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Page 1: Creating Competitive Advantage: The European Insurance ... · Creating Competitive Advantage The European Insurance Landscape ... How to Design Competitive Advantage 32 ... that can

Creating Competitive Advantage

The European Insurance Landscape

R

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The Boston Consulting Group (BCG) is a global manage-ment consulting rm and the world’s leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep in-sight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable compet-itive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 o ces in 38 countries. For more infor-mation, please visit www.bcg.com.

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Creating Competitive Advantage

The European Insurance Landscape

bcg.com

Thomas L. Luippold

Michael Imholz

Elmar Wiederin

January 2008

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© The Boston Consulting Group, Inc. 2008. All rights reserved.

For information or permission to reprint, please contact BCG at:E-mail: [email protected]: +1 617 850 3901, attention BCG/PermissionsMail: BCG/Permissions The Boston Consulting Group, Inc. Exchange Place Boston, MA 02109 USA

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Contents

Note to the Reader 5

Preface 6

Executive Summary 7

From Boom to Bust to Recovery 9Three Phases Reflect Industry Performance 9Improved Operating Performance Drove the Recovery 10Profitable Growth Poses the Next Challenge 12

The Strategic Foundation: Competitive Positions 13Focus on Attractive National Markets and Business Lines 13Build Local Leadership Positions 13Define the International Model 15Shape the Geographic Footprint 17Continuing Consolidation Is Likely 18

The Management Challenge: Sustainable Advantage 20Direct the Group 20Drive Financial Performance 24Generate Operational Impact 27

How to Design Competitive Advantage 32

Appendix: The European Insurance Landscape 37100 Leading European Insurance Groups 37Market Improvements 38Performance Examples 39

For Further Reading 42

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Note to the Reader

Creating Competitive Advantage: The European Insurance Landscape is the second comprehensive report on European insurance published by The Boston Consulting Group and based on the research of the rm’s European insurance-landscape team. It draws on a systematic analysis of the major insurance groups and markets in Europe, as well as on our experience in advising many of the industry’s leaders.

The report covers 100 leading European insurance groups that generate a worldwide premium volume of more than €1 trillion. Geographically, it covers the nine major Western European insurance markets, which, ranked by premium volume, consist of the United Kingdom, France, Germany, Italy, the Netherlands, Spain, Belgium, Switzerland, and Austria. Together, these markets represent annual premiums of €875 billion and account for 84 percent of the total European insurance-premium volume. Finally, it also analyzes more than 300 of the largest local insurers, 164 of which are either one of the 100 leading European insurance groups or one of their local country subsidiaries. These local insurers generate more than 80 percent of the local life and nonlife premium volume in the nine markets.

About the AuthorsThomas L. Luippold is a senior partner and managing director, Michael Imholz is a partner and managing director, and Elmar Wiederin is a senior partner and managing director in BCG’s Zurich o ce. For Further ContactWe hope that this report will prove both informative and thought provoking. We appreciate your comments and suggestions. If you would like to discuss this report, please contact one of the authors:

Thomas L. Luippold BCG Zurich+41 44 388 86 [email protected]

Michael ImholzBCG Zurich+41 44 388 86 [email protected]

Elmar WiederinBCG Zurich+41 44 388 86 [email protected]

AcknowledgmentsWe would like to thank our many colleagues at The Boston Consulting Group who contributed to this report, especially Heiner Leisten and Gunther Schwarz, of the Cologne o ce, for their insights and helpful discussions, and Anton Seidel and Stefan Kindler, of the Zurich o ce, for their substantial contribution in analyzing the leading European insurance groups and major local markets. We are grateful for the continuing support of BCG’s Zurich insurance desk. We would also like to thank Barry Adler, Katherine Andrews, Gary Callahan, Mary DeVience, Kim Friedman, Gina Goldstein, Lynne Smith, and Sara Strassenreiter for their contributions to the editing, design, and production of this report.

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Since the nancial crisis of 2001 and 2002, the European insurance industry has recovered signi cantly. While the recovery was support-ed by favorable stock markets, it was also strongly driven by improved technical results.

Looking ahead, increased competition will force insur-ance executives to break the traditional compromise be-tween pro tability and growth and create sustainable performance on both dimensions.

Competitive strategic positioning in home markets and across foreign countries and businesses is the foundation of value creation in the industry. Insurance groups that focus on attractive markets, build local leadership posi-tions, de ne their international business model, and shape their geographic footprint will create advantages that can be translated into superior performance. Insur-

ers with disadvantaged positions, by contrast, will have to go the extra mile to achieve similar results. Consolidation will further shape the insurance landscape, as most local insurers are subscale in size, and most of the foreign port-folios of international groups are still highly fragmented.

Pro tability and growth vary signi cantly, even among insurance groups with similar strategic positions. Driving the di erences is the extent to which senior management is able to execute on the basis of a set of distinct capa-bilities to exploit sustainable advantages. De ning critical capabilities, setting targets, and enabling the organization to meet those targets have become the most important management challenges in the consolidating industry. Companies that wait too long before they act will lose out, or worse, disappear.

Preface

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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 pro table 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 invest-ments in equities, strengthened the capital base, and restructured business portfolios and operations. By 2005 and 2006, the industry rebounded, with consoli-dated shareholders’ equity and net income reaching new highs in Europe and the average return on equity (ROE) exceeding 16 percent. Despite this record pro t-ability, valuation multiples in 2006 still lagged behind prior records.

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

Pro table 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 op-

timization. Looking ahead, accelerating growth will become another key challenge for insurers. Insurance executives will have to break the traditional compro-mise between pro tability and growth by developing strong competitive positions and creating sustainable advantage on both dimensions.

Competitive positions are the strategic foundation of growth and pro tability. Companies seeking to cre-ate advantage that can be translated into superior performance should focus on attractive markets, build local leadership positions, de ne their interna-tional 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 seek- ing to build local leadership positions to attain com-petitive advantage can pursue or maintain one of three positions: local market leader, life producer, and nonlife mutual.

Insurers must de ne their international business mod- el. 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

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repositioned themselves by strengthening their home-market positions, expanding across Western Europe, building growth platforms in Eastern Europe, or divest-ing 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 interna-tional 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 en-able their organization to excel.

They can direct the group by steering value creation, tapping M&A experience, and developing manage-ment talent.

They can drive nancial performance by improving as-set performance and technical competence.

They can generate operational impact by building operational excellence, sales e ectiveness, and custom-er focus.

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

For most groups, signi cant 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- speci c answers is the foundation for proactively de-signing the future of the organization and initiating change.

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Over the 15-year period from 1991 to 2006, European insurance stocks underper-formed the overall stock market: the Dow Jones Euro Stoxx Insurance Index in-creased by a factor of 2.86, versus 3.65 for

the Dow Jones Euro Stoxx 600 Index, which represents large companies across 18 countries in Europe. (See Ex-hibit 1, page 10.) During this period, the insurance indus-try experienced three very di erent phases of perfor-mance: the booming 1990s, the industry crisis of 2001 and 2002, and the recovery beginning in 2003.

Three Phases Reflect Industry Performance

The booming 1990s were good years for the European insurance industry. The Dow Jones Euro Stoxx Insurance Index increased by a factor of 4.7 between the early 1990s and its peak in November 2000. Most insurers sig-ni cantly increased their equity base, li ed pro ts, and thereby created substantial shareholder value.

Most of this value was created between 1995 and 2000, when European insurance groups increased net income by 383 percent and shareholders’ equity by 222 percent. Average ROE amounted to 15 percent, market capitaliza-tion increased by 302 percent, and shareholders experi-enced a total return of 31 percent per year. Market prices re ected, on average, 20.6 times earnings and 2.8 times book values.

Several factors contributed to this positive environment. First, insurers strongly bene ted from extremely attrac-tive investment returns. At the beginning of the decade,

high interest rates generated a stable, high cash ow on xed-income assets. Then, as interest rates went down,

stock markets provided extraordinary gains. Hence, most insurers continuously adjusted their asset allocation, sharply increasing their share of equities. Investment re-turns became the essential lever for overall performance, allowing insurers to pay high returns to life policyholders and lower premiums in the nonlife business, and still gen-erate high ROE. Second, the structural problems of public retirement schemes became a hotly debated subject in many European countries, and life insurers bene ted from increased demand for their products, o en support-ed by tax incentives. In addition, M&A became an essen-tial instrument for growth for many insurance groups. Speci c opportunities arose from a wave of large-scale privatizations and “demutualizations” as companies re-structured their ownership.

The industry crisis of 2001 and 2002 was caused by ad-verse developments in the capital markets that revealed the structural weaknesses of the European insurance in-dustry. With steadily decreasing interest rates, it became more and more di cult for insurers to keep their prom-ises—and, in some instances, even their guarantees—to life policyholders and to compensate for technical losses in nonlife insurance by investing in bonds. Equities (in-cluding private equity) seemed to o er the required per-formance. Bullish stock markets were strongly driven by optimistic economic outlooks and a continuing net in ow of money, much of which came from insurers. The aver-age share of equities amounted to 23 percent of the as-sets of European insurers by the end of 2000. Several groups invested more than 30 percent—and some even more than 40 percent—of their assets in equities.

From Boom to Bust to Recovery

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The precipitous decline in stock prices in 2001 and 2002, combined with the sheer persistence of low bond yields, caught most European insurers by surprise. (See Exhibit 2.) The industry began a tailspin, plummeting into a high-ly distressed state. From November 2000 to March 2003, the Dow Jones Euro Stoxx Insurance Index declined by 76 percent. In 2001, the net income of European insurance groups decreased by 58 percent; in 2002, the industry as a whole reported a loss. Between 2000 and 2002, the com-bined shareholders’ equity of European insurance groups decreased by 26 percent, while the market capitalization decreased by 63 percent.

