Insurance companies have always faced a persistent and intractable problem: their customers do not like them very much. It is the natural consequence of a relationship that only sparks into life when something unpleasant happens.
So some in the industry have come up with a solution to the problem: stop being conventional insurance companies. Be “services” groups instead, and offer something well beyond the traditional mailing of a cheque to compensate for that holiday that was not all it was promised, fix a dented car bumper or repair a burst water pipe.
“The industry is facing a huge amount of disruption as companies like Amazon redefine customer experience,” says James Shuck, an analyst at Citi. “The customer doesn’t want to buy a product. The customer wants a problem solved.”
Higher expectations are not the only problem the insurers are facing. In many parts of the world, their core markets are mature, competitive and barely growing at all. And since the financial crisis they have had to grapple with low interest rates and new capital rules, both of which have dented their traditional business models.
Services are increasingly seen as the answer to all of these problems. If done right, goes the theory, the costs of providing them will generate happier customers, higher revenues and less volatile profits for investors.
For some insurers, this move into services is an attempt to retain customers and win new business. But for others, it is a fundamental shift in the business model that will change their relationship with customers and investors.
Some companies, such as the UK’s Standard Life, have stopped being insurers altogether. Its stock market listing was moved out of the insurance sector last year, after its merger with Aberdeen Asset Management.
The services take many forms. Travel insurer Cover More offers psychologists and trauma nurses to customers such as Leeann Lloyd, an Australian who was caught up in the 2015 Nepal earthquake. “They were very mindful that we were in the midst of a dramatic situation,” she says. In Italy, Generali provides a babysitting service for customers who have to stay in hospital.
In commercial insurance, UK-based RSA has launched RSARed, which allows customers to track risks at individual or multiple sites. In cyber insurance, services that deal with attacks are seen by customers as a core part of the policies that are sold.
Mario Greco, chief executive of Zurich, is such an enthusiast about services that last year he spent $565m buying Cover More. “This is a great opportunity for the industry to become fully understandable for customers, which for years has been its Achilles heel. Customers haven’t understood why they need insurance,” he says.
For Mr Greco, the main aim of offering services is to improve customer loyalty in an industry where it can be thin on the ground.
“The whole industry has a fundamental strategic weakness on customers,” he says. “Customers may have 10 to 15 insurance policies, but rarely more than two or three with [the same] company. Customer loyalty is low and this is the biggest opportunity for growth. The industry will not have lots of other growth opportunities.”
There is evidence that the strategy can work. Brazil’s Porto Seguro has spent decades building a range of services for its clients, from car parking and car repairs to plumbing for the home. The investment has paid dividends. Last year the company made R$135m ($36m) of net profits from its services businesses, against R$778m from insurance.
Henrik Naujoks, a partner at the consultancy Bain & Company, says: “They [Porto Seguro] are a high-price insurance provider, but they constantly grow market share. People like the services that they aggressively advertise. People are willing to pay the price.”
Not every insurer is simply out to improve loyalty in a world where customers’ expectations have increased. For some, the shift to services is also a way to cut claims costs.
Technology has made it easier for insurance companies to monitor what their customers are doing. This can be helpful when it comes to pricing the policies, but can also be used to advise customers how to avoid the sort of incident that might lead to a claim. “Instead of writing a cheque when bad things happen, it stops bad things happening in the first place,” says Citi’s Mr Shuck.
Generali, for example, has put boxes in some of its customers’ cars that light up when the driver is driving badly. RSA and Aviva are among those installing leak detection kits in their customers’ homes so that drips can be spotted before they turn into floods.
In health insurance, Vitality gives its customers advice on the best way to eat and exercise. It also measures their activity via connected devices such as Fitbits— people who sign up to the plan can receive discounts of up to 60 per cent on their life insurance.
Others see the shift to services as a way to generate a whole new income stream to complement or even replace traditional insurance business.
In property and casualty insurance, Axa is one of those looking for added revenues. Guillaume Borie, the company’s head of innovation, says: “One of the big problems with services in insurance is that customers are not willing to pay for them, so it becomes a cost centre. The question that we are trying to solve is: can we create services that create value for themselves, by earning a fee or driving growth.”
One example is Qare, developed by an Axa-funded start-up lab called Kamet. It is a virtual medical clinic that gives people access to French doctors via mobile phone for a monthly fee. “We want to diversify the business mix and to build very regular interaction with the customer,” says Mr Borie.
Reinsurance companies, which help traditional insurers to reduce their own risks, are also getting in on the act. Their business model has involved taking on risks in return for a premium, much as any insurer would. Increasingly, though, investors are taking on reinsurance risk via instruments called insurance-linked securities. That has pushed down prices for traditional reinsurance.
“There is a melting iceberg phenomenon in reinsurance,” says Mr Naujoks. “The growth potential for classical reinsurance is very limited.”
