the future of general insurance survey and report...

A Marketforce special report

The Future ofGeneral InsuranceSurvey and Report2011

We live in uncertain times and the insurance industry is

currently undergoing the biggest period of change we are likely

to experience in our lifetimes. While many of the headline

topics remain the same - such as underwriting discipline and

consumer engagement - the rules of the game have changed,

especially following the rewriting of the economics of

insurance models by Solvency II requirements.

Growing regulatory burdens combined with the challenging

economic environment, volatile financial markets and

increasing demands from a more informed consumer base are

placing margins under considerable pressure.

It is against this backdrop that Marketforce has produced this

report. We surveyed 370 industry professionals, including over

200 insurers and brokers, to discover expectations for the

coming years. We also interviewed key industry figures to

inform the analysis of these results and, where appropriate,

we have included quotes to showcase their insights in their

own words.

This report has been designed to inform the debate taking

place within the industry, and we hope that it will provide a

valuable resource for insurers and brokers seeking further

clarity on the future of this challenging sector. It is not intended

to be the final word on developments in insurance, but instead

focuses on the questions that have come up time and time

again in the conversations we have had with C-level insurers at

our industry events throughout the year.

We hope that by answering those questions, this report,

alongside our associated conferences, will provide some of the

insights you require to plan for the future.

foreword

introduction

01

Juliet Knight

Director

Marketforce

The Future of General Insurance Survey and Report 2011

Following the recent economic turmoil, financial institutions across the board have faced a

reputational crisis, with consumer trust at an all time low. Many in the insurance industry rightly

point out that the sector has held up well during the crisis and continued to serve the needs of

both consumers and businesses effectively. However, public perception of insurance continues to

suffer - an issue that cannot be ignored when trustworthiness and reliability are such essential

ingredients of the insurance offering.

market trends

The initial fears that beset the insurance sector following the collapse of the

banks did eventually subside but there remains a risk that insurers’ exposures to

sovereign debt could see them once again in the spotlight. There is a clear demand

for transparency and openness and if the sector is to distance itself from the

failings of other financial institutions it would do well to reflect on how it might

better communicate its value and its financial robustness in a way that does this to

the satisfaction of the market and the public.

- Sandy Scott, CEO, The Chartered Insurance Institute

A Marketforce special report 02

“

”

The industry recognises the need to take action to better communicate its value, as is demonstrated by the

importance many of the senior insurers we interviewed attribute to initiatives such as ClimateWise and The

Aldermanbury Declaration. It is hoped that, by turning insurance into a profession, Aldermanbury will give the

sector’s status a much-needed shot in the arm. ClimateWise, meanwhile, not only promises to help insurers

address the risks and opportunities of climate change more effectively, but also positions the industry at the heart

of an issue dear to the public’s heart.

However, these initiatives alone are unlikely to be enough to transform the insurance sector’s reputation. The

transparent demonstration of financial robustness is at least as key. In this respect, the need to meet more

stringent capital requirements under Solvency II has some potential upside, albeit tainted by negative implications

for profitability at a time when margin pressure is already intense.

Against a background of economic uncertainty, the need to provide customers

with financial security and peace of mind has never been greater. Consumer

confidence in financial services has suffered immeasurably as a result of the last

few years and if insurers hope to rebuild the trust that they once had then it is

incumbent upon them to face up to the challenge laid down by consumers to

embrace ethical and professional behaviour.

- Sandy Scott, CEO, The Chartered Insurance Institute”

“

Given the now more sensitive

nature of the customer

relationship, the heavy margin

pressure that has

characterised insurance

provision for the past few

years might be expected to

continue. Not even surge

events have caused rates to

harden as quickly as would

previously have been expected,

and the predictability of the

insurance cycle – once seen as

an incontrovertible truth – can

no longer be relied upon. The

cycle’s correlation with wider

economic trends has become

harder and harder to track.

That said, whilst it remains

unlikely that insurers will see

a full reversal of their fortunes

in the foreseeable future,

market developments suggest

their margins may improve at

least slightly before too long.

Brokers have to date fared better than insurers, particularly when margin trends are viewed across the long term.

Indeed their margins have doubled over the last decade1. But mounting pressure from both clients and insurers

means brokers’ margin growth now appears set to stall or even reverse.

