Luxembourg cross-border life insurers are managing to maintain their revenues in the face of a chang...
Luxembourg cross-border life insurers are managing to maintain their revenues in the face of a changing industry, although the long-term winners will be those companies that are flexible enough to expand their product ranges and move into new markets.
While a strong trend away from capitalisation products and towards unit-linked ones lasts, countries such as Italy, the Netherlands and the UK are providing growth opportunities to those insurers with a more extensive distribution network.
According to a PriceWaterhouseCoopers survey undertaken in the last quarter of 1999, the main customer of cross-border life products is still Belgium, which comprises 47% of the market. This figure is expected to remain constant for the next year.
Olivier Mortelmans, a partner of PWC, said: "Luxembourg has an excellent image in Belgium. Secrecy in Luxembourg used to be a strong argument but now it is more because of the flexibility and modernity of the products."
However, the market in France, the next biggest buyer, is dropping. It provided 23% of premiums last year but this is expected to fall by a quarter next year to 17%.
One of the reasons for this drop is that the recent French finance act adds layers of regulation to cross-border investors. They are required to give out information to the local authority, while investors in domestic companies do not. Insurers have gathered together to try to persuade the European Commission that this requirement is anti-competitive.
This change is counteracted by the growing number of countries interested in cross-border products. Next year, Italy will account for 4% of the market, the Netherlands 6% and the UK 5%. Countries new to the market, such as Spain, should account for 2% or 3%.
However, the broad expansion across Europe brings its own difficulties. On average, companies expect 13% of new business to come from new markets, but this is a drop from last year, indicating that companies think the new markets will be difficult to penetrate. Responses to this fear have included, among other things, looking for sales partnerships and setting up 'free establishment' branches.
Methods of distribution need to be more varied, according to PriceWaterhouseCoopers. The bancassurance channel remains the biggest, accounting for 49% of business, but this is expected to drop sharply by 10% in comparison to 1998. In its place, sales are increasingly being negotiated through intermediaries and brokers. These two make up 48% of the total, while the rest is mostly direct insurance. PWC sees this trend as a result of market expansion and the move away from capitalisation and towards unit-linked products.
The cross-border insurance industry started out primarily as a way for capitalisation products to be sold to Belgium, which is why it is still the largest consumer. However, since the worldwide strength of the markets and falling interest rates in the 1990s, the increased performance of unit-linked products boosted their popularity.
The bancassurance groups needed to increase their limited distribution channels. Mortelmans said: "Banks were tied to distribution through the banking networks, which tend not to be at all pan-European."
The use of intermediaries was a natural choice and the structure of unit-linked products tends to fit their business practices better than that of capitalisation products. This has further enhanced the market share of unit-linked products.
This trend has the effect of pushing companies towards the private banking market, in the sense that all companies, whatever their market, are targeting wealthier clients. It is particularly important for bancassurance groups entering into competition with private banks to formulate a good distribution strategy. Net margins on these products are staying the same, but there is a noticeable difference in gross margins, which are generally lower for bancassurers than their competitors.
However, the profitability of products has generally gone up. This is for two reasons. First, there is an increasing demand for higher quality products that can command a better price. Secondly, unit-linked products simply pay better. These products accounted for 50% of premiums in 1997. This went up to 65% last year and is expected to rise further, hitting 85%-90% before stabilising somewhat throughout 2000.
An unsurprising result of the survey is that it shows insurers have an increasing awareness of the power and utility of the internet. This change has been slow, but many companies are now actively considering for the first time establishing a web site for their clients to access information about distribution and clients.
The idea of offering financial products for sale online is also gaining currency, although fears about clients' security is holding back the pace of change.
The survey also covered the corporate structure of insurers. The average number of employees is 37. Although the survey covered 70% of the cross-border universe, PriceWaterhouseCoopers concentrated on the more mainstream companies, and so the start-ups are probably much smaller. Companies are optimistic about growth, forecasting 17% growth in staff for 2000. Sales staff are the most in demand, followed by IT specialists, accountants and lawyers.
Predictably, outsourcing is on the increase, especially in the fields of IT, which increased from 55% in 1998 to 75% in 1999, and legal advice, which went up from 60% to 80% in the same time. Recruitment outsourcing has also increased from 35% to 50%, reflecting a general move towards these companies shedding non-essential responsibilities, hiring specialists needed for cross-border insurance and concentrating on core activities.
IT spending is increasing significantly - the average IT budget is LUF25m. Despite this increase, it seems these companies are having great difficulties finding integrated IT solutions to record an
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