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Insurance Industry Braces Itself for New Regulation
II Foro del Sector Seguros
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December 31, 2013, is the deadline for insurance companies to adapt to the new European directive Solvency II, which seeks to harmonize the laws of different countries and ensure the viability of the industry.
The regulation shares some common objectives with the financial rules in Basel III: higher provision of own funds, greater transparency, and more frequent assessments and stress testing.
For an industry whose primary purpose is to manage risk, the continued uncertainty surrounding the regulation, and its potential implications, is an unwelcome distraction.
At the Insurance Industry Forum held at IESE on April 24, 2012, speakers ranging from CEOs to managing directors of some of Europe's largest insurers expressed sector concerns that the new capital requirements could undermine profitability.
Dwindling Profitability: A Fair Price for Stability?
The insurance industry has been one of the few sectors to see increased business and profit in recent years.
According to Ernst & Young, between 1999 and 2009 the industry in Western Europe recorded an annual growth rate of between 3 percent and 4 percent.
However, this may be drawing to a close, as insurers are required to front more capital to comply with Solvency II, as well as invest more funds in better information quality.
The price to pay could be a drop in profitability, which, according to IESE Prof. Jorge Soley, will mark a turning point in the industry, potentially leading to the wholesale consolidation of the sector, similar to that already undertaken in the banking industry.
Although the European directive, adopted in 2009, remains to be converted into national law, insurers are already investing in improving technology and procedures to ensure the quality, immediacy and analytical suitability of information.
Painful But Necessary Steps
Regardless of how the new regulations are applied in each country, one can safely assume that they will require more frequent assessments, periodic stress tests and internal procedures to prevent fraud.
In Soley's opinion, this would represent a positive step toward harmonization, transparency and customer protection.
Another major uncertainty arises from the different criteria used from country to country in the assessment of assets and liabilities, which could jeopardize guaranteed return products.
Indeed, countries such as Spain and the United Kingdom are seeking to mitigate restrictions on long-term operations in which assets and liabilities are inextricably linked.
Given the drastic changes on the horizon, the forum participants underscored several areas that need improvement: operational efficiency, talent management, customer segmentation, active redesign of products, service improvement, customer loyalty, fraud prevention and integration of distribution channels.
Banks and Insurers: A Vital Partnership
The most important distribution channel for the industry is the bancassurance segment, which generates up to 38 percent of total sales and 73 percent of life insurance revenues.
Partnerships with banks are very important, as the financial institution brings a deep knowledge of customers and ensures a regular income.
However, as David Angulo, of Aviva, and Ignacio Eyries, of Caser, agreed, the changes taking place in the financial industry -- such as bank mergers, the reduced number of branches and the requirements of Basel III -- are threatening this alliance.
While insurers see a gold mine in the portfolio of bank customers, they realize that consumers are increasingly better informed and are shopping around for the best deals.
In the opinion of Tomás Muniesa, of VidaCaixa, this means that insurers must be present in all distribution channels.
According to José Boada, president of the Pelayo Group, it is the non-life insurance sector in which the most important changes will happen, in particular with the advent of insurance price comparison websites.
To respond to this challenge, insurers will need to have an increased number of channels, greater integration and a higher level of transparency.
Transparency and Customer Loyalty
Indeed, simplicity and transparency are factors that customers value more and more.
In this regard, the role of the office manager is essential in terms of perceiving the customer's needs and offering advice, while constantly adapting the supply to emerging demands.
For Jaime Kirkpatrick, CEO of Aegon, the big challenge is retaining customers and building their loyalty.
To do this, insurers must regularly redesign products, improve after-sales management, maintain a continuous channel of communication with their customers and offer them enticing rewards in return for their loyalty.
Leveraging the Network Benefits of Social Media
The speakers at the forum roundly agreed that improving customer loyalty requires actively listening to them.
Social networks allow companies to take responsive measures, such as addressing unhappy customers, providing information and, ultimately, improving their corporate image.
But they can also be a source of proactive measures, focusing on product design to meet the needs of each segment of the population.
With storm clouds gathering on the horizon, the insurance industry will need all the help it can get.
That said, the measures being implemented should help to make the industry stronger once the crisis subsides.
When that day finally arrives, reduced margins may become the norm, due largely to increased competition.
But their impact should be alleviated by a rise in claims, resulting from increased economic activity.
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