The Debate on the Insurance Value Chain

by Anton van Rossum

The fact that the subject of the value chain in insurance is on the agenda of this meeting
means that CEOs in the insurance sector or the nancial services in general are or will be faced
with major changes in this area.
Before going into detail of some of the aspects of the value chain, one should perhaps
pause a moment and consider the causes that may lead to reconsidering it.
We all want to serve our customers better, more cheaply and faster, without of course
ignoring the other stakeholder: shareholders, employees and distributors who all have
conicting interests. CEOs need to try to keep a proper, equitable balance beween these
stakeholders.
We all serve millions of customers; the need to excel in the execution of daily operations
and contacts with our customers becomes a conditio sine qua non for success. Poor execution
can have disastrous or even fatal consequences.
Customer retention is becomingmore crucial than ever for success in the nancial sector.
Consequently, insurance companies are looking for loyal, protable customers. As a result,
they are increasingly changing from product suppliers to service providers where customers
can feel at home.
Various distribution channels are available to customers looking to purchase nancial
services. Suppliers need to ensure that they actively approach the customer rather than
waiting for the customer to nd them.
Acustomer's choice of channel is no longer product-dependent, but is determined by the
underlying customer needs.
What were once stable bastions are now affected by all kinds of external factors. The
advent of the euro, the liberalization of nancial markets, mobility of capital, and
digitization, with its enormous impact on transaction costs, are creating an entirely different
playing eld for traditional or incumbent banks and insurance companies. A new set of
economics, new market structure and new corporate structures are seeing the light of day as
a consequence.
Mergers, acquisitions and joint ventures in the nancial services sector are regular
headline news items these days. More often than not, these transactions are carried out in the
name of synergy on the income as well as on the expenditure side. In order to achieve these
synergies, one will need to review the organization model, which of course has an impact on
the value chain.
Pursuing the goal of advantages of scale is always at the cost of an organization's
exibility. Achieving economics of scale demands central management, uniform processes

Chief Executive Ofcer, Fortis, Brussels, Belgium.

The Geneva Papers on Risk and Insurance Vol. 27 No. 1 (January 2002) 89101
#2002 The International Association for the Study of Insurance Economics.
Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK.
and products, and centralized knowledge and resources. The customer, however, demands
exibility, choice, etc., which in turn calls for decentralized management and differentiation
at lower (local) levels.
Is this possible? No, if we continue to think in terms of an integrated business model. The
processes in the value chain in such a model are inseparably linked to each other. In other
words, tomorrow's winning institutions will be those that understand the newrequirements of
success in this respect and have the brands, talent, intellectual property and networks, as well
as the courage, to reshape themselves accordingly.
Our traditional viewof looking at our business as a closed and fully integrated systemhas
become obsolete. Traditional businesses will disaggregate and then components will re-
aggregate again in other structures. In both banking and insurance, we already see clear
examples of this. For instance, the life industry is desegregated into three core areas:
distribution, underwriting administration and asset management.
These structural changes, we believe, will happen in other lines of business as well, albeit
along different trajectories and at different speeds.
The possibilities of information technology make it feasible to break up the value chain
in the nancial sector, which means it is no longer necessary to carry out all processes under
one roof. Players are emerging who are concentrating very successfully on just one or two
processes in the value chain.
This development makes it possible to aim for economics of scale in various processes
such as nancial management, product development and administration, while focusing on
and keeping the required exibility in other processes such as marketing and sales.
Breaking up the value chain and questioning who is the best supplier of the services and
functions for each part is a process which is a must and which requires some difcult choices
and decisions. Should it be outsourced? Should it be on the basis of shared services: i.e. intra-
sourced whereby one concentrates the expertise in one of the organizations of the group?
Should one opt for one back ofce? Many nancial services groups pursue a multi-channel
distribution strategy under the same brand or under different labels. The obvious question is
whether each channel (label, brand) should have its own value chain.
Similar questions can be raised in respect of product development, administration
(policy issuing, policy administration, claim handling), asset management, etc.
The concept of shared services is fairly simple and the advantages are clear. However,
implementation is not necessarily, or even most of the time, that simple. It requires a new
model of organization and that means change, and change creates resistance.
Implementing a concept of shared services requires that all aspects be given proper
attention and shape.