The recovery started in the spring of 2003. In the face of the crisis, European insurers had decreased their invest-ments in equities from 23 percent in 2000 to 12 percent in 2003, strengthened their equity base by raising capital, and restructured their business portfolios and operations. They regained pro tability with an impressive track rec-ord. Between 2002 and 2006, shareholders’ equity in-

creased by almost 87 percent to a new high for European insurers. In 2005 and 2006, net income also reached new highs, and ROE exceeded 16 percent. From 2003 to 2006, the annual return to shareholders was 23.1 percent, and the market capitalization recovered 81 percent of its peak value of 2000. Despite this record pro tability, valuation multiples in 2006 still lagged behind prior records: 1.7 times equity and 11.1 times earnings in 2006, compared with 2.8 and 20.6, respectively, in 2000. (See Exhibit 3.)

Improved Operating Performance Drove the Recovery

While the recent recovery was supported by favorable stock-market developments and an increased share of equity investments, which rose to 17 percent in 2006, it was strongly driven by improved technical results. Pricing of products and the stringent management of costs, claims, and payouts to policyholders became the prime issues for insurance executives.

Dow JonesEuro Stoxx600 Index

Peak: 467a

Low: 114b

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

I. Boom II. Bust III. Recovery

0

100

200

300

400

500Index (December 31, 1991 = 100)

Dow JonesEuro StoxxInsurance Index

Exhibit 1. The Dow Jones Euro Stoxx Insurance Index Reflects the Three Phases of Industry Performance

Sources: Bloomberg; BCG analysis.Note: The Dow Jones Euro Stoxx 600 Index represents large companies across 18 countries in Europe. The Dow Jones Euro Stoxx Insurance Index focuses on European companies that earn their primary source of income from the insurance sector; it was introduced on December 31, 1991.aThe peak was on November 30, 2000. bThe low was on March 31, 2003.

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–45

–30

–15

0

15

30

45

60

1990 1992 1994 1996 1998 2000 2002 2004 2006

FTSE 350 Dow Jones Euro Stoxx 600 Index

Swiss Market Index (SMI) DAX

0

3

6

9

12

15

1990 1992 1994 1996 1998 2000 2002 2004 2006

United Kingdom

Germany

Switzerland

Yields for ten-year government bonds Stock market performance

Yield (%) Change in index (%)

Exhibit 2. In 2001 and 2002, Insurers Were Hit by Declining Bond Yields and Stock Prices

Sources: Bloomberg; BCG analysis.Note: FTSE 350 is a stock market index incorporating the largest 350 companies by capitalization that have their primary listing on the London Stock Exchange. The Dow Jones Euro Stoxx 600 Index represents large companies across 18 countries in Europe. SMI is a stock market index of 20 of the largest and most liquid stocks of companies that have their primary listing on the Swiss Stock Exchange (SWX). DAX is a stock market index consisting of 30 major German companies trading on the Frankfurt Stock Exchange.

138117

1009274

9079

2000200120022003200420052006

Marketcapitalization

494437

71100

6681

0 50 100 150 2000 50 100 150 2000 50 100 150 200

–8

13.66.2

–0.39.4

14.516.316.1

2.8 x2.2 x1.4 x1.6 x1.5 x1.6 x1.7 x

20.6 x34.9 x

—6

17.8 x11.3 x11.0 x11.1 x

Index (2000 = 100)

151124

51

42100

90

Shareholders’equity1

Netincome2

Return on equity(%)3

Price/bookratio4

Price/earningsratio5

Exhibit 3. European Insurance Groups Recovered Considerably, but Valuations Lag Behind Prior Records

Sources: Company annual reports; BCG Insurance Database.Note: The analysis used data for 29 European insurance groups. 1Shareholders’ equity excludes minority interests.2Net income excludes taxes and minority interests.3Return on equity is calculated as net income divided by average shareholders’ equity.4The price/book ratio is calculated as market capitalization divided by total shareholders’ equity (on a year-end basis).5The price/earnings ratio is calculated as market capitalization divided by net income. 6Not meaningful, owing to negative net income.

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The leading insurance groups improved their technical results. In the nonlife business, their combined ratio was 13 percent lower in 2006 than in 2000, making the sector technically pro table for the rst time in many years. In the life business, the leading groups’ cost ratio decreased by 0.3 percent and their technical margin increased by 0.5 percent of technical reserves between 2002 and 2006. (See Exhibit 4.)

Major nonlife markets became pro table. Between 2000 and 2005, the combined ratio across the nine major West-ern European markets decreased from 108 percent to 97 percent. On total premiums of €346.8 billion in 2005, lo-cal nonlife insurers increased their technical results by almost €37 billion.

Major life markets turned around and are now pro table. With total life reserves of €3,812 billion in 2005, local life insurers have increased their technical results by about €26 billion.1 In the life business, the margin across all nine markets reached its lowest level of 0.1 percent in 2002. Within only three years, local insurers improved this level to 0.8 percent, a gain of 0.7 percent of reserves.

Profitable Growth Poses the Next Challenge

European insurance groups and local insurers have been forced to decrease costs and have achieved considerable progress. However, there is still a huge potential for fur-ther cost savings. Mass business processes are not yet fully standardized and automated. Furthermore, system infrastructures are still highly fragmented and outdated. European insurers have a long way to go before they reach a level of industrialization similar to that of bank-ing, let alone industries like automotive. It is not surpris-ing that many European insurers are initiating further programs to improve operational e ciency.

Looking ahead, achieving pro table growth will become the next challenge for insurance executives. Growth rates in Western Europe slowed between 2002 and 2005 to a mere 3.5 percent per year, compared with almost 10 per-cent per year during the 1990s. Senior management at insurance companies must break the traditional compro-mise between pro tability and growth and create sustain-able advantage on both dimensions.

80.9

29.1

110

2000

70.3

26.7

97

2006

1.5

20062002

1.8

0.4

2002

0.9

2006

Nonlife combined ratio (%)1 Life cost ratio (%)4 Life technical margin (%)5

Loss ratio2

Cost ratio3

Exhibit 4. European Insurance Groups Improved Their Technical Results

Sources: Bureau van Dijk, ISIS database; company annual reports; BCG Insurance Database.Note: The analysis used data for 26 European insurance groups. 1Combined ratio was calculated as the sum of loss and cost ratios. 2Loss ratio was calculated as net losses divided by net premiums earned. 3Nonlife cost ratio was calculated as net technical costs divided by net premiums earned.4Life cost ratio was calculated as net technical costs divided by net technical reserves. 5Technical margin was calculated as profit life account divided by net technical reserves.

1. In this report, unit-linked business is included in life reserves and premiums.

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The Strategic Foundation: Competitive Positions

In the insurance industry, strategic positioning in home markets and across national markets and business lines is the key to competitive success. By developing strong positions in desirable markets and businesses, insurance executives can create

pro tability and growth. In our view, four strategic pri-orities are the foundation of superior returns and value creation for all European insurance groups: focus on at-tractive national markets and business lines, build local leadership positions, de ne the international model, and shape the geographic footprint.

Focus on Attractive National Markets and Business Lines

The operating performance of all major European mar-kets has improved since the crisis of 2001 and 2002. How-ever, their relative improvement and absolute perfor-mance level vary widely by market and business line.

Nonlife Business. Since the recovery, local insurers in Spain, the Netherlands, and Italy have realized both su-perior growth and superior returns. Germany and the United Kingdom have been characterized by above-aver-age returns and below-average growth. Local insurers in Switzerland, France, Austria, and Belgium have experi-enced above-average growth but lower returns.

Life Business. Local market performance also varies in life insurance. From 2003 to 2005, insurers in Belgium and Italy realized superior growth rates and margins. In the Netherlands, Switzerland, and Spain, local life insur-ers generated above-average margins with slow-growing or even declining premium volumes. (In Spain, pension

reform caused life premiums to decline by 33 percent in 2003 and to increase at a compound annual growth rate of 7.3 percent in 2004 and 2005). France, Austria, and Ger-many were characterized by above-average growth but rather low margins during this period. Local life insurers in the United Kingdom faced relatively low growth and below-average margins. (See Exhibit 5, page 14.)

Build Local Leadership Positions

With scale and focus, insurers can achieve higher e -ciency and generate sustainable pro ts. Our research sug-gests that the critical size for achieving scale in both life and nonlife operations is about 5 percent in market share or €1 billion in premiums in any given country. Depend-ing on their scale (or market share) and focus, companies can pursue any of three distinct types of competitive ad-vantage in a country: local market leader, life producer, or nonlife mutual. (See Exhibit 6, page 15.)

Local market leaders maintain a dominant position— that is, market share at or above 5 percent—in both life and nonlife insurance

Life producers focus on life insurance and exploit mul- tiple distribution channels, including their own and those of third parties such as banks

Nonlife mutuals focus on pursuing attractive client segments through less complex operations and low-cost distribution

Only 112—or less than 10 percent of all the local insurers in the nine selected countries—command sound posi-

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tions as local market leaders, life producers, or nonlife mutuals, enabling them to achieve sustainable superior results. As a result, more than 90 percent of all local insur-ers need to expend extra e ort to generate adequate re-turns; otherwise, they will destroy value and disappear in the long run. These companies are either independent local players or subsidiaries of international insurance groups. Senior managers of such organizations must re-view their positions and decide whether or not they can compensate for structural handicaps. Pressure from poli-cyholders for operational excellence and from sharehold-ers for adequate returns will in uence their decisions and most likely lead to further consolidation.