In such challenging times for insurers and brokers alike, it is not surprising that there is an expectation of further

market consolidation. 9 out of 10 of the insurers and brokers we surveyed expect further consolidation in the next

couple of years. Heightened regulatory scrutiny and a need to meet more stringent regulatory requirements will no

doubt add impetus to that trend. Although the extension of the Solvency II deadline to 2014 will reduce the pressure on

smaller firms, increased capital adequacy requirements in particular may prove a powerful driver for yet more

consolidation.

03The Future of General Insurance Survey and Report 2011

I think the insurance cycle will be much flatter than

the peaks & troughs we have seen in the past. Sadly,

however, recent experiences suggest that it might well

be the profitable ‘peaks’ that are trimmed off in this

flattening, with the troughs of unprofitability being as

prominent as they have been in the past. Insurance

cycles previously have been linked very closely to

wider economic trends; whilst this will remain the

case to a degree, the links seem less pronounced, with

insurance market factors and an excess of available

capacity blurring the connections.

- David Williams, Claims and Underwriting Director,

AXA Commercial Lines

“

”For insurers, I expect margin pressure will ease - it

couldn't have got much worse! The recent

improvement in private motor will not only help that

line but it also puts a 'floor' under other lines.

- Martin Oliver, CEO, Barbon Insurance Group

90% of the sector expects to see further consolidation in the

next two years

“”

04 A Marketforce special report

However, any uncertainty about the potential for further

new entrants is outweighed by a staggering 95% of

personal lines insurers expecting to see a significant

increase in the market share of non-financial brands

over the next two years. Whilst banks and insurers are

suffering from poor levels of trust in the wake of the

financial crisis, retailers and other brands are able to

leverage their customer relationships and strong brand

images. Coupled with a higher level of insight into their

customer bases, non-financial brands are clearly well

placed to expand within the commoditised personal lines

market.

Overall, myriad challenges face the insurance sector but

there also exists an opportunity for insurers to improve

their stability and ability to effectively serve the needs of

their client base. Consumers and businesses alike have been hit hard by the financial crisis and are desperately seeking

the peace of mind that insurance provides during this period of economic uncertainty. Insurers must utilise both

existing and new approaches and channels to gauge consumer issues and then engage with them, if they are to succeed

in this challenging market environment.

95% of personal lines

insurers think non-financial

brands will significantly

increase their market share in

the next two years

In this environment, the industry is undecided as to whether or not new players will be tempted into the market. Only 49

per cent of those surveyed foresee new players entering the market within the next two years.

5% 7%

42%

46%

Highly likely

Unlikely

Likely

Highly unlikely

There will be more new players entering the market

Only 49% foresee new players entering the market

79% of personal lines insurers believe that opting out of the use of aggregators is

not a viable strategy

AgreeStrongly agree Strongly disagreeDisagree

0% 20% 40% 100%80%60%

Personal Lines

Commercial and Personal Lines

London Market

Commercial Lines


There have been numerous revolutions in insurance distribution over the years, from the growing

use of telephone and direct-to-the-consumer approaches since the launch of Direct Line to the

internet boom at the start of the millennium. More recently, aggregators have begun to dominate

the landscape in certain product lines. Their success is clear: in our survey the majority of

personal lines insurers agree that opting out of aggregators is simply not a viable strategy in this

market.

While it is fair to say that the success of aggregators can be accurately described as the distribution revolution of the

last five years, it is social media that looks set to be the revolution of the next decade. 8 out of 10 insurers and brokers

expect the majority of their customers to consult social media or online reviews before buying a new policy within the

next five years.

This trend is not confined to the personal

lines sector alone. For example, 96 per

cent of commercial lines insurers and 93

per cent of the London Market also expect

to see most of their customers searching

for reviews or recommendations online by

2016.

As social media takes on a growing role in

driving consumer behaviour, it will

provide an interesting potential solution to

the challenge of commoditisation.

Insurers who effectively engage with

consumers online and manage their

reputation through social media channels

will undoubtedly benefit from the

increasing weight that consumers place

on the readily accessible opinions of their

peers. In so doing, such firms will be able

to compete on more than price alone.

distribution and marketing

81% of insurers think that, within the next five

years, the majority of consumers will consult social

media or online reviews before purchasing a new

policy

Within the next 5 years, the majority

of consumers will consult social

media or online reviews before

purchasing a new policy

Mobile phones and tablet devices also look set to be a key area

for development in the coming years. 83 per cent of insurers

asked believe that mobile technology displays considerable

potential for use as a sales channel. On the whole though, the

insurance industry has not been a market leader when it comes

to adopting mobile. There have been a few exceptions in the UK,

such as the recent launch of a dedicated mobile site by

Swiftcover, and some notable examples from overseas, but

mobile is not yet a widespread distribution tool.

