First Tutorial

Today I have been...

Reading a case study on AXA non-life insurance.

Why?

Preparation for first B820 tutorial!

So What? 

Time period: 2000

Axa had grown big through mergers & acquisitions (like many other similar firms at the time)

Non-life sector was being affected by its environment (deregulation) plus other pressures (overcapacity, entrenched competitors).

Industry in two segments: life 62% and non-life 38%

EU second biggest market in the world. UK biggest in Europe. EU non life 6 largest markets DE,GB,F,I,E,NL was 87% of the EU market.


Growth rate modest (1.6% vs life 9.5%)

Nonlife market in UK actually shrank.

Value chain in Nonlife ins - claims payment (procurement), servicing, product mfring, distro. Procurement was 60-90% of costs.

Fraud added around 4% to cost of motor ins. for example.

Manufacturing - product development, underwriting etc
Distribution - attracting clients, processing apps

Methods of distribution varied by country/culture eg broker, tied agents, direct selling.

Profitability of a non-life co determined by the result of its primary activities (underwriting) and its investment activities. Underwriting result was paid in - paid out. Claims expressed as percentage of net premiums earned, likewise expenses. Expense ratio and claims ratio added together are the combined ratio.

Time lag between premiums paid in and claims out resulted in technical reserves carried as liability on balance sheet. But they were estimates. Reserve ratio indicated level of technical reserves to premiums. Technical reserves were an estimate. Insurers could increase claims estimates - raising reserves and lowering taxable net income, or lower reserves and increase profits.

Tail of the business - time lag between premium in and claim out.

High Reserve Ratio - Long tail - preferable situation as high combined ratio can be afforded.

Low Reserve Ratio - Short tail - not preferable as high combined ratio may not be affordable.Eg, motor insurance. Annual expiry and short period between damage occurring and money paid out.

During the intervening time, money is invested. Asset management important. Insurance companies held 21% of all UK shares.

EU requires inscos to have capital funds of 17% of premiums

Motor ins largest segment.

Expectation that internet price comparison will result in commoditisation
Some companies regarded motor ins as an entry level product to capture clients at a young age.

Expense ratio static. Claims ratio increasing.

Cost per claim risen substantially. Higher labour costs, manufacturer controlled spare parts markets, personal injury settlements,

Almost 3000 nonlife co's. Mergers and acquisitions had led to concentration gain (biggest players owning more of the market).

A small number of ins giants. New players emerge eg Directline, Tesco, car companies + banks selling over counter.

Giants, mutuals, Direct sellers, customer portals, manufacturers, non-financial retailers (eg tesco), banks.

Core  of value proposition was service with direct sellers, eg. scrapping cover notes, delivering a policy within 24 hours.

Axa predecessor began 1816 Paris. By 2001 AXA was 2nd biggest European insurer behind allianz.Claude Bebear built it up with many many acquisitions. Demutualised in 1992. Bebear retired in 2000 after 42 years. Successor was Henri de Castries who inherited the results of aggressive international acquisitions.

 de Castries decided to shore up existing operation rather than continue acquiring. de Castries moved focus from e-commerce to traditional distribution channels. He wanted to increase average products per customer from 1.8 to 3. CRM became key. Non value-add activities were to be centralised.

Routine transactions moved to call centres/internet and traditional channels would be more advice driven.

By spring 2002 there were problems.

How will I use it?