Local Market Leaders. In the nine Western European countries we analyzed, only 31 insurers qualify as local market leaders with market share at or above 5 percent in life and nonlife sectors. They generate about €273 bil-

lion, or 31 percent, of the total life and nonlife premium volume and belong to 19 di erent insurance groups.

These insurers’ competitive advantage is based on supe-riority in marketing and pricing, a broad product range that supports sales force e ectiveness as well as customer bonding, and economies of scale across products, distri-bution channels, and clients. Local market leaders also achieve higher brand awareness. They are attractive part-ners for banks and other distribution channels and pre-ferred employers for top talent in management and sta . Most local market leaders can convert their structural advantages into superior technical results.

Life Producers. Currently, 24 insurers across the major European markets that focus on life insurance have a market share at or higher than 5 percent. They generate €162 billion, or 31 percent, of the total life-insurance pre-

SpainSwitzerland

Netherlands

Germany

AustriaItaly

Belgium

France

–10

–5

0

5

10

15

20

0.0 0.5 1.0 1.5

Italy

Germany

Netherlands

Switzerland

AustriaBelgium

Spain

0

2

4

6

8

10

9095100105

France

Average = 97.8

Average= 3.1

Average= 3.7

Average = 0.7

UnitedKingdom

UnitedKingdom

Nonlife business Life business

Average combined ratio, 2003–2005 (%)1 Average technical margin, 2003–2005 (%)2

Annual growth in nonlife gross premiums, 2002–2005 (%)

Annual growth in life premiums,2002–2005 (%)

Exhibit 5. Local Performance Varies by Business and Market

Sources: Swiss Re; Bureau van Dijk, ISIS database; company annual reports; BCG Insurance Database.1Combined ratio was calculated as net technical costs and net losses divided by net premiums earned. 2Technical margin was calculated as profit life account divided by net technical reserves.

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miums and belong to 24 di erent insurance groups; 14 of them belong to a bancassurance group. They base their competitive advantage on attractive product design for the bene t of policyholders and shareholders, access to e cient third-party distribution channels (o en banks), and economies of scale in operations, information tech-nology, and investment management. Their focused product portfolios also make the pro tability of their products more transparent. Most life producers can trans-late these advantages into lower costs.

Nonlife Mutuals. Nonlife insurers o en grow their busi-nesses within a speci c population. Many are still orga-nized as mutuals, a legal structure that varies across countries but generally means that the policyholders are also the shareholders. Of the local European insurers, 57 are organized as mutuals, generating €56 billion, or 16

percent, of the nonlife premiums in the major countries. Their competitive advantage is based on a narrow client focus (typically, residents of rural areas or civil servants, who provide better risk pro les and easier retention), low costs owing to less complex operations, and low-cost dis-tribution. The lure of their o erings o en stems from lower prices, which result from their cost and risk advan-tages as well as their lack of an obligation to pay returns to shareholders. Although the low prices of nonlife mutu-als sometimes lead to higher loss ratios, these are more than compensated for by the low cost base and absence of dividend payments to investors.

Define the International Model

Insurance is still, for the most part, a local business: prod-uct requirements and distribution channels di er from

High

High

~5%1

~5%1Low

Low

Life producer◊ Product design focus◊ Multichannel distribution◊ Economies of scale

Local market leader◊ Market dominance◊ Broad product range◊ Economies of scale

and scope

Nonlife mutual◊ Client focus◊ Attractive products◊ Low complexity and cost

Market share in life sector

Market sharein nonlife sector

Exhibit 6. Companies Can Pursue Any of Three Distinct Types of Competitive Advantage

Source: BCG experience. 1Critical share depends on market size and structure.

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country to country, and therefore many leading positions are held by local players. There is only limited scale across countries, so small positions in a number of countries do not add up to a sizable insurance group. In our view, three strategic models in particular create value across nation-al markets: multimarket leader, international life group, and industrial insurer. (See Exhibit 7.)

Multimarket leaders replicate in foreign markets their dominance of the life and nonlife sectors in their home market. Only three insurance groups today have become multimarket leaders across the nine major Western Eu-ropean markets: AXA Group, with its leadership position in ve local markets, and Allianz Group and Generali

Group, each leading in four markets. Only a few other groups have a reasonably good base from which to grow into multimarket leaders.

International life groups leverage product and invest-ment competencies across life markets. Eight insurance groups focus on life business and generate the majority of their premiums outside the home market: the Dutch groups AEGON and ING; Old Mutual (which acquired Skandia in 2006) and Prudential, both based in the Unit-ed Kingdom; the Nordic groups Nordea and SEB; the Spanish bancassurer Santander; and Swiss Life Group. Several other life insurers follow growth strategies be-yond their home markets in order to become interna-

Nonlife mutual

Life producer

Industrial insurer

Multimarket leader

International life group

Life insurance premiums (percentage of total premiums)1

Standard Life

Friends Provident

Allianz

Amlin

Aviva AXA

BNP ParibasCNP

Covéa

Crédit Agricole

DEVK

Eureko

Fortis Generali

Gjensidige

SvenskaHandelsbanken

ING

Intesa Sanpaolo

Irish Life & Permanent La Mondiale

Legal & General

MAIF

Mediolanum

Nordea Old Mutual

Prudential

Reale Mutua

Royal & SunAlliance

Sampo

Santander SEB

Société Générale

Storebrand Swiss Life

Talanx

0 10010 20

AEGON

40 50 60 70 80 90

Premiums outside home market (percentage of total premiums)

100

30

20

30

40

50

60

70

80

90

10

HBOS

0

Zurich

Exhibit 7. Three Major Strategic Models Create Value Across National Markets

Sources: Bureau van Dijk, ISIS database; company annual reports; BCG Insurance Database.1Life insurance includes unit-linked insurance.

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tional life groups, but they have not yet been successful in building signi cant international portfolios.

Industrial insurers diversify corporate risks across several markets. Many insurers have exited the market that serves international corporate clients because of highly unfavorable performance in recent decades. Only a few have built the capability, international reach, and capital base necessary to be preferred underwriters for large cor-porations and brokers. Examples are multimarket leaders Allianz and AXA; insurance conglomerates Zurich Finan-cial Services and Talanx; and the focused players Royal & SunAlliance (RSA), Sampo Group (the Nordic and Baltic countries), and Amlin (operating in Lloyd’s of London and in Bermuda).

Over the past 10 to 20 years, many strategic moves and transformations that did not follow one of these three strategic paths have added signi cant costs, generated enormous risks, and increased management complexity without creating a competitive advantage as a basis for sustainable pro ts. Frequently, the main driver of these exercises has been executive management’s quest for size and international scope rather than sound strate-gic logic.

Shape the Geographic Footprint

In the last few years, a number of European insurance groups have repositioned themselves by strengthening their home-market positions, expanding across Western Europe, building growth platforms in Eastern Europe, or divesting noncore operations.

Strengthening the Home Market Position. The home market is, for most Western European groups, still the prime source for premium collection and absolute re-turns. Several groups have further strengthened their home-market positions and exploited tangible synergies through consolidation or complementary services. As a consequence, the number of smaller, o en subscale com-panies has further decreased, as predicted in our last re-port.2 Some groups have also built new distribution chan-nels through bancassurance joint ventures, especially in countries with a high share of bank distribution such as Italy and Spain.

Expanding Across Western Europe. Several European groups have expanded their international footprint with-in Western Europe. Most prominently, AXA has realized a signi cant further move toward dominance as a multi-market leader. With the acquisition of the Winterthur Group, it became an immediate local market leader in Switzerland, signi cantly strengthened its local positions in Germany, Spain, Belgium, and the United Kingdom, and took over a platform in Eastern Europe.

A small number of groups have developed a focused business model for speci c products and channels across markets. Skandia, now part of Old Mutual, focuses on unit-linked life products and operates in more than 20 countries, limiting its value chain on fund selection, con-cept development, product packaging, service, and mar-keting. Similarly, Talanx’s Aspecta subsidiary focuses on fund-linked life insurance with a tailored, cross-border business model and a presence in 10 European countries. BNP Paribas Assurance sells life insurance through its Cardif subsidiary to individuals in several countries and o ers protection products in more than 30 countries. RBS Insurance has transferred its focused, U.K. business mod-el, Direct Line, to three foreign markets. Direct Line’s Web site explains, “We do business over the phone and on the Internet, and we also do it internationally, with business-es in Germany, Italy, and Spain.”

Building Growth Platforms in Eastern Europe. A er a period of contraction in the early 1990s, Eastern Euro-pean insurance markets have recovered and are likely to generate attractive premium growth rates for years to come. Compared with Western European markets, most Eastern European markets are still rather small. However, the Eastern European countries that we have analyzed generate a total premium volume of €38 billion, of which about 75 percent is accounted for by just four markets: Russia, Poland, the Czech Republic, and Hungary.3 In terms of growth, the Eastern European markets achieved an average annual total-premium growth rate of 18.9 per-

2. See Back to the Future: The European Insurance Landscape, BCG re-port, November 2003.

3. The Eastern European markets we analyzed are, in order of the size of their insurance markets, Russia, Poland, the Czech Republic, Hungary, Ukraine, Slovenia, the Slovak Republic, Romania, Croatia, Bulgaria, Serbia and Montenegro, Lithuania, Estonia, and Latvia.

