8/7/2019 BarrySmith

1/26

8/7/2019 BarrySmith

2/26

The Changing Face ofUnderwriting and Distribution

Barry Smith

8/7/2019 BarrySmith

3/26

Overview

UK in European context

UK market

Impact on underwriting

Looking towards the future

Conclusion

8/7/2019 BarrySmith

4/26

How does European distribution differfrom the UK

0

20

40

60

80

100

France Germany Poland elgium pain Ireland UK

rokers Agents ank ompany direct irect & Affinity

Source: Axco

8/7/2019 BarrySmith

5/26

Why is there a difference?

Context in Europe

Traditional intermediary channels are well entrenched and continue

to dominate

Some company direct channels such as mutuals and in-house sales

teams are still prevalent

In some countries, bank distribution is well established

Pure direct channels (telephone and Internet) are gradually becoming

more common

New regulations driven by the EU will begin to impact in terms of

intermediary consolidation

But change is slow as consumers have a preference for

personal contact & feel insecure about Internet payments

8/7/2019 BarrySmith

6/26

The European va ue chain is sti focusedon the insurer

CustomerCustomer ntermediaryntermediary nsurer nsurer Reinsurer Reinsurer

Insurers in Europe are still calling the shots and the

customer is not in the driving seat

8/7/2019 BarrySmith

7/26

In the UK the va ue chain has increasing ybecome b urred

CustomerCustomer IntermediaryIntermediary InsurerInsurer Reinsurer Reinsurer

Budget,eg Munich Re

Direct insurers

Groupama,

X , etc

8/7/2019 BarrySmith

8/26

In the UK, the va ue chain hasprogressive y reversed

CustomerCustomer IntermediaryIntermediary InsurerInsurer Reinsurer Reinsurer

Customers are now more informed and demanding so that

insurers and intermediaries have to be more responsive to

the needs and norms demanded by the customer

8/7/2019 BarrySmith

9/26

Why UK customers behave different y

Self-service and price focus has been pushed on them

(direct distribution and now the Internet)

They have become more knowledgeable about their needs and

confident in making demands

Has price change affected their view? e.g. liability premiums The Internet in particular has provided them with the ability to

research in their own time

Aggregators enable them make comparisons more easily

Consequently their behaviours have changed and they pull for

products and services

Customers now have more choices about where and when to buy

8/7/2019 BarrySmith

10/26

What e se is changing in distribution

Consolidation of large brokers

Increase in insurer owned brokers

Change in broker model e.g. portfolio transfer andsolus schemes

Emergence of SME direct

8/7/2019 BarrySmith

11/26

Has the market rea y changed?

Insurers have owned brokers for long time

e.g. R&SA (> MMA) + Swintons, Fortis + RIAS, NU + HHH

Brokers have also had access to underwriting capacity for

some time e.g. Budget, Hastings, AA

Both insurers and intermediaries are using the same

technology to contact the customer (i.e. call centres & Internet)

Recent changes in distribution represent an increase in activityrather than a fundamental shift

8/7/2019 BarrySmith

12/26

Where is the increase in activity?Intermediaries acquiring

intermediaries Towergate mode

ON Footman James

Insurers acquiring

intermediaries

X Stuart exander, Layton B ackman, Smart Cook

Zurich Ends eigh

Groupama Caro e Nash

ianz Cornhi remier ine Home Legacy

IAG Equity, Hastings Boncaster

Insurers acquiring or

bui ding direct brands RBS Insurance Direct Line, Churchi , rivi ege, Tesco (JV)

Admira Group Admira , Diamond, E ephant, Be , G adiator

Insurers acquiring arge

customer bases NU RAC

Saga - AA

Affinity partnerships RBS Insurance

HBOS

Fortis, and others

8/7/2019 BarrySmith

13/26

But one size does not fit a

There are differences in strategic rationale

Protection strategy

Growth strategy

Consolidation of existing business

Regulation driven by the need for consumer protection

Some companies are pursuing multiple strategies

The common theme appears to be focused on securing

access to the customer & greater influence on the value chain The key issue is about controlling access to market

8/7/2019 BarrySmith

14/26

Some quotes

Commenting on the recent

merger between Saga and the

AA, Andrew Goodsell

Sunday Times 01/07/07

"The UK market was surprised

by our decision to acquire

brokers, and other insurers

wi be panicking at the

missed opportunity.

