2. OBJECTIVES AND METHODOLOGICAL APPROACH
2.1. To update and improve the knowledge on the distribution and status of Margaritifera auricularia populations in France
• The Combined Operating Ratio or COR is simply the sum of the losses and expenses incurred
• It brings together a measure of an insurer’s underwriting COGS efficiency and operational efficiency to provide a gauge of overall underwriting performance- under 100% implying results
• Ergo, as a function of LOR and EOR, insurers are faced with a number of balancing questions:
• Is it better to write a policy for a preferred-risk driver for a €500 premium, or a high-risk driver for
€2,000?
• Should insurers spend more to reduce its loss ratio or less to reduce its expense ratio?
• What mix of insured and branches is most profitable and worth insurers allocating capital to?
• Will a high commission (and excess of competitions already ‘high’ commissions) induce an agent, broker or bank to “produce” more profitable business, or could insurers bypass them, try establish a direct line and offer a lower premium with the money that’s been saved on EOR?
• Each of these questions lends itself to quantitative analysis
• A leading, or at least market EOR is eminently achievable and there are consultants who can help businesses achieve this. Naturally each business will have its own set of issues. Be they legacy ones of bringing an acquiree up to international best practice, or due to an ill structured indirect sales structure
• The leaders in the market will be those who are able to hold their LOR down and in turn
generate larger underwriting results, being the principal negative on the way to the bottom line
• A combination of factors are required, and not just systems and software
• Fundamentally a culture of success which will challenge norms and pursue better way of doing things and pricing risk, with management that is supportive and rewarding
• To conclude, leading businesses will run a tight ship and lead the market in its underwriting practices. Top line growth will be managed over the long term
5
OVERVIEW (1 OF 2)
• As we have seen, underwriting result is attained by managing top line growth, operating the business effectively (minimising EOR) and instigating accurate and competitive pricing and selection techniques
• That is indeed easier said than done, and insurers, en masse, not having generated much
underwriting result and employing many staff more erudite than the author are testament to that fact
• Incumbents therefore need to undergo a process of reflection and ask question of themselves
• The aforementioned are a series of random thoughts to commence the process:
• Distribution
• Looking at the early attempts of Apple (A very different industry) to grow in Japan where they initially went with a local partner with no existing consumer-tech business - are you selling through the right people and is your existing partner the right one?
• Given the competition for distribution channels, are you targeting the right ones and are there new ones to attract more and attractive applicants? :
• The opportunity to be the leader under the direct model or innovate new channels such as promoting housing related insurance through, say estate agents?
• Can you do things better and different than has been done before? Little things can make a big difference, so can you create differentiation – services, such as user tools that have mass attraction?
• Create invaluable tools insured would use daily/weekly to induce barriers to switching, so even if competitor cheaper, you don’t want to live without the tools. Integrate technology with other financial groups such as banks for must need services
• iPhone app for renewing insurance AND checking you bank balance
• Partner with Mint (online service) for Turkish market?
• American Airlines created competitive advantage through an agent ticketing system called SABRE
• What is a killer app for agents given dominance of agents in Turkey?
• Network effect: do certain lines market better and drive ancillary purchase in ‘core’ products?
• Go about achieving success in a different way
OVERVIEW (2 OF 2)
• Product
• How can products in each branch be structured with ancillary benefits to create differentiation given in this stage of the market vanilla products are in demand?
• Greater allowance for transfer of developed benefits from an insurer to reduce switching costs
• Given the market is relatively unsophisticated, could a large education spend, partnered with the Undersecretariat, concurrently with a complex product offering position the company as market leader of terms of knowledge?
• Brand
• What are options for brand differentiation, and can value be made segregating the market, dividing brand into ‘premium’ and ‘value’?
• Differentiate service. ‘Platinum card’ package – create prestige
EOR
• EOR is simply the costs of operating the business. Every Euro paid in underwriting expense is a Euro that doesn't flow to the insurer's bottom line
• Success therefore amounts to leveraging scale economies
• To attract customers, insurers have to advertise: what is the most cost efficient means of doing so?.
High brand equity imbues a leverage factor
• Paid commissions to distribution channels; banks, agents and brokers: Does head on competition on price pay in the long and short term, or are there other drivers?
• GEICO has achieved long-term success by cutting out the middle-man as Dell did, but will this negatively affect existing relationships?
• Pay employees a salary: what and how many staff are required for any given level of contracts?
• Are you flexible to scale up and down to market changes and are staff delivering?
• Pay taxes and other operational expenses: is the business structured correctly?
• Understanding the answers to these questions comes from experience and increased trade, by insourcing (offering outsourcing) there is potential to gain:
• Economies of scale
• Know how synergies
• Capacity use optimisation
• However this option is uncertain given
• Perspective of loss of competitive advantage (For large insurers everything is core)
• Trust amongst insurers (Will the “partner” undermine them)
• Threat of having a strategic dependency
• And generally collaboration amongst insurers is quasi-novel in the industry, though Zurich offers claims management and Allianz offers underwriting and claims management for example
• In the current market, most insurers have consolidated and developed IT infrastructure and may now be placed to insource and leverage their scalable platforms
LOR
• LOR is the art of mitigating risk at pricing per unit and discipline
• Given intense competition, appreciation of the underwriting cycle, balancing GWP land grab (greed) vs. profitable business long-term growth is a fine balance, but one the would well be worth thinking through
• Discipline when ‘all others lose their head’ in the hard cycle
• Focus should be in developing superior skill in calculating accurate prices
• In doing so they will be able to outperform their competitors by a wide margin over the horizon
• Insurers that chase market share and fail to develop skill will find themselves faced with adverse selection, an inability to grow profitably or remain the same size profitably, and a poor ability to shrink their way to better profitability when phase 2 of the market comes
• Reinsurance as a tool to write more business and get more experience
• Turkish GI is heavily reinsured which impacts profitability structures
• Some companies appear to be innovating in this area
• Higher cession proportion would allow insurers to write greater volume of business and mitigate inevitable claims
• Is there a balance?
