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N째 211 January / February 2008
COVER STORY
Insurance
Claims management SEB SME: a high potential target NEW SURVEY World insurance report 2008 issue, by Capgemini
FOCUS Islamic banking FINANCIAL CRISIS From subprime to the real economy
European financial management & marketing association www.efma.com
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Insurance Brussels, 31 January - 1st February 2008 The following experts will take the floor Nathalie Broutèle, Natixis Assurances
Dominique Monéra, AGF
Christa Decaestecker, ING
Laura Piatti, Intesa Sanpaolo
Bernard Delas, Crédit Agricole
Gert Rammeloo, Kredyt Bank & Warta
Arnaud Giraudon, Suravenir
Vincent Reina, Genertel
Isabelle Grosmaitre, April Group
Virgil Soncutean, Allianz
Johan Hosselaer, Fortis Insurance International
Martial Stambouli, MMA Vie
Michael Kehoe, Zurich Financial Services
Eveline van Baar-Verwijmeren, Eureko
Multichannel management and customer challenges Insurance companies use a high number of distribution channels: exclusive agents, brokers, partnerships with banking networks or with CGPI, direct sales… The objective of this conference is a close review of this selling approach: - Which client segment prefers which type of channel and for which product?
- How the insurance companies coordinate this multichannel approach? - What is the future for insurance sales through the new channels? Each participant will receive a copy of the "World Insurance Report 2008" prepared by Capgemini and dedicated to distribution channel integration.
www.efma.com/insurance
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Efma Magazine 16, rue d’Aguesseau 75008 Paris Tel.: 33 1 47 42 52 72 Fax: 33 1 47 42 56 76 www.efma.com - info@efma.com Publisher Patrick Desmarès Executive director, Efma Head of content management Daniel Lacotte, Efma Deputy chief editor Charlotte Collonge, Efma Editor Christiane Rollin, Efma Layout Florent Chagnon, Efma EDITORIAL BOARD Chief editor Ian McDonald Head of international clients Barclays Bank plc France Marc Alaurent Business relations director Laser Dominique Claudel Directeur des études stratégiques banque de détail Société Générale Emmanuel Guian Managing director Quintess Josiane Lancelle Strategy director Banque Fédérale des Banques Populaires Philippe Laulanie Responsable du département développements multicanaux BNP Paribas Bernard Normand Directeur central honoraire LCL Jean-Christophe Picard, Chargé de mission, Direction générale adjointe Assurance MACIF Yannick Picard Directeur du marketing de l’offre MAAF Assurances Christophe Preschez Directeur Internet et innovation CNP Assurances Stéphan Salberter Group Communications ABN Amro Philippe Wallez Directeur du marketing ING Belgium ILLUSTRATIONS Nicolas Leman PRINTED BY Groupe Corlet imprimeur 14110 Condé-sur-Noireau ISSN : 1771-4222
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In this issue
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I Interview with Bernard De Gryse
COVER STORY
“From industrialisation to financialisation” .................
p. 34
I United Kingdom
“Pay as you drive” insurance ........ p. 36
I Japan
An urgent need to encounter customers .............
I MMA in UK
Outsourced claims handling ........
I Spain
Repairing instead of financing
p. 39 p. 42
...... p. 44
I Genworth
Staying ahead of customer expectations ...........
p. 46
I France
Service offerings improve claimants’satisfaction ..............
Insurance: claims management
I United States
Redefining the claims process
I Bancassurance
Reinforcing customers’ loyalty
p. 48
..... p. 50 ..... p. 53
The European challenge
Focus
• Regulation “Solvency II”, issues at stake in Europe
• Interview with Zamir Iqbal, World Bank “Emphasizing the concept of justice”. . . . . . . . . . . . . . . . p. 22
. . . . . . . . . . . . p. 9
Studies • Online consumer behaviour Internet keeps the pressure . . . . . . . . . . p. 11
• WIR 2008 New opportunities emerge for insurers p. 12
• European retailers Banking at the mall
• Analysis Islamic investment management, the way forward . . . . . . . . . . . . . . . . . . . . . . . . p. 24
Products and markets • Wealth management Serving the UHNWI (Ultra High Net Worth Individuals) . . . . . . . . . . . . . . . . . . . . p. 26
Trend • Financial crisis From subprime to the real economy
. . . . . . . . . . . . . . . . . . . p. 16
Strategy • SEB SME: a high potential target
. . . . . . . . . p. 19
................
p. 30
And more... I News and trends p. 4 to 8 I People p. 55 I Books p. 56 I Event to come p. 58
EUROPEAN FINANCIAL MANAGEMENT & MARKETING ASSOCIATION 16, rue d’Aguesseau - 75008 Paris - Tel.: 33 1 47 42 52 72 - Fax : 33 1 47 42 56 76
www.efma.com
>>> N°211 - January / February 2008 Efma(g) | 3
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trends
STRATEGY AND ACQUISITIONS
AXA launched a European retail bank The insurance company AXA has decided to merge its banking subsidiaries in Germany (AXA Bank), Belgium (AXA Banque Belgium), France (AXA Banque) and Hungary (Ella Bank) into a single European bank, called AXA Bank Europe and which will start operating in 2008. AXA Banque Belgium will be the centralizing legal entity and the other three banks will operate as subsidiaries. This European banking cluster is intended to enable AXA to improve and intensify its range of retail banking products and services on national markets where competition is tough.
A Polish partnership for Aviva The British insurance company Aviva has concluded an exclusive fifteen year partnership agreement with the Polish bank Bank Zachodni WBK (BZ WBK). Under this agreement BZ WBK will distribute life insurance and general insurance products in Poland. Aviva and BZ WBK will set up two joint ventures and will each contribute 50% of the total £13.2 million capital for the new companies. The life and general insurance products developed by the two joint venture companies will be distributed by the BZ WBK network which has 400 branches and 1.4 million customers.
