Insurance Strategy: What is the rationale for being a composite insurer?
In the recent analysis of insurer market participation strategies (access the report here https://www.forske.com/insight-1) it was no surprise to see the diversity of strategies across the 66 insurers analysed.
Applying a market segment model with 10 segments(1) key insights included:
The majority of insurers (c.60%) are specialists in either 1 or 2 market segments.
There are a large number (c.20%) who are active in 4 segments.
Only 1 is active in more than 6 segments, with a presence in all of the 10 segments listed (Aviva).
It was not just the number of segments which were of interest but how related each segment was to each other in which the insurer participated.
Again, no surprise that many insurers focused on segments which had strong links to each other – for example, Pensions & Retirement Income and Savings & Investment.
There remain though a smaller number of insurers who pursue a composite strategy. One that is defined as providing both Life Insurance and Non-Life Insurance. More specifically, those that take a level of underwriting risk in both of these areas, rather than just acting as distributors.
In this sample of 66 insurers, there were 6 who met this definition in the UK:
Aviva – base their strategy on being the True Customer Composite and operate in all 10 of the defined market segments. They have significant scale in both Life and Non-Life markets.
Zurich – another multi-market operator in the UK with a presence in 6 market segments, including General Insurance (Personal and Commercial Lines) and Life Insurance.
Lloyds Banking Group – in combination with its insurance subsidiary Scottish Widows, provides both Life Insurance and General Insurance products.
AIG – a General Insurance Commercial Lines operator who fairly recently entered the UK Life market through acquisition and is now growing quickly.
Covea – predominantly focus on General Insurance lines in the UK but also offer a Life & Critical Illness product.
Generali – a Group Life offer alongside a General Insurance Commercial Lines business.
There were also 2 insurers who have recently announced an exit of the composite model:
L&G – who announced the sale of their General Insurance Personal Lines business to Allianz.
LV= - who announced the sale of the remaining stake in their General Insurance Personal Lines business to Allianz.
What is the rationale for a composite market participation strategy?
If you were starting a composite insurer from scratch, there are arguably three potential reasons to justify the business model choice:
To access financial diversification benefits – 1) life and non-life risks can diversify which could result in a reduction in your overall Group capital requirement. So potentially lower capital resources are required to be retained. 2) earnings volatility in one market segment can be balanced by earnings in another segment (for example to offset the personal lines pricing cycle).
To offer customers a broad insurance product offer. If this could be effectively enabled with a digital interface, arguably this could simplify customers financial affairs. Although this would need to demonstrate great value in price competitive products (such as car insurance) and engage effectively with intermediaries (such as financial advisers) who would contend they own the customer relationship.
Consequently, to broaden and deepen the customer relationship. This could then improve levels of engagement and retention as a well as lowering administration costs. This increasing value for the insurer could be shared with the customer (via loyalty discounts, or multi-product discounts) to create a virtuous circle of value creation.
Set against this, there are clearly a set of considerations:
Evidence suggests that in reality customers don’t naturally turn to one provider to take out products across Life and Non-Life, with typical composite product cross-ownership around 1.2 - 1.5x per customer. There are a number of reasons for this, not least differing distribution channels in each segment, for example high penetration of price comparison websites in Personal Lines and financial advisers in Life Insurance.
Managing two different business areas can create organisational complexity and increasing group overhead. While some functional areas can be shared between Life and Non-Life such as central services (e.g HR, Finance) there are many specialist skills which don’t overlap (e.g sales & distribution, pricing, underwriting, claims management).
The insurer is also then exposed to a differing set of Life and Non-Life risks, which requires relevant expertise to understand and manage.
To really understand the benefits of being a composite the insurer would need to be able to quantify some of the key metrics by answering questions such as:
Are customer acquisition costs lower? How many products (and which products) do customers own? Are there improvements in customer retention? How much lower is the capital requirement due to diversification? Is there an increase in Group overhead and complexity by running multiple business lines? Is the ability to understand and manage risks compromised?
Clearly these are specific to each insurer, but an ability to quantify the benefits and costs of combining Life and Non-Life Insurance is essential to understanding whether value is being created.
Focus on Aviva
Aviva stands out from other insurers with its broad market participation strategy across all 10 market segments. Its strategic framework focuses on three thrusts – 1) True Customer Composite, 2) Digital First, 3) Not Everywhere.
Aviva uses being the only composite of scale in the UK as a competitive differentiator and looks to capitalise on this by utilising digital capability. This is most evidently seen with their investment in MyAviva, a customer portal giving customers access to all their Aviva policies. This platform is likely to be extended to offer new products and services to existing customers as well as wider customers benefits.
Aviva’s composite rationale is to simplify customer interactions with insurers, by being the provider of choice for the major Life and Non-Life products. To support this they outline an objective of utilising a single question set to underwrite a range of risks, to provide pre-underwritten, approved products. With a further objective of not needing to ask any questions and relying on data insight and analytics to automate underwriting.
Types of Composite Model
This analysis suggests there are at least two variants of composite models:
The “financial composite”. Which seeks only to achieve financial diversification benefits or potentially some central cost efficiencies or brand “halo” effects from participating in the Life and Non-Life segments in a market. Fundamentally a synergy question of whether value is increased through the combination of a Life business and a Non-Life business compared to the sum of their standalone value.
The much more connected “customer composite”. Which seeks to achieve the benefits of point 1 but also to deepen and broaden the customer relationship to maximise value creation from this business model approach.
Achieving the customer composite is clearly much more challenging than the financial composite and requires at its core a relationship of trust between the customer and insurer. To engage directly with the insurer to access further products, advice or other services the customer would need to believe the insurer is acting in their best interest in promoting additional products, offers great value when compared to the market and that the product is also the most suitable for that customer’s needs.
Without this trust, the customer may just revert back to third party distribution channels (PCWs, financial advisers etc) rather than engage directly with the insurer on other products. This is of course assuming the customer would be active in finding the best product and doesn’t just go for the easy option inertia of an existing relationship.
Building this trust in a sector with mixed customer perceptions will be challenging. There are however examples of insures who have pursued this model, notably the mutual insurers who serve specific affinities, such as Police Mutual, NFU Mutual and Wesleyan. While these are not true composites (they all distribute at least some products) they could provide some insight into how addressing identifiable customer groups and their specific needs could be a basis for building greater levels of trust. A model that is being used by the successful start-up Bought By Many.
What can we conclude on the composite model?
There may well be a compelling financial rationale for operating in both the Life and Non-Life market segments, but the financial benefit needs to be considered against the potential dis-synergies of operating in differing market areas requiring specialist skill sets.
The ambition to move to a customer composite and offer “one stop” product and service provision is theoretically compelling but with a number of practical challenges. These could be overcome with a compelling digital platform but this needs to be built around fundamental trust between the insurer and the customer.
Developing trust with the customer is clearly a challenge. But there are examples where firms are closely linked to affinity groups and demonstrate a more intimate understanding of their customers specific needs, resulting in a greater opportunity to establish higher levels of trust.
There are alternate market participation strategies which might be more compelling, for example focusing on market segments which address connected customer needs and a closer coherence between products.
Testing the composite model by distributing third party products to your customer base may provide a low-risk way of understanding the effectiveness of this business model from a customer demand perspective, before committing to product manufacture.
(1) Market segments – Life Insurance, Savings & Investment, Pensions & Retirement Income, Pensions De-Risking, Life Consolidation, General Insurance – Personal Lines, General Insurance – Commercial Lines, Asset Management, Distribution & Financial Advice, Health Insurance.