Creating a Competitive Advantage

Creating a Competitive Advantage

          
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Creating a Competitive Advantage

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  • Executive Summary

    Since the 1990s, the insurance industry in Europe has gone through three phases: boom, bust, and recovery. While the recent rebound is encouraging, the key challenge ahead is profitable growth.

    • In the 1990s, industry performance rose as the capital markets surged. Forced by the industry crisis in 2001 and 2002, European insurers decreased their investments in equities, strengthened the capital base, and restructured business portfolios and operations. By 2005 and 2006, the industry rebounded, with consolidated shareholders’ equity and net income reaching new highs in Europe and the average return on equity (ROE) exceeding 16 percent. Despite this record profitability, valuation multiples in 2006 still lagged behind prior records.

    • Improved operating performance drove the recovery. The leading insurance groups improved their performance dramatically, decreasing the combined cost and loss ratios for nonlife insurance by 13 percent between 2000 and 2006. They also increased the technical margin for life insurance—measured as the profit on the technical life account in percentages of life reserves—by 0.5 percent from 2002 to 2006. Local nonlife insurers decreased their combined ratios by nearly 11 percent from 2000 to 2005; local life insurers improved results, measured as the technical margin, by 0.7 percent of reserves from 2002 to 2005.

    • Profitable growth is the next challenge. Both insurance groups and local insurers have been forced to decrease costs, but there is still a huge potential for further optimization. Looking ahead, accelerating growth will become another key challenge for insurers. Insurance executives will have to break the traditional compromise between profitability and growth by developing strong competitive positions and creating sustainable advantage on both dimensions.

    Competitive positions are the strategic foundation of growth and profitability. Companies seeking to create advantage that can be translated into superior performance should focus on attractive markets, build local leadership positions, define their international business model, and shape their geographic footprint.

    • To achieve competitive positions, insurers must focus on attractive national markets and business lines. The operating performance in all major European markets has improved since the crisis but still varies widely by market and business.

    • Depending on their scale and focus, companies seeking to build local leadership positions to attain competitive advantage can pursue or maintain one of three positions: local market leader, life producer, and nonlife mutual.

    • Insurers must define their international business model. Three strategic models create the most value across national markets: multimarket leader, international life group, and industrial insurer.

    • Finally, insurers must shape their geographic footprint. Several top European insurance groups have recently repositioned themselves by strengthening their home-market positions, expanding across Western Europe, building growth platforms in Eastern Europe, or divesting noncore operations.

    Continuing consolidation is likely and will further shape the European insurance landscape.

    • More than 90 percent of local insurers do not hold a leadership position in their market, and the international portfolios of most leading European groups are still fragmented.

    • Because of the need to overcome slower market growth, mergers and acquisitions (M&A) are a key topic on many management agendas.

    • The availability of tremendous amounts of capital both inside and outside of leading insurance groups makes even the largest deals possible. There have been rumors of almost all of the nonmutual European insurance groups becoming either consolidators or M&A targets.

    The management challenge is to create sustainable advantage. Management should identify priorities in three areas and develop the capabilities that will enable their organization to excel.

    • They can direct the group by steering value creation, tapping M&A experience, and developing management talent.

    • They can drive financial performance by improving asset performance and technical competence.

    • They can generate operational impact by building operational excellence, sales effectiveness, and customer focus.

    As they seek to build competitive advantage, senior managers must take steps to position their companies in the market before their competitors do it for them.

    • For most groups, significant change can no longer be a gradual process or an option. They must mandate change if they want to compete on an independent basis.

    • Raising essential questions and developing company-specific answers is the foundation for proactively designing the future of the organization and initiating change.