In response, reinsurers such as Swiss Re and Bermuda-based RenaissanceRe have started to supplement their traditional businesses by becoming middle men between their usual clients and the investors wanting to take on risk. The reinsurers take an arrangement fee, and sometimes an advisory fee, while leaving the risk to someone else. According to the specialist data provider Artemis, RenaissanceRe manages more than $2bn for third-party investors in this way.
“They can generate fee income with relatively little risk, while continuing to work with their customers and develop the brand,” says Brian Schneider, senior director at Fitch Ratings.
One of the advantages of selling these sorts of services, say insurers, is they can generate regular fee income with low capital requirements, because they often do not involve the insurance company taking any added risk.
This trend has gone furthest in life insurance, where some companies are shunning old business models and products in favour of something that they hope will be more attractive to both shareholders and customers.
For years, life insurers have been content to take on risks on behalf of their clients. Some products, such as annuities, protect customers from the risk that they run out of money before they die. Others offer investment guarantees, protecting customers from the risk that markets move against them. Huge teams of actuaries work out how much to charge for taking on these risks.
Recently though, insurers around the world have made the move to what they call “capital-light” business models. Here, the insurers create and sell financial products and take a fee for doing so, but the risks stay mostly with the customer.
“Because of low interest rates and regulation, it is more and more difficult to offer guaranteed products,” says Benjamin Serra, senior vice-president at the rating agency Moody’s, who says the new products the companies are offering are more like asset management products than insurance products.
Many insurers are slowly moving in that direction. Although they are staying in what they call the protection business — paying out to dependants if a customer dies, for example — they are getting out of some of the more capital intensive parts of the industry.
Mr Greco says: “In life insurance we will move to more of a service offering, developing advisory services more than taking financial risks on to our balance sheet.”
Elsewhere, Axa floated its US business this year in part because it wanted less exposure to market risks, and the UK’s Prudential has stopped selling annuities, which used to be one of its core products.
One of the most extreme examples has been Standard Life, which started as a mutually owned life insurer in Edinburgh in 1825. After it demutualised in 2006, the business model really started to change.
For the past decade or so, the company has been moving itself away from traditional insurance and towards newer fee-earning, capital-light investment products that have more in common with asset management. Last year it merged with Aberdeen Asset Management, a more traditional fund manager. This year it agreed to sell its legacy insurance business to Phoenix Group.
The merged company’s stock market listing has changed to diversified financials, but the move towards asset management is not without its challenges. “In the savings arena, insurers are having to compete head on with banks and asset managers. It is a very competitive environment,” says Willem Loots, senior director at Fitch Ratings.
The industry is dominated by big asset managers such as BlackRock and Vanguard, which have huge economies of scale and are driving prices down.
“A key question for insurers is what they do with their asset management activities,” says Mr Naujoks. “There is a question of size, where you are too small to win but too big to die. A lot of insurers’ asset management activities are just in between.”
Standard Life’s merger with Aberdeen was seen by analysts as an attempt to create the sort of scale that would allow it to compete with bigger rivals.
Investors seem unconvinced by all the changes. Over the past five years shares in Standard Life have lost a third of their value. The stock of Legal & General, a UK insurer that has stuck more solidly to its insurance roots, is up by 28 per cent over the same period.
Nevertheless, many in the industry see the shift to services — and away from the traditional idea of taking on risk on behalf of customers — as inevitable, both in life insurance and in property and casualty insurance.
Stéphane Guinet, founder and managing partner of Axa’s Kamet, says: “The industry will move from risk transfer to more and more services . . . The future will be for the ones who can design and deliver experiences. The risk transfer will be ancillary.”
Ping An a pioneer in moving beyond insurance
China’s Ping An has become the poster child for insurance companies that want to move their businesses beyond traditional insurance.
The company, which is only 30 years old, is one of the world’s biggest insurers with more than 160m retail customers. But Ping An has been investing heavily in technology for years, devoting 1 per cent of its revenue to investments in innovation. Last year it spent $1.5bn.
The technology has allowed it to streamline its core insurance offering. For example, car insurance customers involved in an accident can email in photos of the damaged vehicles. Ping An’s algorithms look at the photos and make an immediate damage assessment. These “self-service” claims are almost all paid within a day.
The company has also developed a series of what it calls “ecosystems” to offer a wide variety of other services, from health advice to car sales. Over 300m people use its mobile apps.
These services are partly a way of generating new business for the core insurance and banking operations. According to Lee Yuansiong, Ping An’s deputy chief executive in charge of the insurance operations, 40 per cent of new financial services customers last year came from these businesses.
But they are also a way of girding the group for a future in which financial services might no longer be so profitable. “Competition will get heavier and regulation will get tighter,” says Mr Lee. “Return on capital in the core business will trend lower so we have to supplement that traditional business with new revenue streams that use very little capital.”
It is not just retail customers the company is targeting: it also wants to sell its technology to other banks and insurance companies, again with the aim of generating new fee income.
“The market is huge, and not just in China,” says Jessica Tan, Ping An’s deputy chief executive and head of technology. “It is a very scalable business.” She adds: “If we don’t act, we’ll just become a utility.”