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cent between 2000 and 2005, compared with 4.8 percent for the same period in Western Europe.

In many countries, former state monopolies have been privatized and transformed. Several Western European groups have identi ed Eastern Europe as a core growth region and have continuously acquired business plat-forms across chosen markets. In recent years, interested groups have battled for the few assets o ered for acquisi-tion. As a consequence, prices for acquired growth have increased substantially, in certain cases beyond what is economically rational. To date, three Western European groups have a supreme position in Eastern Europe: Alli-anz generates more than €3 billion in premiums in 9 mar-kets, and Generali and Vienna Insurance Group have each reached more than €2 billion in premiums in 11 and 15 markets, respectively. (See Exhibit 8.)

Divesting Noncore Businesses. During the last few years, some European groups have sharpened their stra-tegic pro les and divested businesses that they regarded as beyond their core business. Multimarket leaders have mainly exited selected overseas markets and businesses. International life groups have divested their remaining nonlife operations or subscale entities. A few groups have realized a signi cant or even a comprehensive strategic

repositioning through corporate-development transac-tions. RSA, for example, is focusing on nonlife a er sell-ing its life portfolio. The Finnish group Sampo has trans-formed itself from a local life producer into an industrial insurer in the Nordic region following the acquisition of If, a property and casualty insurance company, and the recent divestment of its banking operations. And Norway-based Storebrand has become a local life producer since the sale of its ownership interest in If in 2004.

Most of the leading European insurance groups have in-ternational or even global portfolios, although the level of internationalization varies widely by size and share. However, most foreign portfolios are still highly fragment-ed, consisting of subscale entities that have competitive disadvantages. Only a few groups achieve an average of more than €1 billion in annual life and nonlife premiums per foreign market. (See Exhibit 9.) Broad international portfolios consisting of many small units impose enor-mous complexity on corporate centers and are nearly impossible to manage pro tably.

Continuing Consolidation Is Likely

Consolidation will further shape the European insurance landscape for a variety of reasons. First, more than 90

GroupTotal premiums, 2006

(€billions)Number

of markets Major markets

1. PZU 2. Allianz 3. Generali 4. Vienna Insurance Group 5. Rosgosstrakh (RGS) 6. ING 7. KBC Bank and Insurance Group 8. American International Group (AIG) 9. Ingosstrakh (INGO) 10. AEGON 11. Sogaz Insurance 12. Aviva 13. Triglav Insurance 14. UNIQA 15. RESO-Garantia

4.13.32.62.41.31.11.10.90.90.80.80.80.70.70.6

39

1115

155

1143156

131

◊ Poland◊ Poland, Hungary, Russia, Slovakia◊ Czech Republic, Hungary, Slovakia◊ Czech Republic, Slovakia, Romania◊ Russia◊ Poland, Hungary, Czech Republic◊ Poland, Czech Republic◊ Poland◊ Russia◊ Poland, Hungary◊ Russia◊ Poland◊ Slovenia◊ Poland, Hungary◊ Russia

Exhibit 8. Major Insurance Groups Have Expanded in Eastern Europe

Sources: Company information; local insurance authorities; BCG Insurance Database.

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percent of local insurers do not hold a leadership posi-tion. Most of them are subscale in size and have struc-tural disadvantages in times of increasing competition for pro table growth. Second, most foreign portfolios of in-ternational groups are still fragmented, consisting of sub-scale market units. Third, because of the need to over-come slower growth in the markets and to strengthen

home market and foreign positions, external growth is a key topic on many management agendas. The availability of tremendous amounts of capital inside and outside of leading insurance groups makes even the largest deals possible. Finally, there have been rumors about almost all of the nonmutual European insurance groups becom-ing either consolidators or M&A targets.

1004020 1208060Number of foreign markets

0

AEGON

Aviva

AXA Fortis Generali

ING

Standard Life

Swiss Life

1,000

1,500

3,500

500

Prudential

Average premiums across foreign markets (€millions)1

Weighted average = €400 million

Exhibit 9. Few Insurance Groups Achieve Premiums of More than €1 Billion per Foreign Market

Sources: Bureau van Dijk, ISIS database; company annual reports; BCG Insurance Database.1The average premiums per foreign market are calculated as life and nonlife premiums for 2006.

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The Management Challenge: Sustainable Advantage

Our research shows that most local market leaders are more pro table than are fol-lowers and that building stronger interna-tional positions creates the most long-term value for multimarket leaders, interna-

tional life groups, and industrial insurers. But we have also seen that pro tability and growth vary signi cantly across insurance groups with similar positions and strate-gies. Driving the di erence is the ability of senior manage-ment to execute on the capabilities that will di erentiate them from their peers and build sustainable advantage.

To meet the challenges in the consolidating industry, management must direct the group, drive nancial per-formance, and generate operational impact. (See Exhibit 10.) Managers who are able to de ne key focus areas along these capabilities, set targets, and enable the orga-nization to execute on those capabilities will build sus-tainable advantage for their organizations.

To direct the group is to steer value creation, tap M&A experience, and build management talent

To drive nancial performance is to improve asset per-formance and technical competence

To generate operational impact is to build operational excellence, sales e ectiveness, and customer focus

Direct the Group

These capabilities are particularly relevant for publicly traded companies that have the ambition to optimize shareholder value creation. In insurance, where most

businesses have a strong local component, the value of corporate centers mainly comes from value steering, M&A experience, and management talent.

Value Steering. Financial transparency in the insurance sector, compared with other industries, is generally low, accountability is fragmented, and responsibility for re-sults is shared. The starting point for steering value cre-ation is making growth and pro tability transparent—that is, enabling managers to see their role and the main levers in the rm’s nancial performance.

Value steering requires predictable pro ts on the one hand and a clear picture of adequate capital on the other. Furthermore, management must de ne and institutional-ize an ambitious target to increase the group’s value over the planning period. There are three pillars of e ective value steering: planning predictable results, developing a clear picture of capital adequacy, and setting ambitious targets to increase the group’s value over time.

Planning Predictable Results. For several reasons, planning predictable results is a complex process for most insur-ance groups. First, growth in most European markets re-quires expensive organic strategies or risky M&A strate-gies. Second, technical margins depend on factors that are di cult to estimate. In the nonlife business, future claims payments must be predicted, but large claims and natural catastrophes pose a special challenge because of their lower frequency and greater severity. Risk margins in the life business are strongly in uenced by long-term projections of mortality, longevity, and disability, which have become increasingly di cult to assess with the de-sired degree of accuracy.

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Third, because of joint infrastructures, shared distribu-tion channels, and ambiguity surrounding true capital requirements, cost transparency requires complex alloca-tion processes across products, businesses, and market units. Fourth, investment returns, which have generally become more volatile, contribute signi cantly to pro t generation, particularly for life and long-tail nonlife businesses.

Furthermore, the investment margin and the embedded value for life products depend strongly on a competitive outlook for policyholders with respect to their participa-tion in excess returns as well as on applied participation models. Finally, consolidating an international insurance portfolio entails several challenges, including harmoniz-ing local accounting standards and nancial practices, representing market units and businesses across legal-entity structures, and adapting to continuously changing group-reporting policies.

Developing a Clear Picture of Capital Adequacy. Historically, most insurers have relied on rather simple regulatory re-quirements and rules of thumb to de ne their capital needs. For example, under the European Union’s Solven-cy I requirements, many companies found it su cient to

produce an easily calculated solvency ratio above 150 percent and to stay within the range of their peer groups. In recent years, however, several factors have contributed to a fundamentally di erent view of capital adequacy.

First, the insurance crisis of 2001 and 2002 showed the limits of traditional methods. Second, the rating agencies further developed their own risk and capital models and increased the requirements to attain solvency ratings. The envisioned Solvency II regulations will force insur-ance groups to apply sophisticated models in order to quantify their risk exposures and de ne their risk and capital strategies. Third, creating a capital adequacy ad-vantage requires a continuous quanti cation of (techni-cal) insurance risks, investment risks, and operational risks across businesses, national markets, and asset class-es. It also requires an understanding of diversi cation and reinsurance e ects, management’s appetite for risk and consequent risk-capital needs, and the optimization of allocated risk capital and of the potential excess capital of the group.

Setting Ambitious Targets to Increase the Group’s Value over Time. Financial and operational targets must be quanti- ed and the underlying levers must be institutionalized

Customer focus

Technical competence

Management talent

Operational excellence

Value steering

M&A experience

Asset performance

Sales effectiveness

Direct thegroup

Drive financialperformance

Generate operationalimpact

Exhibit 10. Sustainable Advantage Can Be Developed Along Eight Critical Capabilities

Source: BCG experience.

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in the organization. While some companies simply pro-ject historic or assumed pro t and equity multiples, more advanced companies and most nancial analysts employ more sophisticated valuation models based on discount-ing pro ts or cash ows. BCG’s fundamental value model is an established and pragmatic concept for translating con-sistent nancials into future value. (See Exhibit 11.)

The logic of BCG’s model is simple: pro tability (de ned as return on capital a er cost of capital) and pro table growth (de ned as capital growth) are the two major value levers. Value can be created by increasing pro t-ability, by increasing growth to the extent that pro tabil-ity exceeds cost of capital, or, ideally, by pulling both lev-ers. Value creation is measured by discounting future net cash ows (assuming that growth rates and pro tabil-ity fade to the industry average over time); the resulting value is called the added value on equity. The fundamental value of an insurance group is the sum of its adjusted book value and the future value creation. Any di erence between the fundamental value and the actual market capitalization is caused by the expectation that the in-surer will either improve or reduce its performance in the future. Once a speci c target for value creation is identi- ed, it should be communicated both internally to man-

agement and employees and externally to nancial ana-lysts and shareholders. A comparison of communicated value targets among leading European groups shows ma-jor di erences in terms of both selected performance in-dicators and ambition levels. (See Exhibit 12.)