A few examples:
The streamlining of products, although a different commercial policy for each label/
brand, should still be possible; nevertheless, one will have to take into account differences
in products by customer segment and certainly by country;
A regulatory environment in each country;
IT architecture: shared services uncouple the label from the processes that take place
behind it. At the start, each organization has its own application. In the new concept, the
applications are at the shared-services level. However, the marketing and sales area of
each organization will have its own requirements and customer data. The ITarchitecture
has to be an open one, guaranteeing the link between shared services and commercial
organizations;
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90 VAN ROSSUM
Organizational structure: shared services requires a matrix organization with all its
advantages and disadvantages.
To conclude, there is a general consensus that the nancial services world is changing
very rapidly and is a pretty turbulent one: global competition, new entrants, assertive and
demanding customers, strategic alliances, etc.
All of this leads CEOs to have to focus on questions such as ``What are we good at?''
``What should be outsourced?'' ``How should we structure the group from an organizational
point of view?'' ``What should we do with a strategic partner?''
Each company will have to make clear choices translated into the form of new business
models. If not, the customer will make the choice: he or she will opt for another supplier.
Developments in technology offer possibilities and facilitate the trends described. The
role of technology is becoming even more strategically important than in the past.
However, we should not forget that the most important factor which will direct the
business design is and will be the customer. Gearing the business design to the customer's
needs will be one of the most important success factors of the future.
The Debate on the Insurance Value Chain by Henri de Castries

1. Service and the insurance value chain: who, what, where, how?
In the past, consolidation has been a main driver of growth for insurance companies.
Today, the consolidation has not come to an end: the insurance market is still very fragmented
and the global insurance market is still very limited.
However, the market environment has changed, be it from an economic point of view
with the shift towards globalizationand sophistication, mainly due to deregulation of nancial
markets, introduction of the euro and the development of new technologies, or from a
demographic point of view with an ageing population and the growing proportion of mass
afuent clients who represent an important fuel for growth.
Given the new environment, it is necessary to clarify the strategic vision and choose
between being a specialist or a conglomerate. Being a specialist requires having a clear view
of the value chain in order to optimize all the links and to identify where the value is being
created.
Below are a number of strategic characteristics of each link that would be necessary to
ensure or even improve a strategic foothold in the market.
Product
Manufacturing
R&D Distribution Utilization Recycling

Chairman of the Management Board, AXA Group, Paris.

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THE DEBATE ON THE INSURANCE VALUE CHAIN 91
2. R&D: competence and innovation
Over time, even some of today's complex products are bound to become commoditized.
Technology levels the playing eld for all insurers through the ``information for all'' effect,
i.e. the ability to compare similar products from different companies. As such, in order to
maintain shelf space and market interest, insurers must stand out through broad and
differentiated product offerings.
Insurers who want to stay in the manufacturing business will therefore have to be both
best in class and innovative.
Astrong track-record of competence (including good performance, good product design)
will strengthen the existing portfolio;
As the manufacturing market becomes more and more competitive, innovation will be key
in order to react to market change and take benets of new business lines, like non-
medical health (disability, dental and long-termcare) or environment. Adding sophistica-
tion to the products (e.g. options recognizing the different risk tolerances of clients as they
progress through different stages of their life) will get the insurer closer to the client. It will
also allowrevamping of individual products suited to begin providing tailored products to
various distribution channels.
The challenge of R&D is to be able to answer clients' needs, anticipate market changes
and even foster new needs of clients to become a key player in the market.
3. Product manufacturing: exibility and protability
Tomorrow's challenge in the manufacturing business is twofold:
Customer satisfaction, because the client will remain the key driver of company growth,
and because customers are increasingly opting to do business where they want, when they
want, and how they want; and
Penetration of new distribution channels via winwin deals, i.e. reciprocal offerings,
because gaining access to shelf space will become increasingly competitive.
Insurers must rethink the way they develop and manage products. They must gain in
exibility towards products (because time-to-market will be key) and towards customers
(because one size will not t all any longer). To achieve higher exibility, insurers must gain
in protability.
The objective is:
To be able to offer more exible pricing structures because this is likely to be an attraction
to nancial services supermarkets and because distribution partnerships will imply
revamping of the fee structure. This will require operational excellence: lower processing
costs and expense-control management via promotion of re-use, best-practice sharing and
knowledge management;
To reach superior services and technical levels: provide comfort and clarity for the
customer, make it easier for distributors to sell and administer policies, but also operate
topight quality of products. Service levels will have to be segmented: higher-value
customers are likely to desire more personalized attention whereas mass afuent or
commoditized products-oriented customers will only want to deal with direct distribution;
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To design slick back-ofce systems able to provide an up-to-the-minute, entire picture of
the client's position (including his or her nancial statement), and to react to competition
thanks to new products brought to market in a much faster way.
