One might think that, in light of these obstacles, equity analysts might lower their expectations for insurers’ performance. A global Accenture survey of analysts covering property and casualty and life insurance companies, however, shows that analysts’ expectations for profitability continue to rise, with half of those interviewed demanding higher pre-tax return on equity over the next three years before rewarding insurers with superior ratings.
The insurance equity analysts have lowered their growth expectations, saying that insurers should report an average annual growth rate of 7.5 percent for 2012 to be rewarded with superior ratings, compared to 8.5 percent in 2011. Even these lower growth rates, however, will be difficult to achieve given the challenges facing insurers.
There is some consensus among the analysts surveyed about areas of potential growth for insurers. One major opportunity, for example, is in emerging markets. All of the P&C analysts surveyed said that expansion initiatives by North American, European and Japanese insurers into countries such as Brazil, Russia, India, China, Mexico and South Korea are important drivers of superior ratings over the next three years, and a large majority (88 percent) of life insurance said organic growth in these markets is important or critical to earn such ratings.
Expansion into emerging markets, however, brings difficulties of its own. Many countries resist efforts of global carriers to enter their markets and erect barriers to protect local firms. Cultural differences in emerging markets are significant and insurers find it hard to achieve economies of scale across borders. Both P&C and life insurers need a global operating model which allows the insurer to leverage its assets, processes and capabilities while adapting to local needs.
In addition to emerging markets, there are four key elements that both P&C and life insurers must get right to grow at the rates that equity analysts – and, by extension, the worldwide investment community – expect:
1. Controlling risk. Equity analysts place a great deal of emphasis on risk control, not just for underwriting but in areas such as regulatory response and investment management. In responding to major regulatory initiatives, insurers have an opportunity to go beyond compliance and improve both the stability of their organizations and the standards for customer service.
2. Improving operational performance. Insurers should focus on process optimization and lean management as well as an operating model that includes platform consolidation and shared services. These improvements not only help keep costs down, they provide the foundation for improved customer service, cited by half of the survey respondents as the top critical value driver for insurers over the next three years.
3. Setting an effective pricing strategy. More than three-quarters (76 percent) of analysts surveyed rate pricing strategy as critical to insurers. This requires an advanced data analytics capability as well as the ability to meet demand for differentiated, value-added products – sometimes sold alongside standardized products.
4. Using technology wisely. Effective adaptation of innovative technology will deliver returns in areas including risk management/underwriting, investment risk management and pricing. More than nine out of ten (91 percent) of analysts surveyed said that insurers need to improve their technology performance.
With the market transforming so rapidly, insurers need to get more out of their existing customer bases. Doing so requires rich data, advanced analytics and predictive modeling. These capabilities help insurers not only to understand and segment their markets, but also to develop and refine their business and operating models to ensure they are suited to customers’ needs. Data, analytics and modeling capabilities also provide insurers with the flexibility to create and configure new products quickly.
[For more insights from Accenture's insurance practice, see Accenture's Dave Nuernberg on Why Insurers' Projects Succeed or Fail .]
Many insurers have been prevented by their legacy core systems from responding quickly to changing customer demands. Older platforms also make it harder to develop an integrated, multi-channel distribution strategy, one that incorporates innovations such as mobility and social media.
As the equity analyst survey indicates, insurers will need to improve their use of technology to meet analysts’ expectations for profitable growth. There is no magic solution for this problem; insurers will have to pull multiple levers to simplify the existing legacy environment. Platform modernization can help address the current high cost of manufacturing, while also supporting future growth with capabilities such as digital configuration, analytics, digital marketing, mobility and social media. Equity analysts have set a high standard for future performance. Achieving and maintaining a favorable rating will require the ability to manage large-scale change. Such change need not be undertaken all at once, but it should be planned with a clear end in mind and it seems that they expect the industry to embrace change and pick in speed to tackle necessary changes. That way, each enhancement can be a step toward an ultimate – and realizable – goal for profitable growth.
About the Authors: John Del Santo is managing director of Accenture's Insurance practice. Thomas Meyer is managing director of Accentur's Insurance practice for Europe, Africa and Latin America.