M&A Experience. The leading European insurance groups have made their most signi cant moves through M&A transactions. Since the recovery, M&A activity has increased considerably: large European insurers have completed more than 150 transactions during the last four years. Insurance groups that want to improve their strategic positioning and successfully shape their geo-graphic footprint must apply distinctive capabilities in M&A. In a very competitive environment, there are three major areas of required skills: generating winning oppor-tunities, demonstrating convincing transaction skills, and providing rigorous integration.

Generating Winning Opportunities. Management and shareholders are seldom willing to just be taken over or to sell performing insurance assets. Thus, acquiring com-panies must be able to generate winning opportunities, which means they must develop long and short lists of target companies and then continuously screen interna-

Returnn+1

Value levers

Minimum profitdemanded by

capital markets

Profitability

Returnn

Cost ofcapital

Growth

Illustrative valuation

0

4,000

3,000

2,0001,300

1,200 2,500

3,000500

1,000

Model Market

Value (indexed)

Change in profitability

Changein capital

Added value on equityn

Value creation: change in

added value on equityn+1

Capitaln Capitaln+1 Funda-mentalvalue

Addedvalue

onequity

Adjustedbook value

of equity

Expecta-tion

premium

Marketcapital-ization

Exhibit 11. BCG’s Model Illustrates Fundamental Value and Levers

Source: BCG experience.Note: Added value on equity is the calculated value of discounted future cash flow based on the business plan; the assumption is that growth rates and profitability will fade to the industry average over time.

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tional and local strategies while maintaining creativity, exibility, and a pragmatic sense of what is feasible.

The greatest challenges are creating value for the other side and convincing the target’s management and share-holders. In a straightforward merger, the target’s manage-ment can be convinced of the added value for both par-

ties and be motivated to conduct a friendly merger or regional joint venture based on a combined strategic logic. When acquisition of an insurance group’s local sub-sidiary is envisioned, winning opportunities can o en be generated through asset swaps. Divesting noncore units and strengthening positions in core markets can be at-tractive options for both parties.

“Sampo Group’s mission is to create value for its shareholders. The group has no strictly defined strategy, and it aims to flexibly utilize opportunities that arise in the market to create shareholder value through transactions such as mergers and acquisitions.”1

Long-term strategic drivers of value◊ Double value of new business by 2010, from €550 million in 2005 to

€1.1 billion in 2010—a compound annual growth rate (CAGR) of ~15 percent◊ Aim to achieve a long-term average underlying net-operating-earnings

growth rate of 10 percent per year◊ Grow the value 15 percent per year through 2010

Key economic targets for 2009 versus 2006◊ Return on embedded value to increase by 2.9 percent to 16 percent; IFRS

profits to grow by 58 percent, to almost €3.8 billion2 ◊ Combined ratio below 95 percent◊ Premium increase above market◊ Dividends to double

Strategic objectives and growth targets◊ Generate a consistent midterm business operating profit aer-tax and a

return on equity of 16 percent◊ General insurance: 5 percent CAGR in gross written premium over the cycle,

maintaining a pretax business operating profit return on equity greater than 25 percent

◊ Global life: double-digit growth in annual premium equivalent; the aspira-tion is to double the new business value to $1 billion within five years (or to $850 million by 2010)

“Ambition 2012 targets”◊ Life and savings: annual premium equivalents with growth rate of 5 to 10

percent per year◊ Property and casualty: revenues with growth rate of 3 to 5 percent

per year◊ Asset management: revenues with growth rate of 15 percent per year◊ Underlying earnings per share with growth rate of 15 percent per year or

3x over 2004–2012

Business plan target◊ Maintain best-practice technical results: combined ratio of 92.5 percent

in 2008

Examples of communicated value targetsInsurance group

Sampo

AEGON

Generali

Zurich FinancialServices

AXA

Fondiaria-SAI

Exhibit 12. Groups Select and Communicate Value Targets Differently

Source: Company information.1Company mission statement at www.sampo.com.2IFRS = International Financial Reporting Standard.

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Demonstrating Convincing Transaction Skills. Once the op-portunities have been generated, insurance groups with a successful M&A track record must demonstrate convinc-ing transaction skills. Such skills require superior exper-tise in the following critical areas:

Developing focused timetables with task lists, mile- stones, and required data

Evaluating targets, synergies, and combined business cases

Negotiating terms and conditions and designing legal agreements

Performing comprehensive due-diligence tasks

Communicating both internally and externally

Jointly managing combined entities between the sign- ing and closing phases

Orchestrating a network of external specialists to sup- port prede ned areas

Securing fast decision-making processes and overcom- ing inherent hurdles

Providing Rigorous Integration. Many M&A transactions have failed to deliver the expected synergies and added value. To be successful, management must be disciplined on the one hand and exible on the other. Discipline in-volves adopting a predesigned and rigid integration framework that de nes corporate principles for organiza-tional integration, branding, compensation schemes, and cultural change. At the same time, management must be exible enough to address the major sensitivities that

management and shareholders at the target company might have about critical resource retention, social val-ues, public opinion, and postmerger integration.

Management Talent. Insurance is a service-oriented in-dustry. Attracting, developing, and retaining management talent should top the agenda of senior executives. Several insurance companies have identi ed management talent as a major strategic requirement, but only a few have delivered so far. Creating advantage in management tal-

ent starts with positioning the insurer as a desired em-ployer. To that end, the company must o er quality can-didates a high-performance culture. In such a culture, the performance of the organization is driven by the person-al motivation of its key sta and the collective commit-ment to objectives.

Becoming a Desired Employer. Building a brand as a desired employer requires di erentiation along the entire hu-man-resource life cycle, including strategic planning, re-cruiting, compensation, career development, career tran-sition, and alumni relations. Compared with other industries, however, the European insurance sector as a whole is still far away from implementing best practices in these areas. According to Universum’s 2006 survey of business school graduates, no insurance group ranks among the top 40 desired employers in any of the major European countries, and only four groups are ranked in the top 50.

Fostering Personal Motivation. Insurers are generally not seen as high-performance organizations. In a high-perfor-mance culture, personal motivation among employees is re ected by satisfaction, a shared vision and shared val-ues, and pride. Four major elements can be characterized as personal motivators: pathways for personal growth, empowerment, recognition and appreciation, and a sup-portive work environment. (See Exhibit 13.)

Ensuring a Collective Commitment. A collective commit-ment to objectives creates the performance discipline that a high-performance culture requires. The four major elements of this discipline are a capable work force, de-tailed individual accountabilities, rigorous performance management, and platforms for collaboration. These lev-ers strategically align structures, policies, procedures, and measures.

Drive Financial Performance

A sound understanding of both the balance sheet and the key positions of assets and liabilities is a prerequisite for optimizing an insurer’s overall performance. Asset per-formance and technical competence are critical capabili-ties for which many leading international groups have centralized responsibility within dedicated units at the group level.

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Asset Performance. The impact of asset management on insurers’ pro ts, capital adequacy, and pro tability is o en underestimated. Specialized skills in this area are mandatory for each insurance group, and competitive advantages have the potential to create superior value. Management teams competing on asset performance ex-cel in three areas: they manage assets as allocated liabili-ties, they operate on the basis of integrated and controlled risk, and, ultimately, they optimize returns.

Allocating Liabilities. Investment assets have to be man-aged as allocated liabilities because they belong mainly to policyholders and are nancially balanced by technical reserves. Life insurance funds are characterized by dura-tions, expected policyholder dividends, and, in many cases, investment guarantees. Nonlife funds are, to a large extent, customer advances for incurred claims. The challenge in de ning the strategic asset allocation is to cope with di erent liability pro les and optimize invest-

ment returns on the basis of controlled liability and asset risks.

Controlling Risks. For life insurers in particular, acting on the basis of integrated and controlled risk is of major im-portance. Life insurers share the upside of their invest-ment performance with policyholders; the downside (be-low guarantees) is fully borne by shareholders. The magnitude of gain and loss can be tremendous: in 2000, a typical European life insurer could realize investment returns of about 10 times net income and 1.5 times share-holders’ equity. With invested assets at a level of more than 28 times their own equity and 30 percent of these assets allocated to equities, they were leveraging their own equity by a factor of more than 8. In 2002, however, as investment returns fell below guarantees, insurers had to realize substantial losses and burn considerable amounts of shareholders’ equity. A er some years of con-servative investing and signi cant capital increases, Euro-

Collective commitment to objectives

Capable work force

Detailedindividualaccountabilities

Rigorousperformancemanagement

Platformsforcollaboration

Levers to strategically align structures,policies, procedures, and measures

Shared vision, values, and pride

Pathways for personal growth

EmpowermentRecognitionandappreciation

Supportive work environment

Levers that drive work force satisfactionand personal motivation

High

Performancediscipline

Low HighPersonal motivators

AimlessnessLethargic and disordered work force: apathy and lack of interest

Focused engagementA high-performance culture: loyal, enthusias-tic “owners”

Unguided missilesEngaged work force but energies not focused on results

Low

ExploitationWork force feels over-controlled, overworked, and underappreciated

Exhibit 13. Several Levers Can Help Companies Create a High-Performance Organization

Source: BCG analysis.