Achieving the objectives requires moving progressively to regional platforms to foster
economies of scale:
Asset management;
IT;
Product development;
Service/call centres.
Efcient use of technology and tight employee-relationship management will be key in
this regard.
4. Distribution: segmentation and extension
Insurers limiting their distribution to captive-agency forces appear at a stark disadvan-
tage to companies that have penetrated banks, broker-dealers, independent agents, and the
internet. Yet those companies that choose to retain their career agents and push into alternative
channels are setting themselves up for channel conict. There is a clear risk of disruption in
career eld force if sales through alternative channels are not properly managed. Internet, to
another extent, will also cause disruption, but mainly for commodity products. The
acceptance of the internet as a distribution channel will likely diminish as the complexity
of the product being sold increases.
Therefore, reinventing the role of distribution and of sales forces will be the key.
It is rst a question of optimizing proprietary distribution. Because sales forces are the
mainstay of the relation with the client, there is a clear quest and need for excellence. Because
the product knowledge of the sales forces will need to be extended beyond traditional products
and include a broader range of investment and transactional instruments, and because these
newproducts in hand will likely be more often sold than bought, retraining of the sales forces
and support in this effort will be key.
Sales forces will also need enhanced customer-management systems to improve their
overall efciency: shorten the sales cycle, improve pre-sales support, increase productivity.
This retraining exercise will likely be costly, in terms of both time and potential sales lost
throughout this adjustment process.
The entire sales forces will not make the journey and it will not be possible, for
protability reasons, to offer the same service to everyone. Therefore segmentation is going
to be crucial.
It is also a question of extending proprietary networks, be it through alliances or
acquisitions. Because consumers will demand a broad range of products fromseveral insurers
from their nancial services provider, insurers will need to adopt an open architecture to
leverage access to customers.
This may lead to a slowdown in proprietary sales. However, this creative destruction is
likely to be essential to solidify customer relationships and maintain a competitive advantage
in the marketplace, and it will allow the acquisition of new clients according to the same
concept of communicating vessels.
The success of open architecture is contingent upon:
Correctly addressing the up-grading of the proprietary channels;
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THE DEBATE ON THE INSURANCE VALUE CHAIN 93
Adapting the compensation structure
to enable better shelf space and motivate third-party distributors in referencing the
insurers' products;
to motivate agents for selling third-party products;
to change focus from sales to client relationships (commission base on AUM rather
than sales).
Building solid nancial relationships with existing nancial service providers which are
mutually benecial to both parties is a key challenge.
Beyond open architecture, acquisitions are another relay for growth, but this should not
be seen as an easy-going issue. Actually, despite an immediate increase in sales forces, threats
are very similar to the ones in the rst two steps:
Competence and motivation of the sales forces;
Quality of service;
Cannibalization of networks.
Besides, beyond the necessary segmentation required to fuel the distribution power
efciently, acquisitions add the challenge of compatibility of networks. This goes beyond
segmenting the client database, and includes know-how and ethics and can signicantly
impact the image and the brand.
Therefore, acquisitions need to be looked at very closelyand it can prove awiser decision
to enter a network of alliances to ll product gaps rather than make acquisitions.
5. Utilization (after-sales service): client intimacy
Because customers will be confronted with a wide range of products and as many
distributors, there is a clear need to stand out and best serve the client to solidify a relationship
made vulnerable by accrued competition and easy access to broader information. Utilization
is key in this regard because it materializes the service the insurance company can give to its
clients. It is very often the most regular link the client has with his insurance company.
Three axes should be of particular attention:
Follow-up of the product: In the same way as it is an incentive for the client to be sure that
spare parts will be supplied by his car dealer over the life of his car, the client of an
insurance company needs to be sure that, among other things, the guarantees underwritten
will apply over the lifetime of the product. This implies in particular solvability of the
company, solid ratings and a good investment portfolio.
Increased knowledge of the client: The objective is to jumpstart on the relation with the
client to elaborate a better knowledge of the client and be able to manage the relationship
efciently. Customer Relationship Management (CRM) is the concrete application of this
objective: by building a usable asset from the client database, it gives the means for
efcient segmentation of the clients. This best allows the insurer to match the client and
the service given to him, and it should therefore lead to increased satisfaction of the client.
