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The Insurance Business Model - What Will the Future Bring? 13. June 2013 Professor Dr. Hato Schmeiser

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Page 1: The Insurance Business Model -What Will the Future Bring? · PDF fileThe Insurance Business Model -What Will the Future Bring? 13. June 2013 Professor Dr. HatoSchmeiser

The Insurance Business Model - What Will the Future Bring?

13. June 2013

Professor Dr. Hato Schmeiser

Page 2: The Insurance Business Model -What Will the Future Bring? · PDF fileThe Insurance Business Model -What Will the Future Bring? 13. June 2013 Professor Dr. HatoSchmeiser

The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 2

1. Introduction

• Why is it so difficult to estimate future developments?

- Unpredictable changes in customers’ behavior

- «Unexpected» technical revolutions

• Focus on the insurance industry:

- Adherence to analyses based on retrospective views

- «Urban myths»

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 3

• Myths and misjudgements

“The global demand for cars will never be above 1 million – simply because there are not enough chauffeurs”

(Gottlieb Daimler, 1900)

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 4

• Let us try to shake off our assumptions regarding the futuredemand for «chauffeurs»

• Focus on four key aspects:

- Insurance pricing (Chapter 2)

- Business model of life insurance companies (Chapter 3)

- Regulation of the insurance industry (Chapter 4)

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 5

2. The insurance companies’ pricing will change drastically

• Price communication: presentation of price towards the client

- Absolute, relative, broken down by its components, in combina-tion with other products etc.

- Actual price and its perception by the client(Exp.: Media Markt, Praktiker, Lidl)

- Basis: framing effects

- Price communication is influenced by thecompanies‘ strategic price positioning

Source: Th. Angerer 2012, dt. Preisstudie 2009, Simon/Fasnacht 2008

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 6

• Price communication: What does the insurance industry do?

- Cost-oriented pricing (see discussion regarding „unisex rating“ in the EU)

- Customers‘ willingness to pay is rarely taken into account

- Different distribution channels with slight price differentiation

- Moderate transparency regarding price and performance

- „Law of one price“ does not apply in the insurance sector

- Rarely price component breakdowns (pressured by regulator)

- Price presentation in absolute form (prices not time sensitive)

1.

2.

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 7

• Example: Comparis CH1.

Audi A3, HP mit BS, TK mit SB 0, KK mit BS und SB 1'000, Pers. Eff., Unfall

Standard OKP Zürich, F 300, ohne Unfall

Jahresprämie Monatsprämie+54%

+74%

+39%

Health Insurance (OKP)Automobile Insurance

525

421

302

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 8

• Example: Automobile insurance Germany1.

Audi A4, parameters as in CH-offer for Audi A3

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 9

• Comparison with other industries

+ 100 %quasi homogenous product

Omega watches : Ebay / juweller

Opodo flight tickets Zurich-New York

1.

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 10

• This is astonishing, especially since policyholders perceiveinsurance companies as interchangeable …

Source:

BrandAsset™ Valuator – Schweiz –Versicherungen – Gesamtbevölkerung

1.

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 11

… policyholders tend to consider themselves as price sensitive …

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0% 20% 40% 60% 80% 100%

CH

DE

UK

F

NL

DKSupport-seeking individualists

Product optimizers

Uninterested minimalists

Price-sensitive analyzers

Relationship-oriented traditionalists

1.

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 12

1. … and insurance companies associate changes in their custo-mers’ behavior with increased price sensitivity

……

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 13

• I.VW study: Premium breakdowns and different forms of pricepresentation hardly have an impact on the demand

2.

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 14

- Nevertheless, regulators request this as part of a «transparencycampaign»; the insurance industry remain critical towardsbreakdowns

- In other industries, breakdowns have a substantial impact onthe customers’ purchasing behavior

- For a rational decision, solely thetotal price is relevant !

DUS-MNL via AMS; price breakdown:

AdultTicket Price 482,00 Ticket Service Charge -Fuel Surcharge 260,00 Civil Aviation Tax 45,00 Airport Tax for Passenger Service 15,27 Security Charge 14,50 Airport Tax for Passenger Service 12,66 Noise Protection Surcharge Netherlands 4,00 Airport Security Tax 3,89 Total Price EUR 837,32

Number of Passengers 1

2.

