Insurance business used to be simple – but in the last few years, some insurers decided to diversify and started to deal in credit default swaps and other unregulated derivatives, like investment banks. Those meant insurance executives, who spent their lives in traditional insurance business, were unaware of the complexities of these financial instruments, and are struggling to respond to risks in their business lines. The complexity and international spread of some insurers’ operations also impeded regulatory oversight that helped bring down the world’s largest insurer in September 2008.
As the US and some European economies contract, the risk of defaults on corporate bonds held by insurers is expected to rise. Because of the large quantities of bonds held by UK life assurers, the impact on their capital bases could be significant. Some life assurers will have to raise capital to meet solvency requirements. They may sell equity holdings. Those that are listed could cut dividends. Weaker life assurers may merge with better capitalised ones. Seeking reinsurance is another option.
In addition to the industry’s current stress, insurance companies are facing several other challenges, including major changes to demographics and customer needs and the changing nature of distribution as a result of competitive and regulatory pressures and the advance of technology.
As a result, we believe that insurers will need to address the following issues:
• Oversight is as important as insight: To regain trust, insurers will need to recognise that many investment products of recent years contained hidden features that did more harm than good to those who owned them. Customers will demand transparency – both from the insurers and in the products that they market. We expect oversight to become at least as important as insight.
• Market participation strategies: How best to respond to and capitalise on the new demographics and changing customer needs.
• Distribution strategies: What the future of distribution will be and how insurers can position themselves to gain market share and a greater share of value.
• Positioning strategies: How insurers should position themselves close to the customer.
• Operating model: How insurers can enhance their operating model to serve end customers and distributors most effectively.
• Outsourcing, offshoring and shared services: How can insurers be more agile, so that they can reap the rewards of being amongst the first to move in a rapidly changing marketplace? So far, investments in initiatives such as offshoring, call centres and web-enabled access have often only added to total cost of servicing customers. A key challenge for the insurance sector is to deliver the benefits of strategies that promise so much.
• Complexity versus simplicity: In the insurance world of the 21st century, complexity is out and simplicity is in, and self-serving innovation is out and experience back in.
We help our clients in life, general and healthcare insurance companies to implement programmes that deliver lasting value. These include:
• identifying opportunities for growth, by creating an end-to-end view of services, so that insurers can achieve new sources of revenue;
• redesigning processes to streamline activities and reduce costs;
• ensuring the organisation is in the right shape for successful outsourcing or offshoring;
• setting up shared services centres to eliminate duplication and create economies of scale;
• consolidating or virtualising technology platforms to create more agile IT operations that deliver enhanced levels of service more cost-effectively.
Insurance companies come to Centrix when times are tough and difficult decisions are to be made. For nearly a decade, we have partnered with many of the world’s leading insurers, helping them address operational transformation and technology issues that benefited customers, employees and shareholders. Our consultants have worked on strategic engagements covering pre-merger IT due diligence, capturing post-merger integration benefits, crafting IT strategies, pioneering strategic sourcing that reduces risk and captures value for insurers, and reducing operating costs by IT infrastructure virtualisation, to deliver lasting results.