As insurance typically involves fewer points of customer interaction than banking, it is unsurprising that it has taken

longer for mobile technology to be adopted within the industry. However, despite the slow start, it is clear the market

expects an increase in uptake in the coming years.

With the expected growth of telematics, for example, the mobile channel could be embraced by consumers who want to

see real time updates on the amount of mileage left on a ‘pay as you go’ policy. The consequential increase in contact

between clients and insurers could create further opportunities for ancillary sales as well as strengthening the client

relationship. It is unlikely, however, that ability to purchase insurance via mobile will attract any significant increase in

primary sales. In our survey, respondents ranked distribution channels bottom out of five potential differentiators,

including price, brand, policy cover and service.

However, despite the widespread belief in the uptake of social media, it

appears the industry may struggle to keep up with this trend. Only half

of insurers surveyed expect their organisations to invest in social

media as a sales channel over the next couple of years.


Mobile channels are seeing by far the highest trajectory of growth in usage. From both a B2C and

B2B perspective insurers need to consider mobile within all of their future IT platform and design work

if they are to accommodate the proliferation of new mobile devices.

- Paul Wishman, Group eCommerce Director, LV=

“”

One thing is for sure, the days of insurers having a ‘one-way broadcast’ – with full control of product/

brand messages – are quickly disappearing, giving way to ‘marketing conversations’ with our customers.

Those who listen and engage most effectively with their customer will increase the chances of success; my

one word of warning though would be a need to recognise levels of expectation will drastically change –

perhaps a case of be careful what you wish for! Customers would previously accept a 3-5 day timeframe

for a response to their complaint or query, but since the arrival of Twitter this has come down to a matter

of hours.

- Paul Wishman, Group eCommerce Director, LV=

“

83% agree that mobile

technology offers

considerable potential for

use as a sales channel

”

50% expect their company to

invest in social media as a sales

channel in the next two years

Only 45% believe it’s pointless to differentiate on anything other than price

via an aggregator


0.96

1.54

2.16

2.28

3.40

0.50 1.00 1.50 2.00 2.50 3.00 3.500.00

Distribution

Price

Service

Policy Cover

Brand

In previous years2, it has been suggested that

brand is the strongest driver of insurance product

choice after price, but this seems to be changing.

Our survey found that brand is considered to be the

fourth most important factor, with service levels

coming in second and policy cover a close third.

If the markets’ view is accurate, this suggests that

consumers are paying more attention to service

and policy cover than previously. Such a trend can

perhaps be explained by the ease with which

information can be found and compared online,

allowing for much better-informed consumers.

This increased interest in the details of the insurance

offering, combined with the rise of social media, could

well mark the start of a decline in the intense focus on

price that has characterised the insurance market of

the last decade.

Of course, the blame for increased commoditisation

and cut-throat price competition within personal lines

has often been laid at the doors of aggregators, albeit it

is clear that this trend began long before aggregators

became a dominant force.

As aggregators have become more sophisticated, they

have started to enable comparison of policy details,

providing greater scope for non-price differentiation. It

remains to be seen, however, how influential a

differentiating factor policy details will become.

Less than half of insurers and brokers surveyed thought that differentiation on anything other than price when using

an aggregator was pointless – a finding which suggests insurers certainly have more scope to maintain their

margins when selling via aggregators than most commentators would have thought possible but a few years ago.

Service viewed as most

important differentiating

factor after price

Ranked importance as differentiators between

insurance policies

Our profession has focussed far too much on

price rather than on expertise - when was the

last time you questioned your lawyer’s bill?

I think brokers and insurers have learnt from

what has happened in personal lines and will

resist the temptation to dive into a repeat of

these mistakes. Having said that, a long recession

combined with the transparency that the internet

brings to the smaller end of the SME sector,

moves it into a more competitive landscape.

- Martin Oliver, CEO, Barbon Insurance Group

“

”

In recent times, increasingly strained margins have prompted many insurers to put extra

pressure on their claims departments to find efficiencies, reduce claims costs and minimise the

amount of leakage from fraud. Although these have clearly always been aims for insurers, the

pressure has been multiplied as a result of the troubled economic climate, which has brought

with it a rise in both organised and opportunistic fraud.

