iii colÓquio internacional sobre seguros e fundos de pensÕes july 7th, 2004 iii colÓquio...

III COLÓQUIO INTERNACIONAL SOBRE SEGUROS E FUNDOS DE PENSÕES July 7th, 2004

III COLÓQUIO INTERNACIONAL SOBRE SEGUROS E FUNDOS DE PENSÕES July 7th, 2004

Denis DuverneMember of AXA Management Board

Chief Financial Officer

Lisbonne- Denis Duverne - 07/07/04 -

The Future of the Insurance Business :The Future of the Insurance Business :

Challenges and PerspectivesChallenges and Perspectives


What happened in the past 10 years...

CONSOLIDATION, DEMUTUALIZATION Increased competition, with market share strategy a strong option More capital oriented, with ROE a key theme Emergence of sophisticated capital management Increased pressure from regulators Increased risk outsourcing (from large reinsurance capacity to stretched capacities with selective approach from reinsurers)

DISTRIBUTION Development of Financial planning and Asset Allocation advice Emergence of :

Direct insurance, Bancassurance, Move towards Open-architecture

PRODUCTS More single premium products Unit-linked products Bigger demand for private pensions Emergence of hedge funds, mutual funds,derivativesBlurring distinction between life insurance and mutual funds

CUSTOMER More demanding More risk adverse Seeking for advice


Investment margin squeeze

Lower fees on UL

High level of equity losses

Low technical margin

Increased demand for protection

Pressure on solvency and profitability

Since 2000, the insurance sector has undergone a more challenging environment

Property & Casualty Unprecedented level of claims

Sept 11 Natural catastrophes Asbestos

Judicial inflation : “Deep pocket syndrome”

Increasing price of reinsurance

Life and Savings Lower return & uncertain equity market Widening pension GAAP Volatility & Risk awareness Demand for “safer” products Relative failure of recent regulatory changes (stakeholder, riester …)


In L&S, insurers had to quickly adapt to lower returns and tight capital

Following the recent financial market collapse, client turned to safer products, with guaranteed rates.

To face this challenging environment and preserve theirs margins, insurers had to :

Reduce credited rates, in line with low fixed income returns and depleted capital gains

Reinforce Asset/Liability Management

Foster unit-linked sales, being less capital intensive and more profitable products in the long run, while providing various forms of guarantees


"BACK to BASICS"

Selective underwriting

Increased retention and cross selling through efficient CRM

Higher productivity through service centers & call centers

Reduced claims costs through relationship with approved repairers

and spare parts distributors

In P&C, emphasis was on efficiency, through disciplined underwriting

This challenging environment has forced companies to focus on underwriting. More and more, P&C insurers are going “Back to Basics” to reduce expenses, while focusing on profitable clients through selective price increases. Market share-led strategies seem no longer to be an option.

107,6%106,5%

98,5%

4,8%

5,9%6,2%

92%

94%

96%

98%

100%

102%

104%

106%

108%

110%

2001 2002 2003-1%

1%

2%

3%

4%

5%

6%

7%

8%

Combined ratioInvestment return INCL. capital gains / assets

Source : Average investment return and combined ratio for Allianz, AXA, Generali and AIG, based on company public disclosure


Despite the recent turmoil, worldwide insurance premiums have increased...

*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Worldwide gross insurance premiums evolution between

2001- 2002 (%)*

0

200

400

600

800

1000

1200

North Am. W Europe Japan S/E Asia Latine Am. CentralEurope

2001

2002

Industrialized countries Emerging countries

+9%

-1,5%

+17%+3% +9%

+3,5%

0500

1000150020002500300035004000

Japa

n

N Am

eric

a

W E

urope

Ocean

ia

S/E A

sia

Premiums per capita in USD, 2001- 2002*

...with emerging markets posting a particularly strong growth, especially in Asia


Future and challenges for the insurance sector ?

To remain attractive, the insurance sector has to grow profitably while satifying client needs…

What future in terms of growth?

What future in terms of distribution ?

What future in terms of offer ?

What future in terms of margins ?

What future in terms of required capital ?


Emerging markets represent a sizeable growth engine...

0

500

1,000

1,500

2,000

2,500

3,000

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

GDP per capita

Lif

e d

en

sit

y:

GW

P p

er

ca

pit

a Japan

SwitzerlandUnited Kingdom

United StatesIrelandFinland

SwedenNetherlandsFrance

DenmarkHong Kong

Belgium

NorwayLuxembourg

AustriaCanada

Germany

SingaporeItaly

Australia

TaiwanSouth Korea

South Africa IsraelSpain

New Zealand

Portugal

North America

Western EuropeAustralia &

NZ

South East Asia

Central & Eastern Europe

Middle East

Latin America and Caribbean

+30%

+3500%

Source: Swiss Re; World Bank.

Geographical mix is the key variable with emerging markets offering the highest margins and the highest growth rates


1 Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands, Switzerland, Belgium and Austria

2 Two home markets: Netherlands & Belgium

Source: Boston Consulting Group, companies, press

Many potentially sub-scale local positions within top players’ portfolios

Many potentially sub-scale local positions within top players’ portfolios Due to capital

requirements, strategic fit, minimum size and profitability, the insurance sector continues to rationalize.