Quality of service being easy to deal with and enthusiastic: In aworld where all products
are available through all channels, the battle for the consumer will very probably be fought
through customer service. Insurers will need to pre-empt and facilitate life for their
clients, according to the segmentation put in place. This means rst, to gain exibility in
terms of service, with the ability to differentiate between clients. It means second, to be
able to offer the most sophisticated service to the most demanding client. This includes
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one-on-one contact with a nancial planner, and offering clients the possibility of
accessing information and carrying out transactions whenever, wherever, and through
whatever channel they want, all through the same institution. Consumers will demand
access to all products available in the marketplace, along with advice on how to make
sense of the product alternatives, given their nancial goals.
Sales forces will need improved access to product and client information. More probably
they would be willing to share information if insurers could help them identify cross-selling
and up-selling opportunities.
Technology plays a key role in this regard, but it is also a human challenge because it is
above all a question of mindset, availability and reactivity.
Distributors who fail to provide such client intimacy risk losing their customer
relationship to nancial services aggregators.
Because it illustrates the quality of utilization, brand will be the vector of differentiation.
Being able to deliver the promise of the brand will therefore be key to retaining and gaining
new clients.
6. Recycling (cross-/up-selling): going further with the client
Recycling in insurance should be seen as a manifestation of active management on the
part of the client. This involves both a qualitative and quantitative approach. It means
elaborating on new services from a client asset perspective to strengthen and develop the
relationship with the client (proposal of continuation options at the end of one product,
anticipation and responsiveness to the client's newneeds). It also means efciently managing
the client's portfolio by assessing the present and future value of the client. This requires the
ability to reach an analytical view of the client to determine the targets for future protable
development. It is mainly driven by technology.
Recycling is the ultimate phase of client knowledge. It should allow the insurer to
become a customer's partner for life and to be present throughout the customer's life and
according to his or her needs.
Efcient recycling should foster cross- and up-selling opportunities and allow for an
increase both in the number of products per client and the longevity of the client, which are
key for long-term protability. It should also increase client loyalty. By getting closer to the
client, the insurance company protects itself against client departures and attracts new
partnerships. By identifying the most valuable clients, the company will be able to shape its
future development: selecting clients and partnerships in the most efcient way.
A thorough study of the value chain is the rst step towards a clear industrial
organization. The second step consists of improving existing competencies while at the same
time complementing non-existing ones.
Insurers will need to reexamine their entire portfolio of vertical (and horizontal)
solutions and their organizational structure to meet the changing demands of their business.
This will be achieved through the sensible use of the three levers of growth:
Enhancement of internal key competencies. Leveraging of group scale and development
of synergies. Standardized processes across a group are key here. Special attention should
be given to growing proprietary sales forces, who are the cornerstone of client
relationships, hence also of future development.
Development of efcient partnerships. Thorough analysis of the value chain allows the
organization to open itself towards partnerships in order to improve or supplement
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THE DEBATE ON THE INSURANCE VALUE CHAIN 95
internal skills. This is generally known as open architecture. The purpose is to gain and
retain clients by better responding to their demands, and it is justied in many ways:
Customer sophistication increases;
Product manufacturers need to increase their distribution by penetrating a variety of
distribution channels;
Distributors need to capture a bigger share of their customer's wallet, hence
deepening the relationship (trusted advisor) in order to sell more products (cross-
selling).
Selective external growth. To ensure that the operation is worth the costs and business
disruption, a number of key factors need to be assessed prior to any external growth,
among them strategic t, benets from risk diversication, gains in market share and
enrichment of existing competencies.
Efciently segmenting the value chain is a key element of success: today's challenge is a
cocktail of:
Appropriate organization;
Strategic positioning;
Motivated employees who will build a long-term relationship with the client.
The Debate on the Insurance Value Chain by Robert Mendelsohn

The current structure of the insurance business is constantly evolving as a reaction to

external demands and internal potential. What is the function of insurance in society? How
can this function be best served? Where can insurance companies create more value for
customers and clients, and through which activities? How could these be organized? What
other players might threaten the insurance value chain?
