated international life units
High brand awarenessEfficient operations/scaleSuperior asset management skills
Leader in several markets
Focus on multinational clients
Superior underwriting know-howLarge capacityDiversification across countries
Local cost advantagesAttractive for employees/partnersFinancial strength/know-how
Sources of advantage
Exhibit 25
Industrial InsurersTraditionally, most non-life insurers have offered industrial insurance as one of their business segments. Butvery few have achieved the capability and international reach to be a preferred underwriter for large corpora-tions and brokers, which is necessary in order to be profitable in soft markets.
At present, a broad reassessment and consolidation is taking place in this segment. The leading groups, Allianzand AXA, are centralizing service to international clients in specialized units such as "Allianz Global Risks" and"AXA Corporate Solutions."
Industrial insurers such as Gerling, HDI and RSA are facing significant performance problems, and are review-ing their portfolios and underwriting standards. Several international insurers have already exited this marketor particular parts of it.
Develop a Performance Culture
Financial planning, target setting and controlling can be very complex processes for insurers. The reasons aremyriad. First, non-life profits depend heavily on estimates of future claims payments, which of course are impos-sible to predict exactly. Large claims and natural catastrophes pose a special challenge due to their "low frequen-
40
Number of marketleader positions
Source: BCG Insurance Database
Local market leader
AllianzGeneraliAXAAvivaFortisZFSWinterthurERGOBâloiseMapfreINGWiener StädtischeUniqaToroUnipolEurekoRabobankKBCSMAP/OMOB
MARKET LEADER POSITIONS IN EUROPE
L NLUK
L L L L L L L LNL NL NL NL NL NL NL NLD F I NL CH E B A
<1% 5.0% 13.8% 5.5% 12.6% 1.6% 5.3% 4.1% 3.2% 5.9%20.3% 13.4% 15.1% 5.3% 12.7% 6.6% 6.5% 15.1
4.2%
10.3%
–
4.0%
0.6%
–
9.6%
20.9%
1.7%
8.2%
<1%
9.9%
3.7%
<1%
5.4%
2.5%
7.8%
1.1%
<1%
6.2%
12.9%
3.1%
<1%
<1%
21.4%
<1%
3.8%
1.4%
1.5%
<1%
–
8.2%
6.5%
0.7%
2.5%
7.2%
13.3%
0.8%
1.1%
–
22.1%
7.9%
9.1%
3.8%
0.3%
12.7%
25.1%
8.7%
–
4.4%
2.3%
6.8%
0.5%
2.0%
2.5%
0.1%
13.1%
1.8%
<1%
13.1%
27.7%
<1%
1.3%
0.8%
1.1%
10.1%
<1%
11.4%
8.8%
11.0%
2.3%
2.3%
<1%
16.4%
19.9%
6.0%
6.0%
–
4.3%
1.0%
5.2%
1.4%
<1%
5.6%
12.9%
2.5%
–
<1%
<1%
16.0%
3.6%
1.0%
2.9%
<1%
–
<1%
6.7%
10.8%
0.7%
3.1%
7.7%
11.5%
1.2%
0.4%
2.2%
10.2%
12.9%
6.1%
4.4%
0.9%
19.1%
20.1%
8.0%
<1%
5.7%
5.4%
–
1.0%
4.5%
4.3%
1.4%
16.2%
0.1%
2.7%
18.4%
12.8%
2.5%
8.8%
3.0%
5.2%
3.7%
<1%
9.3%
9.8%
20.5%
4.2%
<1%
<1%
18.8%
16.3%
5422211111111111111
Market share > 5% Market share < 5%
Exhibit 26
cy/high severity" nature. And life results are strongly influenced by long-term projections of future mortality,longevity and disability, which have become increasingly difficult to assess with the desired degree of accuracy.
In addition, assumptions about investment returns—which have generally become more volatile—contributegreatly to product profitability, particularly for long-tail life and non-life products. The allocation of expensesand cost of capital to products, businesses and country units is very complex, given joint infrastructures, diversedistribution channels, and ambiguity surrounding "true" capital requirements.
