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Changes afoot for Irish insurance industry Back  
Simon Glancy sets out a series of scenarios that he believes will influence developments in the insurance industry over the next five years and also discusses some strategic options for companies operating in the sector.
The insurance industry has been less affected by the type of fundamental changes that has changed the face of the retail-banking sector in particular utilising the internet to develop new products and services. A series of mergers and acquisitions, the recent introduction of a new disclosure regime in the life market and growing channel diversity have not radically changed the underlying structure of the insurance industry so far.

Perhaps the most significant development in the past decade has been the success of the two leading banks in carving out commanding positions in life assurance, pensions and other retirement savings which have experienced substantial growth rates in a buoyant economy.

We believe the current status quo is now changing for a number of reasons:

• Notwithstanding the recent difficulties being experienced by many e-commerce companies, the Internet is inevitably leading to the emergence of entirely new business models for competing in the insurance market and retail financial services in general. These will take time to make a major impact as firms grapple with the uncertainties and associated risks of launching new ventures.

• Consumer attitudes about the importance of financial services in their lives are changing leading to heightened awareness about the need to bridge the income gap between state cover and their private retirement income. This is creating a market opportunity for informed financial planning through companies offering a range of knowledge and advice-based services - especially in markets like pensions and long term savings.

• There will be a gradual introduction of integrated products that combine insurance cover, revolving loan, current and savings accounts facilities hitherto treated as entirely different customer propositions.

• The lack of any substantive differences in the product and service offers of many established players and lower brand impact of insurance offerings compared to other financial services providers. This has a knock-on effect on customer retention levels.

Six scenarios
E-commerce will lead to entirely new business models for competing in insurance and throughout retail financial services. Greater consumer acceptance of e-commerce as a means of transacting business and sourcing information and advice will undoubtedly be key factors driving change in financial services leading to new business models and providers competing in the marketplace. Recent figures from Amarach show that the number of people using the Internet increased by 50 per cent in the 6 months between October 1999 and February 2000. This is equivalent to 22 per cent of the adult population and could rise to 25-30 per cent this year and compares favourably to the UK figure of 20.5 per cent (11.5 million home users) in December 2000 according to NetValue. The options open to companies are to:

• underwrite and retail insurance services

• act as a gateway to its and other suppliers products and services

• act as a product and service integrator - an increasingly common feature in the US

• act as a product specialist

The majority of these entrants are likely to be offshoots of existing providers keen to exploit opportunities to reduce the costs of using more high cost sales channels while also leveraging their existing brand values and customer franchises.

The biggest challenges facing established companies will be developing a distinctive offering to suit the needs of this rapidly evolving market while at the same time integrating their e-commerce offer with those already available through more conventional channels. Although new entrants adopting a focused e-commerce strategy have the potential to carve out entirely new markets they still face significant challenges to quickly build up market share and achieve profitability within a 3-5 year period. This makes it unlikely that Ireland will see many broadly based new entrants competing in the market operating independently of existing local providers.

Wider strategic networks of companies will collectively develop emerging market opportunities. To date the response of many insurers and wider financial services groups has been to work independently of even other companies operating within the industry. This is set to change as new skill-sets, organisational structures and even changes in corporate culture are required to compete in the future marketplace.

The sheer scale of investment involved will also contribute to the emergence of networks of far more diverse service providers. These cross-industry networks will create entirely new strategic groupings collectively developing market opportunities and become far more common than individual initiatives by Irish institutions. So far there has been little evidence of this other than Tusa, the joint venture between TSB Bank (now part of Irish Life & Permanent) and Superquinn.

The dominant partners in these groups will most likely be those with:

• established brands and substantial customer franchises

• know-how and expertise in the planning, delivery and maintenance of e-commerce services

• experience in developing product and service propositions specifically for the e-economy

• advanced skills in customer analysis, profiling and retention

• corporate vision explicitly committed to the new e-economy

Few firms can boast all or many of these credentials in Ireland however it is non-FS providers who are likely to be in pole position drawn from the ranks of Eircom, BT (now the owner of ESAT and Ocean) and Sky Digital. Many of these networks will consist of a mix of financial services, e-commerce, telecoms and entertainment providers aggregating distinct groups of consumers who have specific service requirements.