1. New consumer personal nancial services distributors
In the not too distant future, consumers will be able to reviewand manage the totality of
their nancial lives in one place. Individuals will have access to best-in-breed transactional
bank and brokerage accounts, lending products, insurance products, and nancial advice
fromeither single or multiple vendors. When accessing these services on-line, customers will
have universal passwords allowing them to sign on to all accounts immediately and transact
seamlessly between them, all the while remaining condent in the knowledge that their
privacy and security are protected. Customers will have access to the same information and
services in the on-line channel as the services accessed via the off-line channels (i.e. all non-
digital channels, e.g. telephone or direct contact).

Group Chief Executive, Royal & SunAlliance Insurance Group plc, London.
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The effects of these inuences may appear a little muted at present, given the current
basic requirement of owning or having access to a modem-linked PC. However, the growing
development of interactive TV, improvements in bandwidth and the speed of connectivity and
increasing access to customers through worksite marketing will result in the opening up of
huge numbers of consumers currently excluded from the e-commerce marketplace.
This paper discusses the emergence of internet-enabled consumer intermediary/
distribution models that allow companies to pursue this vision of integrated nancial
services. The purpose of this paper is to outline current and emerging trends and dynamics
surrounding nancial services intermediaries and briey analyse their potential impact on the
insurance industry.
2. The emergence of new consumer personal nancial services distributors
While early predictions of its ascendance were clearly overly optimistic, the internet will
nonetheless fundamentally transformthe economics and business models of many industries.
In a wide range of industries, the broad availability of information has sparked a shift in
market power from manufacturers to customers with the greatest potential impact in retail
distribution, where traditional product push strategies are having to give way to the demands
of the consumer.
In nancial services, the dynamics are much the same. Given the fundamental
transformation underway and the differing core competencies of market participants, several
new nancial services intermediary/distribution models will co-exist for the foreseeable
future:
(i) Largely independent models that allow customers to transact with multiple vendors
across a broad range of nancial services products;
(ii) Mainly proprietary models that offer the same breadth of offerings but restrict
customers to a single provider;
(iii) Hybrid models that offer proprietary products in areas core to their businesses while
providing choice in other product lines
Among the most important market forces behind this trend are:
(i) Advances in technology: Rapidly developing technology applications, directly aligned
with key customer needs, will attract increasing numbers of nancial services customers
to the internet. Particularly noteworthy is account aggregation which enables users to
view and manage different on-line accounts through one consolidated website.
(ii) Improvements in internet security and privacy: Supported by regulatory developments,
technologies designed to ensure security and privacy on the internet will enhance
consumer comfort in conducting transactions on the web.
(iii) Attractive economics: Financial services providers will be attracted to sustainable
revenue models and the low cost of internet distribution.
To date, players newto nancial services have created independent intermediary models
(such as Yahoo), while traditional nancial services rms, Royal & SunAlliance included,
have introduced proprietary and hybrid intermediary models. These different models are
driven by contrasting motivations, economics and critical success factors.
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THE DEBATE ON THE INSURANCE VALUE CHAIN 97
Independent nancial services distributors
The economics of early movers like Yahoo challenge them to monetize their vast
customer base and alter their revenue mix frompredominantly advertising fees (90 per cent of
all revenue in the case of Yahoo) to transaction revenues. If they can achieve this
diversication in their revenue mix, their low cost of business provides highly competitive
nancial services operating margins.
In order to be successful, independent nancial services intermediaries must:
(i) Offer a demonstrably superior customer value proposition in terms of choice and
convenience: Consumers desire choice when purchasing nancial products. Indepen-
dent models like Charles Schwab OneSource used the power of their customer value
proposition and rapidly outgrew proprietary models within the U.S. mutual fund
industry.
(ii) Leverage a strong consumer brand to attract customers and encourage themto transact:
Companies like Yahoo and AOL must draw users to a portal, but critically that brand
must provide a level of comfort and trust that encourages consumers to transact.
(iii) Rapidly grow and monetize their customer base: Independent models can achieve
protability provided they grow users aggressively and monetize them quickly.
Proprietary nancial services distributors
On-line proprietary intermediary models, typically launched by universal nancial
institutions, are now beginning to emerge alongside independent models. The economics for
traditional providers are driven by the economics of their core business. Revenue drivers are
asset-based while cost structures are characterized by high xed outlays. In contrast, the top
line of the independent model is driven by the number of customers and revenue per customer
while their cost structure is far less weighted toward xed expenses. Therefore, powered by
universal nancial institutions, proprietary intermediary models typically pursue asset
acquisition strategies while independent intermediaries pursue customer acquisition strate-
gies.