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pean insurers have again increased their share of equities in recent years: the leverage factor, which measures in-vested equities to shareholders’ equity, was at a high of nearly 7 in 2006. (See Exhibit 14.)

Optimizing Returns. Most European insurance groups use the majority of their risk capital not to cover insurance risks but to underpin the risks of investment and the risk that assets and liabilities will be mismatched. De ning asset and liability management as a core capability and applying state-of-the-art risk-and-return models are the keys to optimizing returns on invested assets. Levers to achieve superior investment returns include carefully or-chestrated, strategic, and tactical asset allocation, invest-ment style, realization of gains (and losses), reporting systems, and groupwide organization and governance. Overall asset performance varies signi cantly among Eu-ropean insurance groups. The di erence between the lowest and highest investment return for similar groups

ranges between 4.5 and 6.5 percent of invested assets and is quite o en one of the most important di erences between winners and losers.

Technical Competence. The European insurance indus-try has improved technical pro tability considerably dur-ing the last few years. However, there is still a huge di er-ence in technical performance among individual groups. A typical average combined ratio for a nonlife business during the period 2003 to 2006 was between 90 and 105 percent, with a weighted average of 99 percent. In the life sector, the technical margin showed a similar range, with some strong performers achieving around 1.3 percent while others were well below 0.5 percent. The peer group average in life insurance was 0.8 percent of technical re-serves for the same period. Driving the performance dif-ferences, in part, were advantages stemming from strate-gic positioning, but capabilities related to technical competence and operational excellence were also in-

Investment return/net income

Invested assets/shareholders’ equity

Invested equities/shareholders’ equity

Investment return/shareholders’ equity

20 (14%)41 (30%)

78 (56%)

19 (14%)25 (17%)

97 (69%)

27 (13%)

52 (24%)

134 (63%)

2000 2002 2006

Other assets (€billions) Equities (€billions)

Fixed income (€billions)

139 (100%) 141 (100%) 213 (100%)7.3 (5.3%)3.6/8.1

–0.5 (–0.3%)–3.3/2.9

16.6 (7.8%)4.3/9.0

0.7 < 0.1 1.04.9 4.4 7.7

10.2 x –8.9 x 16.5 x

28.3 x 32.0 x 27.7 x

8.3 x 5.6 x 6.8 x

1.5 x –0.1 x 2.2 x

Sample analysis

Invested assets (€billions)Investment return (€billions)Lowest/highest return (%)

Net income (€billions)Shareholders’ equity (€billions)

Exhibit 14. Asset Performance Has a Significant Impact on Financial Success

Source: BCG Insurance Database.Note: The sample analysis used average values from three leading life-insurance groups. Some figures may not add up to totals shown, because of rounding.

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volved. Technical competence is an important factor in applying e ective policies, optimizing reinsurance, and ensuring adequate reserves.

Applying E ective Policies. Insurance groups that compete on technical competence have e ective policies in sev-eral critical areas. Such policies de ne and control group-wide product design, pricing, and underwriting (including risk acceptance and capacity limits) for each customer and industry segment, line of business, and geographic market. They also anchor principles for best-practice claims management.

Optimizing Reinsurance. Our experience shows that many international groups have not yet exploited the signi -cant potential of an optimized reinsurance concept. Such a sophisticated approach optimizes reinsurance at the group level. In line with risk and capital management, it de nes and pools major reinsurance needs, types of cov-erage, processes, and partners for external reinsurance. It also sets clear guidelines for internal reinsurance be-tween corporate headquarters and the individual market units. Without this type of approach, top management can be surprised by the high costs of consolidated reinsur-ance, unsatisfactory reinsurance results, uncoordinated local and group programs, and even limited coverage, ma-jor losses, and unexpected requests to strengthen techni-cal reserves.

Ensuring Adequate Reserves. Technical competence is also a key to de ning adequate reserves and, as a conse-quence, actual technical results. Insurance executives who are able to master the associated complex processes in an e ective way can prevent undesirable surprises.

Managers who have superior technical competence are continuously asking and answering questions such as the following:

What are the best estimates of future payment obliga- tions for incurred customer losses in the nonlife busi-ness? For personal risk covers and for savings and re-turn bene ts in the life business? For each market unit? As a consolidated group?

What are the likely future payment amounts over time for reported and not yet reported long-tail claims?

What is the true technical result for the reporting period?

How does our reserve level compare with that of our insurance-group peers? What is the accumulated safe-ty margin that can, in a narrower sense, be regarded as our reserve capital?

What is our nancial ability to balance results for indi- vidual reporting periods from one year to the next?

Generate Operational Impact

Local market units are mainly responsible for generating superior operational performance. To do so, they have to ensure operational excellence, enhance sales force e ec-tiveness, and focus on customers.

Operational Excellence. The technical pro tability of an insurer is directly driven by product price, costs, and claims. Thus, achieving best-practice technical results re-quires tailored pricing, industrialized processes, and con-sistently managed claims.

Tailoring Pricing. This factor is especially important in nonlife insurance. Insurers of industrial and large com-mercial risks must have sophisticated knowledge in order to assess the individual risk potential, limit exposures, understand capital requirements and the associated cap-ital costs, and realize adequate risk margins.

In retail insurance, the critical question is how to de ne and combine the relevant pricing criteria by line of busi-ness and client segment. Advanced insurers have moved from traditional pricing criteria (such as car characteris-tics, age, region, and claims history) toward behavioral patterns (such as marital status, number of children, changes of address, years with the same employer, credit history, and even driving patterns).

The European insurance industry has improved cost ra-tios during the last few years. Comparison of individual groups, however, reveals huge di erences in relative cost positions. In the nonlife sector, the net cost ratio in 2006 for typical best-practice players was below 20 percent, whereas others had ratios above 33 percent. In the life sector, the net cost ratio as a percentage of net technical

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reserves ranged from 0.7 to 3.1 percent—again a signi -cant variance.

Industrializing Processes. Given that insurance is less in-dustrialized than other major industries, such as automo-tive and textiles, industrialized processes o er most Eu-ropean insurance groups the potential for signi cant cost savings. Insurers that industrialize their processes can compete on e ciency, time, and quality by pulling these levers:

Measurement and benchmarking of key operational per- formance indicators along the insurance value chain. Such indicators include employee productivity per function, share of automated processing, and percentage of ser-vice accuracy.

De nition of standards for retail and individual products on the one hand and for so-called simple and complex proc-ess activities on the other. Retail products account for about 80 percent of most European insurers’ volume, focus on the vast majority of private clients and enter-prises, and are o en sold through sales channels that possess little technical know-how. In order for retail products to be cost e cient, priced competitively, and matched with the needs of sales agents, they must be simple, prepriced, and based on largely automated processing. In the future, industrialized insurance op-erations will be based on integrated client-to-client process work ows and enhanced IT architecture; they will also orchestrate straight-through processing of simple, rst-level and complex, second-level process activities across lines of business in the most e ective manner.

Reduction of complexity through streamlined product and tari structures. Insurance groups competing on indus-trialization across countries will unbundle underlying risks as the basis for exible products and will share platforms across di erent market units.

Consistent di erentiation of value chain activities as either core or noncore and as either locally speci c or sharable within or beyond the group. Most local insurers and in-surance groups are still operating the whole value chain by themselves, despite the fact that others can

provide speci c services at lower costs. When insurers industrialize their processes, near-shoring and o shor-ing as well as in-sourcing and outsourcing will break up the value chain and systematically involve the best service providers, whether they are internal or external.

Consistently Managing Claims. Claims represent the major cost factor in insurance. In the nonlife sector, claims ac-count for 70 to 80 percent of premiums. Consistently managed claims optimize payouts, customer satisfaction, and administrative costs simultaneously. Superior claims management requires that insurers segment claims by amount and process complexity, accelerate settlement, optimize administrative costs for petty damages, apply speci c expertise to minimize insurance losses for large and complex claims, implement e ective control systems to prevent insurance fraud, and develop tools for nan-cial restructuring of loss-generating relationships.

Sales E ectiveness. Compared with many other con-sumer products, insurance is not very appealing to most retail clients. It reminds people of unpleasant experienc-es such as damages and losses, and it seems rather com-plex. In addition, insurance faces high penetration rates and low natural growth in Western Europe. As a conse-quence, increasing the client base and achieving premi-um growth rates that exceed market averages and the growth rates of peers will become one of the most critical challenges for most European insurers. In order to reach such targets through organic growth, insurers will have to gain access to major sales channels and manage sales ef-fectiveness by pursuing and adopting best practices.

Depending on a company’s given channel mix, greater sales e ectiveness can be achieved through any of three critical capabilities: consistent steering of key distribution metrics, e ective incentive schemes, and adequate devel-opment of the sales force. In principle, these capabilities apply across sales channels; however, the core elements of each capability di er by channel, as does the impor-tance of each channel by national market and business. (See Exhibit 15.)

Despite losing share in recent years, tied agents still rep-resent the major distribution channel in the nonlife sec-

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tor and generate a considerable part of the premium vol-ume for life insurance in several European countries. Consider, for example, how the three critical capabilities in sales e ectiveness could be applied to the tied-agent model of distribution.

Consistently Steering Distribution Metrics. Best-practice in-surers understand the theoretical capacity of their sales-agent network in delivering net growth in premiums, and they manage their agent network toward that theoretical capacity.4 Our experience shows that consistently plan-ning and controlling critical distribution metrics for each agent o ers the potential for signi cant growth for many European insurers. BCG has found that, when net growth in premiums is charted per agent, a typical net-premium-

growth curve reveals that about 20 percent of all sales agents generate about 100 percent of net premium growth, and about 30 percent of all sales agents realize a net premium loss; that is, they lose more premiums from existing clients than they generate from new business. (See Exhibit 16, page 30.)

