A tightly regulated and tariffed environment can be beneficial for protecting consumer interests and sustaining industry profitability in the initial phases of development. Mr Roberto Malattia and Mr Rajesh Sabhlok of Towers Watson say this can, however, eventually become a constraint to further growth as insurance markets evolve. They recommend a more freely competitive environment, with a balance of prudential and consumer protection regulation, be established when the industry demonstrates sufficient depth, character, maturity and experience.
It is no surprise that countries like Malaysia and Thailand are actively considering deregulation of general insurance over the next few years, and Indonesia may follow next.
The intended consequences of deregulation are noble, including promoting innovation in product design and distribution channels; enhancing focus on customer engagement and servicing; increasing insurance penetration to support economic growth.
However, deregulation would require a transformational change in the operations and business model of insurers.
While the transition is likely to involve significant volatility, as seen in other recently deregulated markets such as China and India; being well-prepared and disciplined will not only help insurers in making informed decisions through the transition period, but also in achieving longer term success.
Managing motor insurance in a deregulated environment
Given that motor insurance is the largest line of business for many general insurance companies, a sound strategy and approach towards managing its motor insurance business could well determine the level of success a company can achieve in a deregulated market.
Two main outcomes of deregulation that could have a wide ranging impact on the industry are:
• Free competition – Insurers will be free to design their products and also price them differentially.
Some insurers may intentionally pursue a strategy focussed on increasing their market share in preference to profitable underwriting; or unintentionally end up doing so simply because they have not implemented tools and processes to properly select and price risks. This could trigger fierce and unhealthy competition, although robust regulatory frameworks, adequate capital requirements, shareholder expectations around return on capital and lessons learnt from other deregulated markets may act as restraining factors.
• Consumer choice – With increased competition and pressure on premium rates, insurers are likely to introduce innovative variants of current products to differentiate their offerings. Expanded choice and increased marketing efforts is expected to drive a change in consumer buying behaviour, encouraging them to shop around.
Operating in such an environment will require product revamp, customer and distribution strategies as the “one size fits all” approach will need to be replaced with a more discerning approach, where the marketing mix and strategies are aligned to the varying needs and requirements of individual customer segments.
To be successful in a deregulated environment, companies will need to simultaneously focus on the four key areas as indicated below:
1. Strategic focus – shift in approach
With shifting customer needs, preferences, buying behaviour and increasing competition; companies will need to work on the three important pillars of a company’s business strategy – products, customers and distribution, underpinned by a strong focus on analytics.
Notably, companies with a robust framework to monitor and assess the actual impact of business strategies deployed in the market and having the capabilities to administer changes quickly are likely to be more successful.
2. The importance of predictive analytics
Forward-thinking insurers will need to be more conscious of the importance of risk segmentation and risk selection and its dependence on predictive modelling. Especially in a deregulated environment, companies using less sophisticated pricing and targeting mechanisms may end up acquiring higher-risk and increasingly under-priced book of business as the more progressive customers strategically focus on “cherry-picking” better quality risks.
Within Asia, the use of predictive models is already advanced in markets such as China, Japan, Singapore and South Korea. In countries such as India, Malaysia, Thailand and Vietnam, the use of predictive analytics is typically in the earlier stages.
The application of predictive modelling does not necessarily stop at pricing. In China and Singapore, for example, several of the more forward-looking insurers are already exploring the use of such models in areas such as underwriting, monitoring customer behaviour, marketing segmentation and fraud detection.
We have seen profitability improvements from well-managed execution of broad-based predictive analytics. Achieving this requires a strategic view cross-business and an end-to-end analytic execution plan with clear deliverables and milestones. Exclusion of these vital steps will undermine the success of all the downstream activities.
Once the company has defined its target customer segments, it can work towards an effective product pricing strategy well-integrated with distribution, employee and customer engagement strategies.
In a highly competitive environment, companies that monitor their customers’ behaviour closely and have the capabilities to allow customer access through all possible touch points, seek feedback and carry out changes based on the “voice of the consumer” will be better positioned.
3. Distribution strategy and approach
The role of the distributor will become even more critical, especially in the emerging markets which are planning to deregulate or have recently deregulated, as customers seek advice in navigating through the myriad of product choices.
In most Asian markets, agencies (which include motor dealerships) currently represent the leading distribution channel for motor insurance. Given the influence that they have on their customers, agents can continue to act as the flag bearer in successfully promoting insurance products in a deregulated environment. Agency management strategies and incentives would need to be reviewed and aligned to ensure recognition to the most valuable agents.
However, more “provider agnostic” channels such as broking and open architecture bancassurance could gain share of new business sales in a deregulated environment.
Alternate distribution channels like aggregators, telemarketing or affinity marketing, could also emerge if distributor commission is also deregulated as witnessed in China, where the direct channel recorded significant growth and currently accounts for over one-third of the total gross written premium in China.
4. Process and capability improvements
In a deregulated environment, agility of an organisation in decision-making and responsiveness to the competitor actions will assume critical importance.
Companies would therefore benefit from integrating analytics with strategy to create a more factual, data-based and measurable business process and decision-making culture so that they can respond to market developments as an informed participant.
Speed to market and agility to swiftly implement rates are critical success factors in a deregulated market and control on such levers can have a major impact on companies’ profitability.
In addition to being able to optimise product pricing, optimal use of high end technological tools to improve capabilities and processes would help insurers in further expanding the profit – growth frontier as reflected below.
Cultural shift
Deregulation will not only be new for customers and distributors, it will also be the first time for most of the employees, middle management and leadership of insurance companies to experience operating in a free and competitive market.
With deregulation, markets are expected to undergo a paradigm shift. For many, it will involve learning how to operate in the new environment and adopting a new mindset.
As the focus shifts onto attracting and retaining target customers and on achieving profitable growth in a competitive environment, companies will need to build a culture that promotes, among other things, customer centricity, innovation, service excellence, agility and transparency with technology being the bedrock and foundation supporting operations.
This is likely to need concerted efforts in institutionalising cultural change, starting from the top management and through to the front-office.
What is the cost of being prepared and when should I start?
The regulatory path to deregulation may be unclear but the cost of being too late to prepare is clearly high.
Even where an insurer cannot yet control price or product terms, predictive analytics has proven to be useful in significantly enhancing distribution and customer targeting strategies for new business and renewals.
Early adoption of predictive analytics pre-deregulation helps to establish the need for and therefore processes around having better quality and breadth of data. The early implementation of tool and processes can facilitate informed decision-making and execution of strategies to refine underwriting, distribution, claims management, expertise and knowledge management in the organisation.
There is no question that deregulation is a significant market shift for insurers. This provides a platform for positive step-change for progressive insurers and will need robust business cases and execution plans for substantial investment in time and money in technology and people development.
The real question insurers should be asking themselves is: “What is the cost of not being prepared in time?”
Mr Roberto Malattia is Director, General Insurance Consulting, South East Asia while Mr Rajesh Sabhlok is Senior Consultant, Insurance Management Consulting, Asia Pacific, both at Towers Watson.