In order to be successful, proprietary nancial services intermediaries must:
(i) Leverage a well-established nancial services brand to attract consumers to their on-
line portal and create customer condence: In contrast to most independent portals,
established nancial institutions have brands steeped in the traditions of trust, security,
and reliability, which provide customers with the comfort necessary to encourage on-
line transactions. Support for this argument can be found in retail brokerage. Despite the
success of newentrants like E

TRADE and Ameritrade, brokers with established brand

names still hold an estimated 82 per cent of market share in the U.S. in terms of assets
under management in the on-line brokerage industry.
(ii) Effectively integrate on-line and off-line channels to convert web users into buyers while
deepening relationships with existing customers: By integrating these channels,
incumbents can derive the competitive advantage of bricks and mortar with the ability
of on-line channels to acquire new customers and broaden the value proposition to
existing customers (the so-called ``Clicks &Mortar'' or ``Bricks &Clicks'' businesses).
Appropriately designed nancial education and advice in either the on-line or off-line
channels will help players with proprietary intermediary models acquire larger shares of
their customers' spend. Since their revenue drivers are asset-based, traditional players
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#2002 The International Association for the Study of Insurance Economics.
will dramatically improve their economics by deepening relationships with customers.
(iii) Develop a competitive customer value proposition that simulates key elements of the
independent models: Due to the choice and objectivity inherent in the independent
nancial services distribution model, proprietary models must seek opportunities to
mitigate this disadvantage.
Successful proprietary distribution models will succeed where they possess a compe-
titive proprietary product range across nancial services segments and leverage the strengths
of their existing brands. In order to refrain customers from comparison shopping, these
players must create a value proposition that the customer perceives as possessing a level of
trust, convenience and value that outweighs the choice and objectivity of the independent
model.
Citigroup, through its portal MyCiti, is an example of a company that aggregates
nancial information from a variety of vendors whilst only offering the facility to transact
proprietary products.
Hybrid nancial services distributors
Most nancial institutions lack the product breadth, top-tier consumer brand, and
customer reach to create a universal proprietary nancial services portal. As a result, some
players are pursuing hybrid intermediary/distribution strategies. These models offer vendor
choice in those product lines where the intermediary lacks product manufacturing capability,
while limiting access to proprietary offerings in core business lines.
This model will be very attractive to non-universal nancial institutions with strong
market positions in selected markets. An example of this model is ABN-Amro's ``Money-
planet'' where current account, credit cards, and on-line share transactions are the exclusive
domain of ABN Amro, while other products come from a range of banks and insurance
companies. In an extension to this model, Bradford & Bingley's ``The MarketPlace''
promotes its competitors' mortgage, investment, pension and household insurance products
side by side and in direct competition with its own.
As with proprietary models, hybrid intermediaries will be driven by the economics of
their core businesses and thus adopt asset acquisition strategies. Several players will be
successful in pursuing objectives similar to those of the providers of proprietary models (i.e.
building new customer relationships and deepening existing ones).
Hybrid models have a distinct advantage over proprietary models in terms of their
customer value proposition. They can offer choice in core product areas by tuning their
offerings in open product lines to increase the likelihood their own products will be chosen by
customers. With most consumers likely to prefer a pre-screened choice of ve or six product
providers, hybrid players can place their products at an advantage over those of their
competitors while maintaining the customer's perception of openness.
The key success factors for hybrid models are largely the same as for purely proprietary
approaches, i.e. strong brands, effective on- and off-line channel integration, and competitive
customer value propositions. Hybrid intermediaries, however, are subject to one additional
critical success factor: the effective selection, structure, and management of alliance
partnerships. This importance of this factor should not be underestimated.
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THE DEBATE ON THE INSURANCE VALUE CHAIN 99
3. Impact on personal insurances
There are strengths and weaknesses in each of the models discussed in this paper.
The generic impacts upon personal-lines business are likely to be:
Increased customer knowledge and product awareness, i.e. transparency between product
offerings both at the time of the initial purchase and thereafter for comparative
performance purposes;
Distributors will need to guarantee excellence in customer service where barriers to
switching provider are low;
Expectation of better value for money from web-based transactions;
Increasing commoditization of products with new product innovations speedily adopted
throughout the market;
It will be essential to be among the top companies in delivering efciency and advantages
of scale;
The volume of personal-lines business placed through traditional intermediaries will
decrease as customer condence grows in direct dealing;
There will, however, be niche markets for intermediaries to operate within, especially
where personal advice is sought;
In the longer term, more will be made of the Single European Licence and Freedom of
Services legislation to transact insurance across borders as technology and consumer
familiarity improve.
