More Related Content Similar to How to increase insurer’s profitability. (20) 1. How to increase insurer’s profitability.
Marek Golebiowski
@StoryReasoner
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Contents
2
How to increase insurer’s profitability:
I. Life, Property & Casualty insurance market.
II. Insurer’s Life profitability explained.
III. Peak Savers and real GDP drive life insurance profitability.
IV. Insurer’s Property & Casualty profitability explained.
V. Auto Premium per Vehicle drives Property & Casualty
profitability.
Appendix: Insurer’s profitability model.
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P&C has 1 p.p. higher CAGR and
its prices are less volatile than Life.
Life, P&C insurance market.
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Both P&C and Life have stable volume.
Future Cash dominates Life insurance and fuels
Bancassurance and Direct writing.
Auto Insurance dominates P&C segment which supports
price competitive agents as main distribution channel.
Life decreases while P&C grows.
Insurer has stable 15-16 percent reserves market share in life
insurance which has potential to triple.
Insurer has 1 percent share in the P&C insurance which has
potential to double.
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Insurer’s Life profitability - Raise prices to break-even underwriting.
4
Why is the existing profit model unsustainable?
Insurer’s underwriting is unprofitable. It is unprofitable because he under-prices competitors to gather more cash for its
investment machine. Investment income is responsible for over 100 per cent of profit before reserves.This overreliance on
investment income leads to higher income volatility in comparison with competitors. Insurer compensates the volatility by
changing reserves up to ¾ of premiums.
Unprofitable underwriting
6x higher volatility
Investment Machine
Under Pricing Risk to gather Cash to invest
Better Cost Efficiency
Up 2x Investments Yield
Lower Customer Acquisition
2x longer insurance maturity
Weaker new business
acquisition
Lower/equal G&A
Strong
Weak
Neutral
5x higher but Investment Machine driven
Trade-off
AVIVA Peer Group
Percent
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4. GDP PER CAPITA AND
DEMOGRAPHIC TRENDS
4.1. GDP PER
CAPITA TRENDS
As stated in 3.1, PFA per capita increases
with GDP per capita. The relationship is not
linear but follows an “S-curve”. In regions
with low GDP per capita, households
typically need to spend the majority of their
income. PFA per capita is thus low in these
countries. As countries get richer, savings
rates accelerate quickly which helps drive
PFA growth (moving them through the steep
part of the S-curve). As countries become
rich the proportion of their incomes that
people save levels off – as, therefore, does
growth in PFA.
4.2. DEMOGRAPH
TRENDS
Demographics are the secon
of PFA. The global populatio
to grow at a rate of 1% per an
there are significant regiona
variations. Populations are b
level off in many developed e
limiting PFA growth. Populat
China, after many years of la
is also slowing. On the other
population growth is expecte
Malaysia, and many countrie
the Middle East, which will a
growth there.
EXHIBIT 4: TYPICAL LIFETIME CONSUMPTION AND SAVING PROFILE
IN A DEVELOPED ECONOMY
Retirement RetiredChildhood Working
Savings
Consumption
35-65
Peak saver
Source: Oliver Wyman analysis
8 Copyrigh
Peak Savers and real GDP drive life insurance - population is stable but age mix changes.
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Why should insurer sell life insurance to Peak Savers?
① Insurer has better Investment Machine than Peer Group.
② Insurer’s portfolio maturity already has 7 years duration – ideal for Peak Savers.
Why Peak Savers?
① Their earnings exceed
consumption.
② They have still enough time to
build value for future retirement.
③ Peak Consumers’(< 35 and >65)
earnings exceed consumption
due to education and living
expenses.
Peak Savers
Peak Consumers
Personal Wealth
increases at 1 percent
CAGR
Number of adults has
been stable
Adults/Population
ration is flat
No increase in population
but age mix changes
Births rate is fixed
Mortality rate is fixed
Cause of volatility: net
migration in 2010 nearly
equaled births – many
people are afraid of future
GDP per adult grows at
5 percent CAGR
Both Prices and Volume
contributed to growth
Polish Personal
Wealth amounted to
PLN 2,500 billion
Personal Wealth is
up to 1.7x GDP
Opportunities
Threats
Neutral
Peak Savers share in population
increases by 3 p.p. (2013-2007)
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More volatile investment
portfolio?
Insurer’s Property & Casualty profitability -
Take market share via strong underwriting.
6
Strong
Weak
Neutral
P&C Underwriting activities offset reserves management and investments effectiveness:
① Cheaper customer acquisition gives access to volume.
② Better pricing can takeover volume from competitors.
1.5 higher underwriting margin
2x higher volatility
Better pricing of risk
Better cost efficiency
Cheaper customer acquisition
Higher but improving
G&A
Slightly shorter insurance maturity
Diminishing new
business acquisition
Doing just fine
Hampered by VolatilityAVIVA Peer Group
Percent
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Auto Premium per Vehicle drives Property & Casualty –
better pricing is key to new business acquisition and conversion of existing customers.
7
How can insurer use its strengths to utilize decreasing Auto Premium per Vehicle?
Insurer can use its pricing and customer acquisition advantage to win business from price pressured Peer Group.
Vehicle stock grows at 4 per
cent CAGR 2008-2013
Premium per Vehicle decreases at
1.1 percent CAGR plus strong
downward trend with 9 percent
slash in 2013
Auto premiums increase at 2.7
percent CAGR but with ups and
downs
Vehicle stock grows faster
than real GDP
Stable 75 % share in motor
vehicles - good proxy
Passenger cars volume grows
in line with Vehicle Stock
Good enough proxy for vehicles
volume growth - new cars registrations
mirror general surge in economic
activity
Decreasing in importance
74 per cent share of cars being over 10 years old
74 per cent share of imported cars in new registrations
Opportunities
Threats
Neutral
