How insurance companies can weather the storm

Mahendra Gautama, Contributor, Jakarta

A "perfect storm" may be the appropriate phrase to describe the current predicament of insurance companies worldwide.

One of the reasons for this is the failure of most mergers and acquisitions, which started in the early 1990s.

This was confirmed by a survey conducted by the consultancy company McKinsey in 2003 in its report titled Assessing Insurance Deals, on the major failures of many American and European insurance companies in their efforts to increase the value of their shares.

There were 237 mergers and acquisitions between 1990 and 2001 for a value of US$75 billion, but they were only able to increase shareholder earnings by 1.6 percent for the short-term period and 2.4 percent in the long term.

The turbulence was worsened by the Sept. 11 tragedy that compelled global insurance companies to pay out claims of US$40.2 billion. This blow to the insurance industry caused nine out of 10 leading insurance companies major losses and reduced the entire industry's capital, as reported by Oxford Metrica and Aon Corporation in Insurance and the Stock Market: The Asset Test.

The second factor that contributes to further difficulties is a change in the "power" between insurance carriers and insurance brokers.

Traditionally, insurance brokers -- the backbone of insurance companies -- play a vital role in acquiring clients. Apart from their astuteness in negotiation, they are also frequently relied upon by many clients to design their risk program management. For all this, they receive commissions calculated from premiums paid by their clients.

Today the situation has changed. Many major corporations are designing their own internal risk managements. This has prompted insurance brokers to adapt and enhance their consultancy skills, which leads to more income directly from clients due to their larger role as consultants compared to the conventional commissions. The 2002 report issued by McKinsey, Brokers Versus Insurers, indicated that most insurance brokers with their newer role have beaten the insurance companies in relation to the earning ratio by about 65 percent.

The third factor is the emergence of new competitors, like smaller and middle-sized companies on the Internet and, of course, the ubiquitous banks with their large base of clients. These new competitors are aware that the transaction cost of insurance companies is high: as much as 35 percent of premiums or $140 billion. With a more cost-effective strategy, these new entrants only need a third of the transaction cost.

The question that lurks in the minds of most CEOs of global insurance companies is whether it is still possible to survive and make a reasonable profit.

There are some classic but still promising marketing strategies to be adhered to. Obviously, the foremost task is to increase the level of customer satisfaction. As reported by Accenture in 2001 in Unlocking the Value in Claims, claim settlement is number one in creating customer satisfaction. The report indicated that 94 percent of consumers said the speed of claim settlement is the top priority, while 74 percent said the nominal amount of settlements is another important factor.

It was also reported that close to 90 percent of customers that were happy with the above two factors preferred to remain loyal to the same company. Seventy-eight percent of them even said they would recommend the company based on these satisfactory elements.

The next step for insurance companies to take is either to become a giant-sized company with a worldwide reputation or a very specialized company. One example of such an alliance is that between Allianz of Germany, AGF of France, Generali of Italy, AMB of Germany, AXA also from France and the Royal Guardian Exchange from England. This alliance is a "dream come true" about a single European market.

Naturally, this global conglomeration or alliance is offering the very best of its resources, product features and their combined strength is meant to serve clients more efficiently in face of current competition. Hence, for smaller insurance companies the option is to specialize and provide specialized and highly customized products.

In England, for example, newly specialized insurance companies have cropped up, like the one offering policies for musical instruments and another specially handling Chinese restaurants. Such specialists are required to have a greater focus on the seemingly smaller segments, but provide a full-range of personalized product features that cater to clients' needs on a one-to-one basis.

It seems that to reduce the impact of today's situation, the challenge for insurance companies is to roll up their sleeves and position their companies correctly through the right choices. A customer-oriented mind-set is one of the wisest choices to adopt.