The key strength of new start-up operators in the independent model will be their low
day-to-day operating costs and lower commission levels. Their product offering may be
extremely broad, they may be particularly responsive to change in the marketplace and their
brand, in the broad sense, may be highly attractive. Their weaknesses, however, will the
ongoing drag of the amortization of their start-up costs, particularly in developing their brand.
Their lack of history in the nancial services arena means that consumer condence in the
nancial services aspect of their proposition may be lowwhilst they will be heavily reliant on
the skills and appetite for joint ventures/partnering from their nancial services providers.
Whilst existing independent nancial services providers entering the e-commerce world will
not be prone to these weaknesses, they will have higher levels of operating cost whilst their
levels of commission may drive consumers to deal directly.
The proprietary model presents the earliest opportunities for success as established,
skilled and reputable businesses explore additional routes to market for their existing
products. The key weakness with this model is that very few businesses provide the full
spectrum of products that consumers require. This necessitates the decision of whether to
operate solely in a range of specic or niche products (and rely on the desire of consumers to
seek a range of suppliers for their needs), expand through M&Ainto the bancassurance model
(which brings with it the risks of any merger and disruption to operations in addition to the
uncertainty that it is not yet proved that consumers want all their nancial services needs
provided by just one company) or as a nal option to pursue the hybrid model.
By contrast, the hybrid model overcomes the principal weaknesses of the other models
but relies on the availability of partners and the equality or dependency of their relationship.
These models will take longer to establish and will still need to overcome the perception of the
consumer that they are placing all their needs with one supplier, however much they present
themselves as a distributor and a manufacturer. The consumer too may wish to continue to
deal independently and directly with a number of providers. The key to the hybrid model is to
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#2002 The International Association for the Study of Insurance Economics.
develop the proposition not only for the provision of family, health, wealth and asset
protection products but to expand into the provision of other non-insurance products and
services.
4. Conclusion
It is arguable that the internet is a disruptive technology that will transform the
distribution of nancial services, but in ways different from those initially anticipated.
Enabling technologies, improvements in security and privacy, and increasingly attractive
economics will ensure that the internet becomes a major channel for distributing nancial
services. The spoils, however, will not go to the small, nimble players that are eet of foot.
Rather, they will go to those competitors with exceptional brands and signicant customer
bases that move aggressively to build nancial services distribution/intermediary channels
that meet the needs of their target customers.
However, it will be essential to ensure that customers are serviced in the way they wish to
transact business. Not everyone will embrace buying over the internet and many people will
still wish to deal directly via the telephone or direct mail; others will continue to buy through
trusted non-core insurance brands in the high street while others will continue to prefer the
impartial advice of their broker/intermediary.
Although access to the internet is signicant in the developed countries of the world, the
number of people who use the internet to shop is less signicant and the number of people who
buy even less so. From this position we have to differentiate between the comfort of buying
tangible items on-line (e.g. books, CDs) as opposed to the relative additional time it takes
people to develop the condence to buy intangible products on-line.
Looking ahead, the world of internet nancial services distribution will be dominated by
traditional intermediaries and distributors that move on-line aggressively and the dominant
internet portals that create new nancial services intermediaries to help monetize their
already sizeable customer bases (e.g. Yahoo).
The competition between independent, proprietary and hybridintermediary models will
not be a war won by one model or another. It will rather be a series of continuing battles for
customers and their allegiance, with the winners employing one of the three models, or
perhaps a mixture of the three, depending on how they choose to segment their markets.
For example, in Royal & SunAlliance we have adopted a number of approaches, using the
proprietary model for RSAInvestments.comand R&SAYou and Your Family; the independent
model in Wheretolive; and hybrid models in UseColor.com that partners with service
providers for the needs of the small business, and CareOnLine in Scandinavia, our health
portal that operates in partnership with NetDoctor.
The winners of the future will continue to have to deliver what the winners of today have
achieved. They will have to demonstrate that theyare able to respond quickly to changes in the
marketplace, maintain a trustworthy brand, provide strong and visionary leadership and,
above all, maintain a focus on the customer.
#2002 The International Association for the Study of Insurance Economics.
THE DEBATE ON THE INSURANCE VALUE CHAIN 101