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 15

• Extreme case: price communication at airlines

- Differs from the insurance industry’s price communication inevery aspect

• Examples:

- Pricing is based on the customers’ willingness to pay

- Capacity-oriented price determination

- Pricing is strongly time dependent (remaining time until depar-ture, time of the day, day of the week etc.)

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 16

• Cost-oriented pricing in other industries

- Example: Porsche 911 versus 911 S

- Price: 123‘000 CHF versus 141.300 € (2013)

- Clear focus on the customers‘ willingness to pay

Link to the discussion about «unisex rating» in the EU: Proof of an input factor’s significance with regard to the product

price in other industries?

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 17

• Hypotheses regarding the pricing in insurance companies

- The pricing of insurance products is about to be revolutionized: In the future, pricing will be basedon the customers’ willingness to pay and optimal «price – quantity – combinations»

- Actuarial pricing (solely) used to determine lower price limits

- The market will be become more competitive. The products, however, will develop rather lesshomogenously

- The market will be characterized by supplementary services (which in return will result ininhomogeneity)

Page 18: The Insurance Business Model -What Will the Future Bring? · PDF fileThe Insurance Business Model -What Will the Future Bring? 13. June 2013 Professor Dr. HatoSchmeiser

The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 18

3. Life insurers’ business model under pressure

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June 2013Slide 19

Current study of I.VW

• Customers seek long-term investmentguarantees

- However: Is their willingness to paysufficient to cover the costs?

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 20

• Obtaining the guaranteed interest proves very difficult

Currently: flat yield below 1 %

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 21

• Investment structure of a life insurer – very few degrees offreedom

(E0 = 0.11, = 0.89)

With Solvency II and the requirement of a minimum interst rate follows strictly

the adjustment of the amount of the equity

capital (E0)

and at the same time

the derivation of the investment structure ()

rf = 3.00%g = 1.75%

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 22

rf g

Save investment(100% risk-free)

1

rf – g 0

investment 100%

No scope for risky but promising investments “forced” investment

structures in practice solely safe at first sight, since hardly

diversified Minimum interest rate guarantee practically worthless, Inv. mglw. unfavorable compared to direct investment; investment portfolio without potential regarding profit participation

g = 1.75%

rf = 4%

rf = 2%

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 23

• Just a vague theory?

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 24

• Hypotheses regarding the future of combined endowmentinsurance

- In the current situation, this product looses its attractiveness (option practically worthless, profitparticipation limited)

- Financing of this business model is hardly possible from the stakeholders’ point of view

- Scenarios: Interests go up? Lowering of the guaranteed minimum interest rate?

- Insurance industry will switch to alternative saving products, a delimitation with regard to theinvestment funds industry is mandatory

- Pressure on transaction costs (also applicable to other divisions) will increase drastically

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 25

4. Regulation in the insurance industry

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 26

- Solvency II (2017?)

- Reform of VVG and insurance brokerage directive

- Unisex rating in the EU

- EU insurance guarantee fund

…….

• Re-regulation

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 27

• Solvency II (2017?)

- Current I.VW study: Nothing truly fits in the standard model, impacts on the insurers’ assetallocation are absurd from an economic point of view; in addition: the actual ruin probabilities differsubstantially from 0,5%; the absence of an obligation to deposit in the context of government bondsin the EU is politically motivated, with regard to stability of the system very dangerous

- Unisex rating in the EU

- Current I.VW study in 5 European countries: The application of „gender“ as a rating element is notperceived negatively by the customers

- Insurance brokerage directive

- Despite estimated costs summing up to a three-digit million figure, there is no analysis whether theinsurance brokerage directive resulted in better-informed customers

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 28

• Hypotheses regarding the future of insurance regulation

- There needs to be and there will be a trend towards “better”and not “more” regulation

- Regulative concepts will have to undergo a well-foundedcost-benefit analysis

- In my opinion, the continuation of the existing qualitystandards of re-regulation can be ruled out

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The Insurance Business Model – What Will the Future Bring?Business Models

June 2013Slide 29

5. Summary and outlook