Whilst rises in the level of fraud detected can in part be attributed to impressive advances in fraud detection, rather

than an increase in fraud itself, our survey reveals the majority of the industry believes there has been a genuine rise in

fraudulent claims. Only one third

believes that the rise in fraud

figures is due simply to

improvements in detection.

A key driver in improving fraud

prevention has been the rise in

data sharing across the industry.

Insurers have widely supported

data sharing programmes and the

approach has been hailed as a huge success in motor lines with numerous high-profile convictions. However, despite

the progress made, the industry would like to see this work extended, with an overwhelming 87 per cent of those

surveyed saying that data sharing arrangements do not go far enough.

5

13% 17%

70%

Strongly agree

Disagree

Agree

Strongly disagree


Only one third agree that the rise of claims fraud is simply a reflection of improvements

in detection

87% of insurers and brokers think that

current data sharing arrangements do not

go far enough

claims and fraud

Fraud prevention data sharing

arrangements do not go far enough

Like distribution, claims is also the scene of a potential

revolution with the use of new consumer technologies.

Something as simple as the ability to use a mobile phone

to take photographs can have a transformative effect in

facilitating a claim. Also, with the expected growth in

telematics, insurers could even be automatically alerted

in the event of a motor accident, allowing them to contact

the driver in order to provide immediate assistance. In

this and many other ways, the claims experience is set to

change dramatically.

During surge events, social media has a similarly

potentially revolutionary role to play, with 88 per cent of

the industry saying it has the ability to transform

communication. For example, Twitter can be used not

only to communicate quickly and efficiently to large

groups of consumers and other third parties, but it can

also provide insurers with a timely resource to follow and

gauge the sentiment and issues of those affected by the

crisis.


Data sharing has been phenomenally successful to date and insurers would suffer

considerable losses if we didn't share data. However, data sharing is restricted to very narrow

areas in personal lines books. We have much to do to develop practices and improve the

efficiency of what we do.

Fraud management urgently needs to turn itself into a truly preventative process and the only

way to do this is by investing in front-end controls, leveraging the knowledge that the

industry can share about a customer.

- Richard Davies, Group Fraud Risk Manager, AXA UK and Deputy Chairman, IFB ”

“

11%1%

15%

73%

Strongly agree

Disagree

Agree

Strongly disagree

Social media could transform

communication during surge events

Perhaps the most controversial area of claims this year

has been referral fees and the media outcry that

surrounded them. The move to ban referral fees has been

generally welcomed, although there are still concerns

that much the same practice may continue in other parts

of the claims supply chain that may escape the impact of

the legislation.

Referral fees have often been blamed for increasing the

cost of claims and wiping out margins in motor lines, yet

only 29 per cent of the industry think that banning referral

fees would make motor insurance profitable again,

highlighting that the sector has much work still do to.

Moreover, irrespective of whether referral fees have been

instrumental in pushing up claims costs, there are those

who argue that, if the ‘compensation culture’ remains

entrenched, the ban could even put further upward

pressure on motor premiums by depriving insurers of a

revenue stream.


Social media tools offer a unique ability to communicate with large numbers of people quickly and

efficiently. The benefits of using social media platforms are never more apparent than when a widespread

event such as flooding occurs. Although engagement with social media can leave an organisation open to

direct customer criticism, there is a clear case to be made for its use at industry level, especially during surge

events, to inform policy holders. Indeed as the technology becomes more prevalent it is likely that there will

be an expectation from tech-savvy customers that the industry will interact with them in this way.

- Robin Stagg, CII New Generation Claims Group 2010

AXA is already using Twitter to raise awareness ahead of extreme weather events. Having better

prepared policyholders will obviously have a financial impact, but also the reputational impact of both

providing valuable information and using modern communications mediums should not be overlooked.

With call centres being inundated following a large scale event, it is better to get information out to

impacted customers via Twitter, rather than add to the burden on the phones with people ringing up

just checking what they need to do next.

Twitter is instant. Compare and contrast that with the old approach of changing a website, or worse

still having to create and post printed material. The only downside of this is that customers will expect

quicker service than they have had in the past, and insurers using Twitter and other immediate forms of

communication will simply reinforce that. And when of course we get things wrong, we can expect

news of that to spread far more quickly and widely than ever before!

- David Williams, Claims and Underwriting Director, AXA Commercial Lines

“

”

Twitter in Claims

Just 29% think that banning referral fees will mark a return to profitability

in motor lines

“

”

84% think that market

factors – as opposed to risk

factors – play too great a

role in pricing decisions

The concept of pricing for risk has been central to the insurance proposition since its inception.