Commenting on AXA's broker

acquisition strategy, Mr de Castries

Post Magazine 28/06/07

We are not trying to be a

things to a menits about

using our know edge and

expertise (in cross se ing) to

make the AAmore successfu

8/7/2019 BarrySmith

15/26

What about the customer?

One size does not fit all customers

Providers now focus on a range of solutions

Niche segments and schemes

Direct marketing (telephone, press, internet) Owned distribution

And a new trend has emerged

Alternative services for no-fault claims are emerging

customers increasingly do not go their insurance company first What value do they get from insurance when it is not their fault?

8/7/2019 BarrySmith

16/26

The impact on underwriting

How has underwriting changed?

What are the driving forces?

8/7/2019 BarrySmith

17/26

Underwriting has a so becomemore discip ined

Insurers now write for technical profit (I think)

Low investment returns

Shareholder pressure

Regulatory factors

Low cost base is now key

Drive towards low cost models

8/7/2019 BarrySmith

18/26

How the science of underwritinghas changed

Harnessing the power of technology impact on number

crunching; speed of reaction increased (real time)

Rating increasingly granular micro level (next nano level?)

Use of credit checks secondary underwriting More data from ever increasing sources

Flood plain mapping

Greater underwriting discipline pressure from regulators and

lower investment returns

8/7/2019 BarrySmith

19/26

Our approach to the customer haschanged underwriting

Retail environment

Internet discounts (not necessarily reflecting operational

cost savings)

Use of traditional retail incentives 2 for 1 offers, 13 months

cover for 12 months premium, price matching, etc

Long term customer value balancing new business acquisition

against lower cost of retention over time

Test and learn pricing

Sensitivity to customer segments multiple pricing structures Elasticity modelling optimum pricing

8/7/2019 BarrySmith

20/26

Looking towards the future

Challenges?

Influence of the customer?

Where do we go next?

8/7/2019 BarrySmith

21/26

Cha enges of the 21st Century

Marketing

Increased competition beat your renewal

Manipulation of prices to the customer cutting margins/commissions

Distribution

Impact of the Internet and aggregators driving down margins

Consolidation of broker market

Customer

Taking control of the research and buying process

Erosion of loyalty at renewal ease of switching

Power of brand

8/7/2019 BarrySmith

22/26

Customers wi shape our future?

Consumers will continue to influence / control the buying process

We will need to respond to their needs

They will expect us to know them and price accordingly

Will be more accepting of risk?

How consumers buy will continue to change Affinity groups and retailers will continue to grow

Expanded offerings

New entrants

Own brand direct insurers will continue to grow but at a slower pace

On the horizon, aggregators will gain a greater foothold and challenge otherchannels for the number one slot

Small commercial lines (SME) become commoditised like

personal lines

8/7/2019 BarrySmith

23/26

What shou d we expect?

Application of different strategies

Further consolidation of brokers and insurers

Influence of existing power brands and emergence of

new brands

Ownership change

Evolution of collaborations

Further sophistication of micro-granular pricing techniques

in addition

8/7/2019 BarrySmith

24/26

Where do we go next?

Need to consider strategic positioning and customer value

Cross sell and optimised pricing have greatest value impact

Insurers (& brokers) must think more about customer value and less

about claims prediction

Pricing will be geared to LTV of loyal customers

Wide ranging implications on whole business

Optimal price setting

Price presentation

Customer management

Proposition changes

Statements true for both direct and brokers channels

8/7/2019 BarrySmith

25/26

Increased focus on customer ifecyc eoptimisation to determine pricing strategy

Acquisition Deve opment Retention

Customer targeting

Direct mail

Narrow band promotion LTV based acceptance

through intermediaries

Customised product

Discounts targeted at

high value customers

Discount tied to value

opportunity

Cross selling

Service calls

Loyalty promotions

Benefit accumulation

Claims handling &

after care

Relationship pricing on

cross sold products

Promotional add-ons

Vouchers & other incentives

Service calls

Treatment by save team

Price development

through relevant stages

Retention discounts

Key customer

va ue metrics

tactics

Ro e of price

Source: Oliver Wyman

8/7/2019 BarrySmith

26/26

Conc usion

How life has changed

Need to be clear on strategy and most importantly,

execution

Decide where you want to be and why?

Who do you want to work with and alongside?

The choice is yours!