In order to steer the net-premium-growth curve proac-tively and thus shape the curve for maximum advantage, successful insurers institutionalize underlying perfor-mance metrics for each agent. To achieve the desired growth rate from new business, they measure, for exam-ple, the required number of client visits per week, the expected o ers per visit, the contract closings per o er, and the average premium per issued contract. To monitor the expected loss of premiums from existing clients, they measure, for example, expiring premiums, assumed pre-mium cancellations, and planned renewal rates.

40

80

60

20

100

0SpainSwitzerlandItaly Germany Austria

Nonlife business Life business

Tied agents/agents Tied agents/agentsBrokers Others1

Brokers Banks Others2

Premium volume sold through the channel (%)Premium volume sold through the channel (%)

40

80

60

20

100

0SpainGermanySwitzerland Italy Austria

Exhibit 15. The Sales Channel Mix Differs by Market and Business

Sources: Local regulators; local industry associations; company reports.Note: Countries are ranked by share in the tied agents/agents channel. Tied agents are not allowed by law in all countries.1For the nonlife sector, “others” includes direct sales and banks.2For the life sector, “others” includes direct sales.

4. The capacity for net growth in premiums can be calculated as the optimal number of agents times each agent’s expected new-premi-um volume minus the agent’s lost-premium volume.

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Ensuring E ective Incentive Schemes. The major part of sales agent compensation is related to performance. Many European insurers use compensation schemes that are still largely based on gross productivity, that is, the growth in premiums from new business. As a conse-quence, the correlation between total agent compensa-tion and net premium growth per agent is rather low. Advanced distribution management aligns sales force in-centives with net premium growth and value creation; furthermore, it recognizes business pro tability and sales force development targets.

Fostering the Adequate Development of the Sales Force. Insur-ers competing on sales e ectiveness apply targeted pro-

grams to systematically manage the net-premium-growth curve. Such programs include distinct career paths for agents (such as all-round retail agent, specialized nan-cial advisor, and commercial insurance expert), focused training to deepen required technical expertise and sales techniques, local underwriting support for individual products, and complex process activities and sales promo-tions for speci c products or client segments. Sales force development also includes periodic performance reviews for each agent, as well as consistent recruiting and out-placement.

Customer Focus. The last but not least important set of capabilities puts the customer at the center of operation-

Percentage of total agents2

~20 percent of sales agents generate100 percent of net premium growth

Typical net-premium-growth curve

250

20

40

60

80

100

120

140

160

50 75 100

Cumulative net premium growth per sales agent(percentage of total net premium growth)1

~30 percent of sales agents realize a net premium loss

Exhibit 16. The Net-Premium-Growth Curve Reveals Significant Potential for Sales Growth

Source: BCG experience.Note: The net-premium-growth curve reaches more than 100 percent of net growth at its peak as 30 percent of agents realize a net premium loss.1Cumulative net premium growth per agent was calculated as new premiums generated per agent minus lost premiums per agent in a given period. 2Sales agents were ranked by net premium growth in a given period.

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al activities. There are three critical factors that can make the di erence in this area: identifying valuable segments, delivering optimal service, and building an appealing brand.

Identifying Valuable Segments. De ning valuable segments helps in the allocation of resources and investments to activities that create the most value. In our view, there is no single “right” way to segment retail clients, but there are several promising approaches for achieving di erent operational objectives. For example, clients could be seg-mented by product pro le and personal characteristics (for cross-selling and up-selling), by probability of closing and defection (for new-business acquisition and reten-tion), by wealth and income (to focus life insurance chan-nels), by behavioral characteristics (to optimize product design, price, o ered channels, and service levels), or, of course, by expected technical pro tability.

Delivering Optimal Service. This capability aims to enhance client satisfaction and retention, brand awareness, and sales e orts. The critical operational capability is to break the obvious compromise between client service and its associated costs in the most e ective way possible. When

insurers compete on client service, executives have to un-derstand and measure important factors for client satis-faction and dissatisfaction and align service levels ade-quately.

Building an Appealing Brand. Almost all insurers aim at high brand awareness and invest signi cant amounts of money in marketing and branding. But only a few com-panies communicate a distinct and clear brand promise on which they continuously deliver. In order to build and maintain an appealing brand, management has to de ne a consistent client promise, systematically align the value chain, periodically measure client awareness, and active-ly deliver on the brand promise.

Senior management of insurance groups and local insurers must de ne the speci c set of core capa-bilities that will allow them to exploit sustainable

advantage. Core capabilities and aligned business models will di er among individual insurance groups, as they will between central and local units of the same group. (See Exhibit 17.)

Local insurer

Customerfocus

Managementtalent

Assetperformance

Saleseffectiveness

Valuesteering

M&Aexperience

Technicalcompetence

Operationalexcellence

Customerfocus

Managementtalent

Valuesteering

M&Aexperience

Assetperformance

Saleseffectiveness

Technicalcompetence

Operationalexcellence

Insurance group

Exhibit 17. Insurers Should Align Their Business Model to Core Capabilities

Source: BCG experience.Note: Shading indicates the sets of core capabilities specific to each type of insurer.

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How to Design Competitive Advantage

In the consolidating European insurance industry, competitive market positions are the strategic foundation for success. Groups that focus on at-tractive markets, build local leadership positions, de ne the international model, and shape their

geographic footprint create advantages that can be trans-lated into superior performance. Insurers with disadvan-taged positions have to go the extra mile to achieve simi-lar results.

But structural advantages may not be su cient. Growth, pro tability, and value creation vary among rms with similar competitive positions. Senior management has to execute on core capabilities to di erentiate a rm from its peers.

Successful managers will de ne their organization’s de-sired future and decide on the best way to achieve their goals based on available skills and resources. They must position their companies within a changing landscape before their competitors’ actions do it for them.

The Management Questionnaire for Designing Advan-tage on pages 33 through 36 can help guide senior man-agers in determining the path that their own organiza-tions should take.

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The Strategic Foundation: Competitive Positions

Focus on attractive markets What is our view on the attractiveness of national markets?

How does our local performance compare with that of our peers in the market?

How shall we de ne growth and pro t targets for each local entity?

Build local leadership positions What is our relative positioning in each national market?

How do we convert leadership positions into pro tability?

How do we handle subscale units and local disadvantages?

De ne the international model What is our group’s strategic logic and model?

How does each unit individually generate value for the group?

How do we create value across markets and businesses?

Shape the geographic footprint What is our strategy to reposition the group?

How do we intend to expand across core markets?

How do we decide to exit noncore markets?

The Management Challenge: Sustainable Advantage

Value steering

Predictable results What is our strategy to grow pro tably above market averages?

How much pro t can we generate in each market and business?

How do we optimize consolidated pro t over the planning period?

Adequate capital What is our overall net-risk pro le by risk class?

How much risk capital do we need to execute our strategy?

How do we optimize allocated risk capital and available equity?

Ambitious target What is the value and return we want to generate for shareholders?

How do we institutionalize major levers to achieve our ambition?

How do we communicate targets and manage external expectations?

Management Questionnaire for Designing Advantage

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M&A experience

Winning opportunities What is our scope to generate winning M&A opportunities?

How can we create value for the target company’s management?

How do we prioritize our assets in terms of divestments or swaps?

Convincing transactions What is our road map to ensuring e ective signing and closing?

How do we address the target management’s level of comfort?

How do we align responsibilities for both parties?

Rigorous integration What is our framework for realizing synergies and added value?

How do we de ne principles for postmerger integrations?

How do we cope with the sensitivities of the target’s stakeholders?

Management talent

Desired employer What are our talent needs and recruiting programs?

How do we di erentiate among human resource capabilities?

How do we become an employer of choice for our targeted talent pools?

Personal motivation What are our major concepts for fostering personal motivation?

How do we support the personal growth of each manager?

How do we balance motivation and performance discipline?

Collective commitment What are our major tools for achieving collective engagement?

How do we systematically ensure that each manager contributes fully?

How do we strategically align structures, policies, and measures?

Asset performance

Allocated liabilities What are the key characteristics of our policyholder liabilities?

How do we align our asset allocation with our liability pro les?

How do we adjust asset allocation to changing nancial markets?

Management Questionnaire for Designing Advantage (continued)

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Controlled risk What are the key elements of our risk-management approach?

How do we manage and control asset and liability risks?

How do we determine capital requirements for investments?

Optimized returns What is our overall investment philosophy and style?

How do we de ne and measure investment performance?

How do we organize groupwide asset management?

Technical competence

E ective policies What technical policies do we apply on a groupwide basis?

How do we ensure transparency across countries and lines of business?

How do we control local execution of group policies?

Optimized reinsurance What are our major reinsurance needs?

How do we de ne processes to obtain external coverage?

How do we optimize internal reinsurance?

Adequate reserves What are our principles for de ning technical reserves?

How do we harmonize central group and local responsibilities?

How do we build or make use of safety margins?

Operational excellence

Tailored pricing What is our approach in commercial/industrial insurance?

How do we de ne/combine retail pricing criteria?

How do we consider behavioral/individual patterns?

Industrialized processes What is our vision of industrialized insurance operations?

How do we measure and benchmark operational e ciency?

How do we standardize, automate, and outsource major processes?

Management Questionnaire for Designing Advantage (continued)

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Managed claims What are our targets for claims ratio, client satisfaction, and cost?

