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Global trends in insurance and risk management - PowerPoint

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					    Global trends in
  insurance and risk
     management

       Mike Cullen
Managing Partner - Markets
Overview

The main theme of this presentation is value
• Where is the value to the customer in
  insurance and risk management?
• Where is the value to the investor in financial
  services companies?
How the world used to be

• Customers
• Professional service firms
• Insurance brokers
• Insurers
Broker Consolidation
          1990                             2000                 2005
   Marsh McLennan
   Alexander and Alexander
   Bain Clarkson
   Hudig Langeveldt
   CT Bowring
                                      Marsh
   Arthur J. Gallagher
                                      Aon
   Hogg Robinson
                                      Willis Corroon
   Alexander Howden
   Sedgwick
   Stewart Wrightson
                                      Arthur J. Gallagher
                                      HLF Insurance Holdings
                                                                       ?
                                      Jardine Lloyd Thompson
   Willis Faber Dumas
                                      Alwen Hough Johnson
   Johnson and Higgins
   Lowndes Lambert
   Fenchurch                  More than half of the
                              1990 top 20 Insurance
   Jardines
                                Brokers no longer
   Lloyd Thomson
                                      exist.
   CE Heath
   Nicolson Jenner Leslie
                              “The future is oligopoly”
   Alwen Hough Johnson
Convergence of broking and
professional services
• Massive consolidation of broking sector
• Where will broker growth and profit come
  from?
   • Disintermediation
   • Commoditisation of placing risks
   • Self-insurance
• Diversification of brokers into risk
  management and general consulting
• …..but that‟s what we do
Convergence of broking and
professional services
What next?
• Broking becomes a cash cow for the
  remaining „broking‟ companies
• Ernst & Young, Slaughter & May, Marsh and
  Aon all operating in the same market
• A few giant financial service firms that do
  everything?
Advising customers

• Professional service firms and brokers are not
  the only ones seeking to provide advice to
  customers
• Is an insurer a product provider or a solutions
  composer?
Product provider or solutions
composer?
• Private car insurance – smooths the cost of
  repairs or keeps you mobile?
• Personal injury insurance – rehabilitation and
  risk management
Personal Injury – rehabilitation
and risk management
Social inflation outstripping public‟s willingness
  to pay premium inflation
• Medical improvements help people live longer
• Judicial and legal developments
• Expectation of care at home rather than in
  hospital
• Government plans to recoup NHS costs from
  insurers
Personal Injury – rehabilitation
and risk management
• Reactive and adversarial claims management
  proving to be inefficient and ineffective
   • Introduces delay into the process of diagnosis and
     treatment
   • Litigation exacerbates the delays and greatly
     increases the ultimate cost

• Move towards proactive and cooperative
  approach
Proactive and cooperative
approach to personal injury
• Risk management advice to help reduce claim
  events
• Early expert diagnosis and treatment greatly
  reduces potential cost, eg whiplash claims
• Active management of claims helps claimants
  return to work earlier
• Treat third parties in the same way as
  policyholders
Constituent parts of an insurer

• Customer relationship business
• Product innovation business
• Infrastructure business
• Asset management business
• Capital management business
Customer relationship business

• Potential for value where the customer wants
  advice and is willing and able to pay
• Commodity products and services will be sold
  on price through the most cost efficient sales
  channels
Product innovation business

• Sustainable advantage from product design?
• Increase value to segments of the insured
  population through risk adjusted pricing
Risk adjusted pricing

• Reveals the cross-subsidisation between
  policyholders
• Niche players can take advantage to make
  short-term gains
• Increase the number of uninsured risks?
• Vigilante consumerism
• Impact on society and Government reaction?
Measures that matter to equity
markets
As industries evolve, trusted ways of
 creating value are also evolving:
  • managing physical and financial assets and managing
    earnings are no longer sufficient ways of growing value
  • non-financial activities are key drivers for growing future
    value

The FS sector is no exception:
  • Ernst & Young study identifies the key non-financial
    drivers for the sector
  • through interviews, survey and statistical analysis
  • and concludes there is a huge potential for improvement
  • by actively managing their critical non-financial activities
Evidence: Past performance is not
a good indicator of market value
                    S&P 500 (10 yr. example)

                    4
                                                                                             Mkt.
                                                                                             Value
                   3.5

                    3
Normalized Value




                   2.5

                    2
                                                                                             Earnings
                   1.5
                                                                                             Book
                                                                                             Value
                    1

                   0.5

                    0
                    1989   1990   1991   1992   1993   1994   1995   1996   1997   1998   1999
                     For financial services, continued
                     success in growing earnings...
                     3.00




                                               Manufacturers
                     2.50
                                               Distributors