Mergers will become less important than strategic alliances in an already heavily concentrated market. Ireland, like other European markets, has already seen a reduction in the number of suppliers of insurance and integrated financial services. However the fact that Ireland’s insurance market financial services industry are already one of Europe’s smallest and most concentrated making the potential for further consolidation within the financial services industry limited. The focus of acquisition strategy is likely to change with established providers seeking to fast-track competitors in their own industry by accessing new technologies and delivery systems through vying to work with new economy companies that already hold commanding positions in these key emerging consumer markets.

Acquiring broad market share will become far less important than dominating specific strategic customer segments and partner’s customer franchises. These segments are likely to encompass the growing numbers of young, high net worth twin incomes, especially those working in the IT and software industries, returned emigrants and expatriates residing in Ireland. Advances in customer databasing and profiling technology will make this a far easier proposition and allow providers to target those customers with the greatest income/product potential with increasing precision.

An intense phase of product and service development will occur spurred on by the e-environment and cross-industry partnerships. The surge in web-based retail transactions across the economy should have a beneficial effect on injecting new life into product and service design in financial services making offerings more creative and relevant. If there are more cross-industry alliances, involving financial services as well as other retailers, the opportunity to gather and share much broader information about customers’ lifestyles and attitudes will be far greater. Not only will financial services providers have more broadly based strategic information to utilise in product and service development but they should also benefit from the input of partners using an entirely different approach to creating customer value. This should feed through to new customer propositions if such alliances are to have any real long term benefit.

Customer ownership and the management of customer relationships will become more complex and will probably no longer be exclusively controlled by a single service provider. An inevitable consequence of financial institutions seeking to reach customers through new sales channels is the loosening of direct ties between customers and traditional service providers. This is a trade-off financial institutions will increasingly have to make in order to access lucrative new market segments. Even the largest financial institutions are likely to spin-off some parts of their operations where they neither have, nor want, to acquire the necessary expertise or expense to operate these activities themselves. This process will accelerate moving from often low valued added back office operations to high value, high visibility customer services at the initial point of contact. Much of this will involve sales generation through warm customer leads by a variety of new web-based intermediaries operating throughout retail financial services.

Customers’ competitive reference point for dealing with financial services providers is no longer confined to other providers in the sector. Customer loyalty will inevitably decline as new entrants offer new service propositions and better value while the Internet facilitates far greater comparison-shopping and to a lesser extent changes in product design. Customers now have greater empowerment alongside dependency and will increasingly gather information and compare options themselves - then go direct to product suppliers, essentially a DIY approach. This creates a market opportunity to provide knowledge based services to assist customers manage their personal financial planning. Any models of this in Ireland?

The impact of Bank of Scotland in the mortgage market, or Quinn Direct in personal lines shows that customers are increasingly prepared to move if there is a better offer and that new entrants can create a strategic space in a market characterised as highly competitive. This does suggest customers are responding positively to new propositions offered by these new suppliers.

The status quo in the Irish insurance is changing and established incumbents in industry are and will continue be challenged by new service providers opening up new market spaces primarily through exploiting e-commerce as an entry strategy to develop new product and service propositions.

The size of the Irish market, compared to other European countries is no longer a deterrent to entry. The increase in disposable income makes Ireland a lucrative hunting ground for retail financial services although general insurance is less attractive due to claims experience, low growth rates (check) and margin attrition.

• Establish a fully-fledged stand alone e-commerce operation operating under a separate brand. This is probably the most high risk option in the current uncertain climate. There are few precedents for this, possibly Anglo-Irish Bank’s new life assurance venture. Justifying the scale of investment involved would require broad customer coverage however major benefits are exclusive customer ownership and first mover advantage in the marketplace.

• Develop strategic partnerships with other service providers and service facilitators. These could be within and outside financial services involving retailers, telecoms and entertainment providers. Benefits of this approach are augmenting the existing service offer with other relevant customer propositions, mining several customer franchises and building up a broader picture of customer lifestyles and shopping behaviour.

• Wait and see how the market develops. The spate of internet related failures and disappointing returns from many e-commerce operations acts as a warning to firms against moving first into an evolving and uncertain market. Most financial institutions are adopting a wait and see position until greater consumer penetration rates are achieved for online purchasing, consumer perceptions about security are resolved and the technical and legal difficulties associated with selling complex financial products, like life and pensions, are fully addressed. Another uncertainty is possible channel conflict. All of these factors have seen many institutions confine their involvement to using the Internet primarily as an information and marketing tool.

• Introduce e-commerce services as part of an existing channel proposition. This strategy has already been widely adopted with many institutions seeking to combine fledgling internet operations with established call centres.

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