How do we segment and manage di erent types of claims?

How do we prevent fraud and loss-generating relationships?

Sales e ectiveness

Consistent steering What are our key distribution metrics by sales channel?

How do we manage the net-premium-growth curve?

How do we institutionalize underlying performance levers?

E ective incentives What is the correlation between compensation and net premium growth?

How do we align sales force incentives with value creation?

How do we recognize sales force development targets?

Adequate development What concrete programs do we use to develop our sales channels?

How do we leverage di erent skills and career ambitions?

How do we systematically strengthen our sales networks?

Customer focus

Valuable segments What are our approaches to building valuable client segments?

How do we di erentiate operational targets and measures?

How do we communicate and control client segmentation?

Optimal service What are important factors in client satisfaction and dissatisfaction?

How do we de ne optimal client service?

How do we break the compromise between service and cost?

Appealing brand What is our brand promise for target clients?

How do we anchor measurable brand targets along the value chain?

How do we evaluate brand awareness and client satisfaction?

Management Questionnaire for Designing Advantage (continued)

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AppendixThe European Insurance Landscape

Total premiums (€billions)1

Traditional life insurance Unit-linked life insurance Nonlife and health insurance

Allianz Prudential

AXA Generali

Aviva ING

Zurich Financial Services CNP

AEGON Crédit Agricole

Standard Life Old Mutual

HBOS Fortis ERGO

BNP Paribas Eureko

Groupama Swiss Life

Legal & General Crédit Mutuel

Covéa Talanx

Lloyds TSB Société Générale

Fondiaria-SAI Friends Provident

Royal Bank of Scotland Royal & SunAlliance

R+V Unipol

UVIT Mapfre Debeka

Intesa-Sanpaolo Poste Italiane

KBC Vienna Insurance Group

Versicherungskammer Bayern La Mondiale

UNIQA Banques Populaires

Resolution Irish Life & Permanent

BUPA HUK-Coburg

Bâloise MACIF Sampo

Santander Signal Iduna

Cattolica Wüstenrot & Württembergische

Royal London Mutual PZU

Ethias Gothaer

Banca Monte dei Paschi Dexia

Nordea Menzis

Mediolanum Skandinaviska Enskilda Banken

Reale Mutua Helvetia

Caixa Geral de Depósitos Nürnberger

Provinzial NordWest Varma

DnB NOR Länsförsäkringar

Agis Continentale

SV SparkassenVersicherung Ilmarinen

MAIF Bank of Ireland

Storebrand BBVA LVM

Provinzial Rheinland Catalana

Tapiola VHV

Alecta SNS REAAL

Caser SMABTP

Svenska Handelsbanken Folksam

Alte Leipziger CaiFor

Gjensidige DEVK

Mobiliar Amlin

VGH NFU Mutual

MACSF Co-operative

0 10 20 30 40 50 60 70 80 90 100

European Insurance Groups Greatly Vary by Size and Business Mix

Source: Bureau van Dijk, ISIS database; company annual reports; BCG Insurance Database.Note: Companies ranked by worldwide total premiums in 2006.1Premiums include nonlife and life gross premiums and unit-linked business volume.

100 Leading European Insurance Groups

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2000 2005Change in ratiosfrom 2000 to 2005

Combined Loss Cost Combined Loss Cost Combined Loss Cost ratio (%) ratio (%) ratio (%) ratio (%) ratio (%) ratio (%) ratio (%) ratio (%) ratio (%)All nine markets 107.9 80.4 27.5 97.2 71.7 25.5 –10.7 –8.7 –2.0Germany 105.2 76.4 28.8 96.4 69.3 27.1 –8.9 –7.1 –1.8United Kingdom 109.1 79.5 29.6 97.6 67.8 29.8 –11.5 –11.8 0.3France 110.3 86.8 23.5 99.5 76.9 22.6 –10.8 –9.8 –0.9Italy 111.8 82.4 29.4 96.8 72.0 24.9 –15.0 –10.5 –4.5Spain 103.9 81.1 22.9 92.1 72.2 20.0 –11.8 –8.9 –2.9Netherlands 102.9 84.0 18.9 94.0 76.5 17.5 –8.9 –7.5 –1.4Switzerland 102.7 74.2 28.5 98.6 75.9 22.8 –4.1 1.7 –5.8Belgium 113.9 80.3 33.5 104.9 71.8 33.2 –8.9 –8.5 –0.4Austria 116.6 84.0 32.6 100.5 75.2 25.3 –16.2 –8.8 –7.3

Major Nonlife Markets Have Become Profitable

Sources: Bureau van Dijk, ISIS database; company annual reports; local insurance authorities; BCG Insurance Database.Note: Markets were ranked by total premiums. Combined ratio was calculated as the sum of the loss and cost ratios. Loss ratio was calculated as net losses divided by net premiums earned. Cost ratio was calculated as net technical costs divided by net premiums earned. Some figures may not add up to totals shown, because of rounding.

20022000 2005Change in ratiosfrom 2002 to 2005

Technical Cost Technical Cost Technical Cost Technical Cost margin (%) ratio (%) margin (%) ratio (%) margin (%) ratio (%) margin (%) ratio (%)All nine markets 0.7 1.4 0.1 1.5 0.8 1.1 0.7 –0.4United Kingdom 0.5 1.2 1.6 0.6 1.0 0.6 –0.6France 0.7 1.1 0.4 1.0 0.6 0.9 0.2 –0.1Italy 2.3 1.8 0.9 1.5 1.3 1.2 0.4 –0.3Germany 0.4 1.5 0.4 1.7 0.6 1.4 0.2 –0.3Netherlands 1.7 1.4 –0.6 1.6 1.6 1.5 2.2 –0.1Belgium 2.7 1.6 1.3 1.8 1.0 1.8 –0.3Spain 1.0 1.3 0.8 1.0 1.3 1.0 0.5 Switzerland 1.1 2.3 –1.5 1.5 1.0 1.3 2.5 –0.2Austria 1.7 2.5 –0.1 2.5 0.6 2.2 0.7 –0.3

0

00

Major Life Markets Have Turned Around

Source: Bureau van Dijk, ISIS database; company annual reports; local insurance authorities; BCG Insurance Database.Note: Markets were ranked by total premiums. Technical margin was calculated as profit life account divided by net technical reserves. Cost ratio was calculated as net technical costs divided by net technical reserves in life insurance. Some figures may not add up to totals shown, because of rounding.

Market Improvements

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0 –5 –10 –15BelgianDutch Swiss

Austrian Swiss

Spanish Dutch

German Italian

German French Italian

British Swiss

Austrian Italian

German Swiss

Austrian

Nonlife cost ratio of local market leadersrelative to market average, 2005 (%)1

Local Market Leaders Can Achieve Superior Results

Sources: Bureau van Dijk, ISIS database; company annual reports; local insurance authorities; BCG Insurance Database.Note: Bars represent individual local market leaders; the nonlife cost ratio was used as a proxy to represent superior results.1Cost ratio was calculated as net technical costs divided by net premiums earned. Market averages exclude nonlife mutuals.

Performance Examples

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Life cost ratio of life producers relative tomarket average, 2005 (%)1

0 –0.25 –0.50 –0.75 –1.00Spanish

Austrian

Spanish

British

Spanish

French

French

French

British

Belgian

Spanish

Italian

Italian

Dutch

French

Bancassurance group Other life producer

Life Producers Can Achieve Lower Cost Ratios

Sources: Bureau van Dijk, ISIS database; company annual reports; local insurance authorities; BCG Insurance Database.Note: Bars represent individual life producers.1Cost ratio was calculated as net technical costs divided by net technical reserves.

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0 10 15 205–10 –5

0

–10

–15

–20

–5

Lower cost ratio andhigher combined ratio

Lower cost ratioand lower loss ratio

Higher loss ratio over-compensated by lower cost ratio3

German

British

Spanish

French

Dutch

Spanish

BritishDutch

Austrian

German

French

Dutch

Spanish

British

German

Spanish

BelgianGerman

French

French

Dutch

Spanish

French

French

German

German

German

Spanish

Dutch

Spanish

Cost ratio of nonlife mutuals relative to market average, 2005 (%)1

Loss ratio of nonlife mutuals relative to market average, 2005 (%)2

Nonlife Mutuals Can Leverage Specific Advantages

Source: Bureau van Dijk, ISIS database; company annual reports; local insurance authorities; BCG Insurance Database. 1Cost ratio was calculated as net technical costs divided by net premiums earned. 2Loss ratio was calculated as net losses divided by net premiums earned.3In this category, the combined ratio (sum of the cost and loss ratios) is lower than the market because the cost ratio advantage exceeds the loss ratio disadvantage.

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For Further Reading

The Boston Consulting Group publishes many reports and articles on insurance that may be of interest to senior executives. Recent exam-ples include:

“Creating Lasting Advantage in Claims Management”Opportunities for Action in Financial Services, February 2007

Operating for Value in InsuranceA Focus by The Boston Consulting Group, September 2006

“Ensuring IT Excellence in Insurance”Opportunities for Action in Financial Services, April 2006

Creating IT Advantage in the Insurance Industry: BCG’s Benchmarking InitiativeA report by The Boston Consulting Group, April 2005

“Grow with the Flow in Insurance”Opportunities for Action in Financial Services, October 2004

Building Professionalism: The Next Step for Life Insurance in ChinaA report by The Boston Consulting Group, March 2004

Back to the Future: The European Insurance LandscapeA report by The Boston Consulting Group, November 2003

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