• Questions
• Reinsurers with the highest credit rating benefit from having sight of more business and understand the market better as a result. How can insurers do this?
• Can’t own brokers/agencies to get increased volume (See law summary)
• How can you get more data from customers?
6
OVERVIEW
• When an insurance company with a quality brand offers lower prices, it now has a better chance of gaining new business than in the past, but this can only be sustained if the lower prices are the result of more accurate pricing skills, meaning the VNB is profitable
• Ultimately, more accurate pricing is more important that a quality brand
• Insurers can grow rapidly and produce an excellent loss ratio even though its brand is only modestly useful
• Over time, companies with most accurate pricing may end up with the best brands
• There are a number of tactics and strategies for insurers to undertake to expand market share, around gaining distribution channels, preparing itself to participate in the inevitable wave of consolidation arising from phase 1 and its conceivable “mispricing cycle”
• However they inevitably involve playing the same game as competitors, which will likely be an expensive one
• The best course of action is twofold:
• A combination of moderation in direct expansion by offering favourable distribution terms and engaging in expensive acquisitions
• A zealous focus on creating a competitive advantage in the underwriting systems, as over time this will lead to profitable business being written, which self-perpetuates and self-funds
expansion
• Acquisitions are not on a financial basis the best course of entering the market, or expanding market share, as valuations have risen exponentially, and in essence, ‘there are no good deals left’
• The sell side realises long-term potential and the multiple reflects that, the buy-side still likely smarting with capital constraints retains the bargain hunting mentality
• Investment banking advise emphasises the need for ‘deep pockets’
PARTNERSHIPS
• Partnerships with as many touch-points amongst distribution channels are imperative to deal with fierce competition
• Partnerships will play a significant role and incumbents are actively looking for them, such as Aksigorta
• Press statement enunciating their desire for a leadership position and will sell no more than 50%
• However, distribution is being bought up in the bank channel by competitors such as BNP;
insurers must therefore seek to differentiate themselves and secure mutual agreements
• Whilst traditionally “loose” strategic partnerships may be preferred to tie up distribution, JVs which also may have been viewed as unrealistic are necessary (and may hopefully serve as a basis to creep up to 100% control)
• The main focus of the JV is to leverage the existing client base
• The market is now difficult to enter and more recent entrants are already being rumoured to be takeover targets.
• New entrants with small war-chests will be required to align themselves, but given the paucity of players, this is unlikely. Furthermore, those left have stated they will only do so if they are assured a commanding position in the market
• Structurally, the market does not lend itself to immediate profitability; unemployment is high and research has illustrated that insurance is neither seen as a necessity or even a good thing
underpinning the dubious status as the lowest penetrated market in Europe
• The ‘informal’ economy, according to some estimates, is in the region of 25% of GNP
• Employers still evade paying social security contributions for their employees, for example, by not registering them or adjusting categories in their favour- such as smaller salaries and contract basing
• Having said that, the late development of the market has facilitated best-practice to some extent
• In comparison to another growth nation, Russia, the tax system is a marginally more favourable, the regulatory environment is well-advanced, products transparent and consumers with more of a long-term focus
CONSOLIDATION
• Given the level of competition in the market and empirical evidence that GI is inherently cyclical in nature, consolidation at some point is inevitable
• Analysis of EOR provides prima facie evidence that there are benefits of scale
• The basis for consolidation is somewhat difficult in the short term, given:
• The majority of domestic players have been bought or have aligned themselves
• Macro trends for foreign entrants domestic markets are poor, pulling them to growth markets
• There are therefore little to no low hanging fruit to commence a wave of consolidation, and foreign players will only exit if losses become unpalatable and/or some exogenous events happen, such as corporate distress requiring divestments (UK banks)
• In the absence of deals, there have been many cases of foreigners buying out partners, such as in 2008 with Allianz and Koc and AXA with Oyak for $525 for the remaining 50%
• At present, foreign entrants are taking a long term perspective. Whilst penetration may be low and market share fragmented, they will be content with small % holdings, expecting penetration to increase and other benefits, such as compulsory insurance expanding in scope and take-up thereof, thereby benefiting players that have been incumbent for a number of years
• Two of the largest players, AXA and Allianz have been in the Turkish market since 1998 and 1988 respectively, the longest of any other foreign player
• Likely consolidation will benefit those with the greatest resolve. Many entrants are dominant
globally and fall into the camp of wanting to rapidly gain market share, which impacts LOR, and to get to ~15% will cost them, with no certainty that the investment will pay off
• Those remaining Turkish players may eventually be lured away from going it alone
• Yapi Kredi received overtures in August 2008, but a deal was not consummated
• The market will eventually consolidate to a handful of players, they will be those companies who have established a great distribution network across channels, strong brand equity and are
inherently profitable
• A similar situation is envisaged in the pension market where only 4 players will be believed to be left standing, at the end of the day