Yet there are few major industries in which transparency is so low, accountability so fragmented, and responsi-bility for results so diluted as in the insurance sector. Making the right decisions on the business mix, ensuringthat pricing is in line with real cost and risks, and motivating management to achieve its full potential are there-fore critically important. Such efforts require a rigorous financial framework and consequent steering of allmanagement processes (Exhibit 27). These include:
■ strategy development, based on a clear understanding of which businesses need how much capital andgenerate which level of returns
■ planning and budgeting for operational and functional units, based on key performance indicators
■ regular financial controlling and monitoring, to proactively direct the business
■ personal incentives, to encourage the desired employee behavior.
41
Level
STEERING FINANCIAL PERFORMANCE REQUIRES AN INTEGRATED FRAMEWORK
Core-competence Financial drivers
Market capitalization
ROE
RORAC
Result non-life
Value management
Portfolio management
Risk management
Margin management
Shareholder
Group
Market unit
Business segment
Exhibit 27
Loss ratioCost ratioInvestment result
Risk marginCost marginInvestment margin
DividendsExpectation premiumEmbedded value
Net asset valueReserve redundanciesSolvency requirements
Risk capitalDiversificationAsset/liability risk
Result life
The profitability and solvency of many European insurance groups is clearly in jeopardy. The dramatic invest-ment losses of the past few years have severely hurt annual results and wrought havoc on balance sheets.Although financial markets may indeed rebound to a more "normal" range of returns, the root causes of theoverall malaise in the industry run deep and need focused attention. Among them:
■ Significant parts of the capital invested in marginal businesses provide below average returns and oftenlosses
■ Low operational efficiency causes insufficient technical results in many cases
■ Processes to manage technical and financial risks are often underdeveloped, not well integrated betweendecision makers, and too slow
■ The transparency needed to optimize pricing and guide performance is often insufficient
■ The expenses of corporate centers are often higher than the value they generate
Senior managers, in order to help their companies confront this crisis, will therefore have to implement radi-cal changes. They will need to develop and communicate a strategic logic and clear performance targets fortheir group that can guide both long-term decision making and day-to-day operations. They will also need toposition their companies in a way that generates sustainable profits, based on clear competitive advantages.When this is not possible, the sell-off of non-strategic units or even a full merger with another organizationshould be considered.
Furthermore, core competencies must be identified and developed across groups to create value, with empha-sis on areas where advantages of scale are evident and outweigh the cost of complexity. Where there are no syn-ergies across countries or businesses, the corporate center must be kept to a minimum. Managers need toactively consolidate their core markets, organically or by acquisition.
Taking these actions will dramatically alter today's highly fragmented European landscape. We expect the mostsuccessful European insurers over the next five to ten years to break down into the following groups:
■ Three to five Multi-Market Leaders, with leading life and non-life positions in several European markets
■ Three to five International Life Groups, focusing on a few core markets, with clear group competencies
43
RESHAPED LANDSCAPE WILL EMERGEA
■ Three or four Industrial Insurers that will dominate this market segment, most likely as part of multi-market leaders (and reinsurers)
■ Two or three Local Market Leaders per country, with leading positions in life and non-life business, anda clear focus on their home market
■ Three or four Life Producers per country, working in close cooperation with banks and other distribu-tion partners (or non-life insurers)
■ A varying number of Non-Life Mutuals in several countries, focused on non-life business and on nichegroups in their home markets
■ Many Independent Distribution Companies offering superior advice and open-platform products, andan increasing number of Third-Party Providers offering specific parts of the insurance value chain.
This structure leaves a very long list of insurance companies and subsidiaries that will not be able to earn theircost of capital, expand their businesses, or offer attractive jobs. Many of Europe's leading insurance groups willhave to redefine their portfolios and limit the scope of countries in which they pursue competitive advantage.This process will fundamentally challenge and change the future of marginal country units, which will be eithergrown by acquisitions, merged with other operations, sold, or put into run-off.
Now is the time for senior management teams to act. Asking the right questions and making the tough deci-sions will help insurers avoid repeating the mistakes of the nineties, which the high investment returns of thatdecade succeeded so well in covering up.
44
Change is no longer an option but a must in order to return to adequate solvency and profitability. Change isthe basis for future growth and value creation. For some insurers, it has become a prerequisite for survival.