However, the realities of market competition have made pricing for risk challenging, particularly

in commoditised product lines with high claims costs.

Worryingly, the overwhelming majority

of the industry feel that market factors

play too great a role in pricing

decisions at the expense of accurate

risk-based calculations – a view held

by 84 per cent across both general

insurance and the London Market,

rising to 93 per cent in commercial

lines.

Some insurers interviewed expressed

concern that, whilst there is

significant talent in underwriting and actuarial departments, the industry may have lost the habit of proper

underwriting and risk-based pricing decisions as a result of being in a soft market for too long.

It does look, however, as though a turning point in pricing may have been reached: 81 per cent expect a return to

more accurate pricing for risk as a result of increased capital requirements and falling investment returns. Whilst

this could mean greater pricing discipline in

future, for some insurers it could come at the

expense of market share, particularly in

personal lines where competitive pricing

plays such a dominant role.

At the same time, pricing for risk has been

made more difficult by this year’s EU gender

ruling, which removes insurers’ ability to make risk decisions based on gender. There is also the potential for other

risk factors – notably age - to fall foul of equality laws, raising further concerns about difficulties in long-term

forecasting. Similarly, postcode pricing has come under fire, after being criticised by Jack Straw in the House of

Commons in September.

Now the potential for unlawful discrimination has been established, discussions as to what counts as a legitimate risk

factor and what counts as an unfair bias are likely to become more prevalent in the years to come. All of these factors

are likely to have a noticeable impact on pricing of policies in the future.

0% 20% 40% 100%80%60%

Personal

Personal & Commercial

London Market

Commercial

Strongly agree DisagreeAgree Strongly disagree


pricing and risk

81% agree that capital adequacy requirements

and falling investment returns will drive a return

to risk-related pricing

Market (rather than risk) factors play

too great a role in pricing

Regulatory uncertainty has been a key cause for concern throughout the year and, with the large

budgets being spent on Solvency II compliance, the call for further clarification is understandable.

In October, the FSA confirmed it is working on

the assumption that Solvency II requirements

will become effective for firms from January

20143. Whilst this announcement has at least

provided a degree of clarity about

implementation dates, there are concerns that

the increased period for implementation itself

creates greater scope for uncertainty. Some

smaller and less prepared insurers may

welcome the delay; however, many larger firms

who are already advanced in their

implementation efforts may fear further

changes in the regulations could challenge the

relevance of work done to date.


the solvency II extension

Three quarters believe the extension of the Solvency II deadline

to 2014 will mean further costs to the UK insurance industry

Given the large amount of existing commentary available about the implications of Solvency II in general, we chose to

focus our research specifically on the impact of the recent delay and the likely implications for the industry. While this

delay has been reported as having been broadly welcomed across Europe, our survey revealed a less positive reaction

in the UK, where implementation is already more advanced than in most other EU countries. 74 per cent of UK insurers

and brokers thought the extended deadline would mean further costs to the UK industry.

Despite the insurance industry’s broadly

supportive stance towards Solvency II to

date, a concerned 73 per cent also think

that the benefits achieved will not justify

the cost of implementation.

Given the magnitude of the change

programmes involved, it is clear that

those with a good grasp of the impact of Solvency II on their business, and those who use their change programmes

simultaneously to improve efficiency and risk-based decision making, are likely to gain a considerable competitive edge

in years to come.

73% think that the cost of implementing

Solvency II will be disproportionate to the

benefits achieved

“

”

After such a lengthy period of

preparation, the prospect of a deferral to

2014 is unhelpful. At LV= we have decided

to press ahead and operate on an 'as if'

Solvency II basis from January 2013 in order

to sustain our focus on the programme and

to minimise costs.

- John O’Roarke, Managing Director, General Insurance, LV=(speaking shortly before the FSA’s revised

implementation assumptions)

1 IMAS Top 50 Broker Report for the Insurance Times

2 At Marketforce’s The Future of General Insurance conference

3 FSA Revised Implementation Assumptions - October 2011

Footnotes:

© Marketforce Business Media Ltd October 2011

Research devised and conducted by Marketforce

Marketforce mobilises knowledge in

business across the key industry sectors

of Financial Services, Utilities, Transport

& Logistics, Media & Entertainment,

Public Sector and Outsourcing. With over

20 years experience of creating forward-

thinking, senior-level conferences,

interactive networking environments and

analytical, research-based reports,

Marketforce provides business

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