Look on the bright side

Insurers have, in the main, ridden out the financial crisis more successfully than many banks, and few have suffered catastrophic losses and writedowns. Now, in recovery mode, one of the main challenges facing the industry is generating sales growth; this is particularly true for personal lines insurers. Simon Gleave and Scott Marcello argue that the route to success for personal lines insurers lies in strategic thinking, product development and innovation.

One of the major challenges insurers face as they emerge from the crisis is that of restoring and rebuilding sales volumes. In the non-life personal lines sector, especially, consumers have a lot of discretion over the degree of cover they take and the risks they choose to insure. Economic conditions are likely to remain tight for some time, and discretionary consumer spending is likely to continue to be constrained. Based on these conditions and other market factors, it is likely that the battle for insurance revenues is going to be very competitive.

Automotive
In the motor market, for example, revenues have been badly damaged by the recession. Much new policy activity, and most transfers of allegiance to new insurers, are driven by new car sales, and these have been severely hit. Consumers are more price-sensitive. Price comparison websites encourage shopping around for the lowest premiums. As spending in the automobile sector recovers, many insurers are going to have to review their business strategy, carefully segment their markets, improve their product positioning and get their risk pricing right to take advantage.

Historically, these have not necessarily been strong focus areas for auto insurers. They have tended to rely on automatic renewals and on the passive flow of business from new car registrations, to drive revenues. This is unlikely to be good enough to generate sustained growth into the future.

Relying on a natural return to growth in the market will also be insufficient. In the West, markets are likely to take time to recover. The fastest-growing car market in the world is China, but the associated insurance market is still tightly restricted. Other Asian car markets such as Korea and Japan face continued declining sales. Similarly, despite consumers' sensitivity to price, cutting premium rates to stimulate sales is unlikely to lead to sustainable growth and leads to the possible result of under-pricing of risk, with the obvious dangers to profitability and overall stability. The route to success will instead lie in product innovation and a much greater understanding and responsiveness to the market.

Specific efforts like new partnership relationships with dealers can help. Innovative initiatives to persuade motorists to renew, and inclusion of new added value services and to switch from other suppliers may be part of these efforts. One important example might be a focus on emerging environmental issues. For example, both the car market and consumers are changing, in large part as a result of much greater awareness of environmental issues. Advances in vehicle technology are rapidly moving engines away from traditional oil-fueled combustion to the development of hybrid vehicles, electric vehicles and fuel cell vehicles. As yet, these represent a small proportion of the automobile marketplace. But their penetration is set to grow rapidly, especially if global initiatives such as the United Nations Climate Change Conference in Copenhagen result in a world-wide framework for CO₂ reduction (refer to our article 'Carbon trading: Rescued by Copenhagen?').

At the same time, consumers are increasingly demonstrating their attraction to suppliers - in many areas of the economy - who reflect their environmental concerns and offer distinctive products. Many international energy suppliers are now trading on an environmentally-friendly image. The first motor insurers who work out how to position themselves convincingly in a similar fashion may capture a significant and important segment of the market.

Property
The property insurance sector has also been severely impacted by the financial crisis and resultant recession. In developed economies, property sales volumes have almost universally been severely hit, even where domestic markets have fared better. Since a significant portion of personal lines property business is tied to new mortgages, insurance volumes have followed the property market down. The decline in property values is likely to depress premiums for some years. Indices of rebuilding costs are softening. Where consumers have discretion, for instance over whether to take specific insurance for high-value goods and luxuries, they are likely to constrain spending.

Property insurers, like motor insurers, have historically tended to rely passively on annual renewals. These are not going to generate sufficient growth in the future. Once again, one strategy for differentiation in the market and for attracting new customer segments could be to develop innovative insurance products and services which will attract the environmentally-concerned consumer. Policies which offer preferential benefits to customers who invest in clean domestic technology could be one option. Burnishing the insurer's green credentials, and supporting this with actions which attract customer loyalty, could be another. Either way, the trick will be to come up with new offerings, and new market positioning, which will appeal to new customer segments.

Overall growth in non-life insurance is likely to remain weak for some years to come. To succeed in what will inevitably become a tougher, more competitive market, insurance providers are going to have to raise their game. The most innovative will win.

Article Authors

Simon Gleave
Partner
KPMG in China +86 10 8508 7007 Simon Gleave View all articles by this author

Scott Marcello
Joint Regional Coordinating Partner
Financial Services Americas region
KPMG in the US +1 614 249 2366 Scott Marcello View all articles by this author