Many first steps have been taken. Some companies have raised new capital, adjusted policyholders' dividendsand agents' commissions, increased prices, reduced costs, and divested non-core units.
The senior managers of every European insurance company must define their organization's desired futureand decide on the best way to achieve their goals based on available skills and resources. Managers must posi-tion their companies within the new landscape before competitors' actions do it for them. The ongoing con-solidation process will offer many new possibilities to those with proactive strategies.
The following Management Questionnaire intends to guide senior managers in determining the path that theirown organizations should take.
47
OW TO DESIGN CHANGEH
48
MANAGEMENT QUESTIONNAIRE TO DESIGN CHANGE
What are key the characteristics and major trends in each market?What are the expected profit levels for each relevant business?What are the performance benchmarks of local leaders?What are the key requirements for executing winning strategies?What are our core skills in each market?
1.Focus on attractive markets
Do we focus on clear "core" markets/units?Do we have sustainable leadership positions?Do we have measurable competitive advantages?Do we convert advantages into superior profitability?Do we need to strengthen our "core" market positions?
Which markets and businesses are "non core" for us?Which players are better owners for our "non core" operations?Which exit strategy creates the most shareholder value?Which businesses or services should we out/insource?Which partners are best providers for "non core" services?
2.Build local leadership positions
3.Exit marginal activities
What is the return on (required) capital of each business unit?What is the relative performance compared to market peers?What are the main areas of operational strength and weakness?What are the key levers to becoming the best-practice benchmark?What is the additional value potential of being best-in-class?
4.Achieve operational excellence
What is the strategic logic for our group?What are our core competencies at the group and local level?What is our added value across core markets and businesses?What is the value of each unit belonging to our group?What is the best governance model for leveraging our core competencies?
Do we have a common understanding of performance management?Do we have clear financial targets and performance indicators?Do we have adequate planning, budgeting and controlling processes?Do we adequately ensure optimal performance orientation?Do we have effective accountability and incentive systems?
5.Realize group advantages
6.Develop a performance culture
Top Insurance Groups
51
(1) Incl. savings-type premiumsSource: ISIS; Annual reports; BCG Insurance Database
Premium (B )€
WHO'S WHOEurope's Top Groups, 2001
Univé
VHV
DEVK
Gjen
sidige
NOR
Mob
iliar
Sam
po-L
eoni
aFo
lksam
NFU
LVM
MAI
FAl
ecta
Post
e Ita
liane
Reale
Mut
uaBa
nca
Mon
te d
ei Pa
schi
Roya
l Lon
don
Mut
ual
Frien
ds P
rovid
ent
Agis
Irish
Life
& P
ensio
nBU
PAUn
iqaBa
nque
s Pop
ulair
esNo
rdea
BBVA
If...
P &
CW
iener
Stä
dtisc
heLa
Mon
diale
Helve
tia-P
atria
Co-o
pera
tive I
nsur
ance
MAC
IFCa
ttolic
aAz
ur/G
MF
HUK-
Cobu
rgW
& W
San
Paolo
Cred
it Ly
onna
isSi
gnal
Idun
aRa
boba
nkGo
thae
rVK
BSa
ntan
der
Bâloi
seUn
ipol
Socie
té G
ener
aleCr
édit
Mut
uel
Toro
-Cap
italia
MM
A/M
AAF
R+V
Roya
l Ban
k of S
cotla
ndEu
reko
Abbe
y Nat
ional
Map
freLlo
yds T
SBFo
ndiar
ia-SA
ILe
gal &
Gen
eral
BNP
Parib
asCr
édit
Agric
oleSk
andia
Gerli
ngGr
oupa
ma