According to a study by The Boston Consulting Group*, many insurance groups suffer from highly fragmented European portfolios, consisting of sub-critical units that have “severe structural disadvantages”.Number of western European markets outside home country 1

Ave

rag

e w

este

rn E

uro

pea

n m

arke

t sh

are

ou

tsid

e h

om

e c

ou

ntr

y

* Back to the Future: The European Insurance Landscape

0%

1%

2%

3%

4%

5%

6%

7%

8%

0 2 4 6 8 10 12 14 16 18

2002

2003

ING

Fortis2

Baloise Aviva

ERGO (Munich Re)

WinterthurZFS

Allianz (91.8%)

AXA (67.3%)

Generali (89.8%)

(European premiums from markets with >5% market share)

...while developed countries will see further rationalizations


Changing demographics will provide opportunities for Life & Savings products

82% of baby boomers believe their lifestyle would decline upon the death of a spouse

72% of baby boomers who own life insurance believe they don’t own enough

7 of 10 non-buyers believe they still need to buy life insurance

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Recent market studies* indicate that in the US for example, variable and fixed life insurance should grow as baby boomers enter retirement

Elderly Population (aged 60 & over) as a % of total population

0%

50%

Countries

% o

f el

der

ly1950

2000

2025

20501950 16% 16% 15% 16% 12% 11% 13% 8% 13% 8%

2000 21% 21% 23% 22% 24% 21% 16% 23% 16% 10%

2025 28% 26% 32% 30% 34% 30% 24% 36% 25% 20%

2050 32% 30% 35% 33% 41% 41% 26% 42% 30% 30%

France

UKGermany

Belgium

Italy Spain US JapanAustralia

China

Life expectancy at birth by country

0

50

100

Countries

Lif

e ex

pec

tan

cy 1950

2000

2025

2050

1950 66,5 69,2 67,5 67,5 66 68,9 63,9 69,6 40,8

2000 78,8 77,8 78,1 77,8 79,1 76,6 80,6 79,8 71,4

2025 81,8 81,1 81,2 81,2 81,9 80,5 82,8 82,3 77,4

2050 83,5 83,1 83,2 83,2 83,5 83,9 84 83,8 81

France

UKGerma

nyBelgiu

mItaly US Japan

Australia

China

Life

Source: United Nations, US Census bureau

Source: United Nations


Mass Affluent

Mass market

High quality network

Advice tools

Wide product offer (innovation,

performance…)

Rich Internet proposition

(value added services, information…)

Standardised product offer

Recruiting machine

Cost-effective channel management

Low cost / streamlined back-office

operations

“Off-the-shelf” selling proposition

Advice &

Relationship

Sales and

Service

industrialization

Focus of Focus of business modelbusiness model

Source: McKinsey & Company, “Reinventing for growth”

2 business models emerge in L&S, with insurers well positionned on Mass Affluent

Towards a more segmented and differentiated distribution


Full OwnershipBancassurance

• Capital intensive

• Potential conflict of interest (capital allocation)

Joint-Ventures

Co-Ownership of a separate entity to cross-sell products:

• Alignment of interests

• Governance is key

Partnerships are increasingly important, notably in bancassurance

• Capital allocation similar to proprietary distribution

• Allocation of profits between manufacturer and distributor is key

Bancassurance, one of the avenues for third-party distribution can be dealt with three different approaches...

Distribution Agreements


Offering innovative and tailor made products and services will be key

Innovative & tailor made products Development of unit-linked business with guarantees (GMIB, WB…) Development of protection products Development of tailor-made offering in P&C

Specialized and trained life agents Open-architecture

Improved customer service IT investment (consolidated customer view) Expanded internet proposition

advice/educationtransparencyavailabilityfaster settlementsquality

broad range of

products and servicesprotectionretirement incomeelderly care

solutions

Insurers will have to focus on …to answer clients needs for


Maintaining margins will require :

A better leverage of technology investments

A constant discipline to improve internal processes

A more rigourous analysis of opportunities offered by outsourcing (components of risk as well as components of the service proposition)

Improved risk management and capital allocation practices

A focus on market segments where sustainable competitive advantages can be gained


What future in terms of required capital ?

After softening rules during the market turmoil, European Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive system for assessing the overall solvency and risk management discipline of the industry What is the true level of capital required

Existing regulatory capital Risk Based Capital (RBC) Internal models Rating agencies’ models Adequacy of reserves

What adjustements are needed to reflect the quality of risk management

?


Key success factors - Capital management and discipline ...

Capital should be allocated to one core business

Capital is a very expensive resources that need to be tightly managed

Capital is the last currency you need to use

Financial protection only

Economic capital methodology

Selective expansion and divestments


Conclusion

Insurance will remain a growth business

Thanks to a reduced capitalization and improved risk management practices, future cycles should be less pronounced

The unbundling of the various components of the value proposition will be key to the future success of insurance companies

Thank you

iii colÓquio internacional sobre seguros e fundos de pensÕes july 7th, 2004 iii colÓquio...

Documents

lisbonne denis duverne

insurance sector

life insurance

direct insurance

insurance groups

insurance business

advice slide

riester slide