                                               Retailers
Earnings Per Share




                     2.00
                                               Banks

                                               Insurance Cos
                     1.50




                     1.00




                     0.50




                     0.00
                        1981   1982   1983   1984   1985      1986   1987   1988   1989   1990   1991   1992   1993   1994   1995   1996   1997   1998   1999
                 …has done little to make it a
                 high performance industry
               3.00




               2.50




               2.00
Price / Book




               1.50




                                                                                                      Manufacturers
               1.00
                                                                                                      D istributors

                                                                                                      Retailers
               0.50
                                                                                                      Banks

                                                                                                      Insurance C os

               0.00
                  1981   1982   1983   1984   1985   1986   1987   1988   1989   1990   1991   1992    1993    1994    1995   1996   1997   1998   1999
Conclusion
• Market expectations:
  • past financial growth and past physical
    investment
  • are increasingly unreliable indicators of the
    future

• then what are reliable indicators?
Much of the future value is in the
performance of non-financial activities
   Capital Markets                                                                       The Company
                 Share
                 Price                                                      Resource Allocation
     Estimation of future earnings and
     assessment of core competencies                                Strategic Intent

                                                                                             Strategic
                                                                                             Decisions
                                         Financial                   Execution of Strategy
                                         Performance

                 Non-Financial
                 Activities
                                                       Note: See Ernst & Young’s Measures that Matter study

– such as strategy, management quality, corporate
  governance, human capital, innovation …..
 Why?
• Because reports on non-financial activities:
   • provide investors with information not
     contained in financial reports
   • are often leading indicators of future
     performance
• At least 35% of market valuation is attributable
  to non-financial activities
   • as shown by E&Y study “Measures that Matter”
     across a range of non-FS sectors
• and analysts forecasts are considerably more
  accurate when non-financial activities are
  incorporated
For FS companies
• Both analysts and executives say that non-
  financial activities are very important
• about 45% of market valuation is
  attributable to these activities
Discussion of the Results
• Obviously considerable overlap
    • both stressed branding and the importance of the
      customer relationship
• Key points of difference:
    • investors stressed consolidation, ie. successful
      completion of strategies and the commoditisation of
      high quality products
    • CEO‟s stressed convergence, ie. increasing breadth of
      reach and products
    • investors wanted improved communication, CEO‟s did
      not!
• Our interpretation: market perceives focused
  excellence to be better than broad mediocrity
The Survey
•   Scope:
    • covered 255 investors and 55 buy-side analysts
      across all market sectors
    • including 40 FS companies


•Method:
    • provided with list of non-financial activities
    • including the multi-sector study: “Measures that
      Matter”
    • asked to list in order of priority
Results of the Survey
• Non-financial activities for FS companies
     • in order of priority
•   Execution of strategy
•   Quality of management
•   Innovation
•   Customer franchise: reach & strength of
    distribution
•   Quality of strategy
•   Customer franchise: brand
•   Human capital: attract and retain talent
•   Customer franchise: quality of CRM
The Results
• Our Interpretation:
   • develop a consistent vision, then focus on delivery of
     strategy
   • credible management to ensure efficient delivery
   • everything else follows ...
• This is consistent with interview findings
• In addition the survey covered relative
  performance across the sectors:
   • FS companies performed consistently badly compared
     to all other sectors surveyed
   • in all non-financial activities
   • which is consistent with poor market performance
 Back to the Investor Interviews
• We asked about comparative performance
• FS companies were perceived as poor in:
  •   strategy execution and delivery
  •   quality and experience of management
  •   lack of meaningful vision for both product and service
  •   strength of customer relationships
  •   strength of investor relationships
  •   corporate governance
• with a small number of exceptions
  • perceived to be strong across all activities, such as
    ABN AmRo, AMEX and MSDW
The Outcome: Main non-financial
activities
 Non-financial Category               Degree of Influence
     Strategy                              Very high
     Human Capital                          High
     Management                            Medium
     Company Image                         Medium
        ie. brand, customer
            social responsibility
 • all other non-financial categories were not statistically
   significant
The Outcome: Our Interpretation
• Results reinforce conclusions from
  interviews and survey:
    • successful implementation of strategy is critical
    • human capital and credible management also
      important
    • corporate image is also important

• Non-financial activities are significantly
  important contributors to stock value
Overall Conclusions
• Non-financial activities are important for FS
  companies
   • approximately 45% of market value is driven by non-financial
     activities
   • strategy, human capital including management quality, and company
     image are the most important in driving company value on capital
     markets
   • not all non-financial activities are effective differentiators
• FSI performs non-financial activities badly
   • financial analysts give relatively low ratings on the non-financial
     activities of FS companies
   • executives and investors disagree on some of the most important
     activities
• Statistics can identify highly-rated activities

				
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