GAN
HBOS
Swiss
Life
(1)
ERGO
HDI
Stan
dard
Life
CNP
AEGO
NFo
rtis
RSA
Win
terth
urPr
uden
tial
Gene
rali
Zuric
h FS
(1)
Aviva
ING
Axa
Allia
nz(1
)
80
70
60
50
40
30
20
0
10
Exhibit 28
A PPENDICES
Local Insurance Landscapes
■ UK■ Germany■ France■ Italy■ Spain■ The Netherlands■ Switzerland■ Belgium■ Austria
52
AXA
Aviva
Prudential
RSAZFS
Market share non-life (%)
10 20
UK: LOCAL INSURANCE LANDSCAPE
Market share life (%)
30
305 15 25
Standard Life
RBoS
25
20
15
10
5
0
HBOS
BUPA
Lloyds TSBL&G
Exhibit 29
Allianz
Note: UK life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 173.3 / 74.5 and 46% / 59%Source: ABI; Swiss Re sigma; BCG Insurance Database
€
53
Allianz
AXA
ZFS
Market share non-life (%)
10 20
GERMANY: LOCAL INSURANCE LANDSCAPE
Note: German life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 63.1 / 77.2 and 41% / 43%Source: Hoppenstedt; Swiss Re sigma; BCG Insurance Database
€
Market share life (%)
30
305 15 25
Generali
Gerling
ERGO
HUK-Coburg
25
20
15
10
5
0
Exhibit 30
Allianz
AXA
Market share non-life (%)
10 20
FRANCE: LOCAL INSURANCE LANDSCAPE
Note: French life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 85.3 / 43.6 and 54% / 57%Source: L'Argus; Swiss Re sigma; BCG Insurance Database
€
Market share ife (%)
30
305 15 25
GroupamaMMA/MAAF
25
20
15
10
5
0
MACIF
CNP
Crédit Agricole
GeneraliCrédit MutuelBNP
Azur/GMF
SG
Exhibit 31
54
Allianz
Market share non-life (%)
10 20
ITALY: LOCAL INSURANCE LANDSCAPE
Note: Italian life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 47.1 / 31.2 and 57% / 64%Source: Giornale delle Assicurazioni; Swiss Re sigma; BCG Insurance Database
€
Market share life (%)
30
305 15 25
Generali
ToroCapitalia
San Paolo
25
20
15
10
5
0
Fondiaria/SAI
Unipol
Exhibit 32
Poste Italiane
AEGON
ING
Allianz
Aviva
Fortis
Market share non-life (%)
10 20
NETHERLANDS: LOCAL INSURANCE LANDSCAPE
Note: Dutch life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 24.4 / 17.8 and 67% / 49%Source: Assurantie Magazine; Swiss Re sigma; BCG Insurance Database
€
Market share life (%)
30
305 15 25
Eureko
25
20
15
10
5
0
Univé
Rabobank
Exhibit 33
55
AllianzAXA
Aviva
Market share non-life (%)
10 20
SPAIN: LOCAL INSURANCE LANDSCAPE
Note: Spanish life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 22.0 / 19.4 and 43% / 38%Source: INESE; Swiss Re sigma; BCG Insurance Database
€
Market share life (%)
30
305 15 25
Generali
MapfreSantander
25
20
15
10
5
0
Caifor
BBVA
Exhibit 34
AllianzBâloise
Swiss Life
ZFS
Market share non-life (%)
10 20
SWITZERLAND: LOCAL INSURANCE LANDSCAPE
Note: Swiss life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 22.3 / 13.4 and 79% / 72%Source: BPV; Swiss Re sigma; BCG Insurance Database
€
Market share life (%)
30
305 15 25
Winterthur25
20
15
10
5
0
Helvetia Patria
Mobiliar
Exhibit 35
56
ING
Bâloise
Allianz
AXA
Fortis
Market share non-life (%)
10 20
BELGIUM: LOCAL INSURANCE LANDSCAPE
Note: Belgian life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 13.6 / 9.6 and 74% / 59%Source: CDV/OCA; Swiss Re sigma; BCG Insurance Database
€
Market share life (%)
30
305 15 25
Winterthur
25
20
15
10
5
0
DexiaKBC
SMAP/OMOB
Exhibit 36
Allianz
Market share non-life (%)
10 20
AUSTRIA: LOCAL INSURANCE LANDSCAPE
Note: Austrian life / non-life total premiums (2001) and cumulative top-5 group share of relevant market are B 5.9 / 6.7 and 66% / 72%Source: VVÖ; Swiss Re sigma; BCG Insurance Database
€
Market share life (%)
30
305 15 25
Generali
Wiener Städtische
25
20
15
10
5
0
Uniqa
Sparkassen
Wüstenrot
Exhibit 37
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