Santander sold Antonveneta The Spanish banking group Santander has sold the Italian bank Banco Antonveneta, that it recently acquired as part of the ABN Amro break-up, to Monte dei Paschi di Siena (MPS) for a consideration of €9 billion. MPS is financing 50% of the acquisition via a share issue and another 20 to 30% via asset disposals. Santander will make a profit of €2.4 billion on the sale, while this 4 | Efma(g) January / February 2008 - N°211
acquisition will make MPS Italy’s third largest bank, increasing its market share from 6.2 to 9.3%, behind UniCredit and Intesa Sanpaolo. The deal will also add more than 1,000 branches to its network, i.e. 3,022 in total, with a particularly strong presence in the north of the country.
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Mapfre acquired an American insurer Mapfre, the leading Spanish insurance company, announced at the end of October 2007 that it had acquired the Commerce Group, America’s twentieth largest insurance company, in a deal valued at $2.2 billion (€1.53 billion). Commerce, which is headquartered in Massachusetts, is particularly active in non-life insurance and has 31% of the automobile insurance market in its home state. Commerce, which operates in 17 other states, generated €1.368 billion in premiums and a net profit of €168 million in 2006. Mapfre’s existing subsidiary in the United States will be merged with Commerce.
Swiss Life is selling its private bank The Swiss insurance company Swiss Life is selling its private banking subsidiary, Banca del Gottardo, to BSI the banking subsidiary of the Italian insurance company Generali in a deal valued at 1.87 billion Swiss francs (€1.13 billion). BSI and Banca del Gottardo, which already work closely together, in particular sharing the same IT platform, are expected to be merged once the deal has been finalised, probably in the first quarter of 2008. As both banks are headquartered in the Italianspeaking Swiss canton of Ticino, a large part of their business involves high net worth clients in Northern Italy.
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... so did Munich Re The German company Munich Re, the world’s second largest reinsurer, announced in mid-October that it had reached an agreement to acquire the American insurer, Midland, in a deal valued at $1.3 billion (€917.3 million) payable in cash. This deal will enable Munich Re to double its operations in the USA. Midland, which is headquartered in Cincinnati, Ohio, is present in all American States and has 1,200 employees. In 2006 it generated some $832 million in premium income for a net profit of $71 million. The projected synergies are expected to generate savings of $11.2 million in 2008 and up to $62.5 million in 2012.
ING to launch a retail bank in Ukraine The Dutch bancassureur ING has announced its intention to open a retail bank in Ukraine in 2008. The retail banking sector is growing rapidly in Ukraine and ING plans to invest some €100 million there over the next two years. Several Western European banks, such as BNP Paribas, Crédit Agricole, Erste Bank, Intesa Sanpaolo and Raiffeisen, are already present in Ukraine, in most cases via the acquisition of a local bank. ING has already launched a similar type of retail banking operation in Romania, where it has been operating since 2004 and now has 140 offices and some 400 000 customers. N°211 - January / February 2008 Efma(g) | 5
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News trends
COMMUNICATION
A bidimensional adverting campaign for Sabadell To promote its mortgage product “Hypoteca Joven” aimed at young people (maximum age 30), the Spanish bank Banco Sabadell is using “bidi”, the bidimensional code technology developed by Movistar. Interested customers take a photo with their mobile phone of the code included, like a barcode, in a printed advert. This code then enables customers to obtain additional
DISTRIBUTION
Hard-to-please customers According to a pan-European study conducted by TNS on behalf of Fujitsu Services among 2 500 consumers in Germany, Spain, France, the Netherlands and Sweden, bank customers want both online banking and face-to-face contact in a branch. Customers have a clear preference for these two channels, without wanting to sacrifice one for the other. Call centre contact is their third choice, while mobile services came last. The survey also reveals a disparity between what banks think customers want and what users would really like. While banks believe that a wide range of products is the key factor for customers, the latter attach the most importance to brand reputation and the quality of the information provided regarding products and services. 6 | Efma(g) January / February 2008 - N°211
information and a promotional video presentation of the product on their mobile phone. This marketing operation is part of the “Instant Banking” innovation programme, the result of the cooperation agreement concluded in May 2007 between Banco Sabadell and the operator Télefonica.
Société Générale to open a Pan-African branch The French banking group Société Générale recently opened a new specialised branch in Paris for customers having close business ties with Africa, based on the concept of “Your Bank here and over there”, which offers all the products and services available in France and their equivalent in Africa. The bank also hosts the rep offices of four Société Générale subsidiaries in Africa: the Cameroon-based SGBC, the Ivory Coastbased SGBCI, the Guinea-based SGBG and the Senegal-based SGBS. Société Générale has already opened several co-branded branches: with its Senegalese subsidiary in Paris and with its Moroccan subsidiary Société Générale Marocaine de Banque, also in Paris and in the Paris region, as well as in Lyons. It is also planning to open shortly a branch in Marseilles with its Algerian subsidiary, Société Générale Algérie.
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PRODUCTS AND SERVICE OFFERINGS
Colombian fans of remote banking services At the end of November 2007, Colombia’s largest banking network Redeban Multicolor, the country’s mobile phone operators and Gemalto, the digital security specialist, launched a mobile phone based remote banking service. A secure software application storing the subscriber’s specific data is inserted in the phone’s SIM card and a server interprets the messages exchanged between the bank and the SIM card. Customers can use this solution to perform secure banking transactions, check their account balance, transfer money, pay bills, etc. Since this new service was launched more than half a million transactions have been recorded, i.e. approximately six transactions, per active user, per month.
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A private ATM dedicated to retailers Bank of America is innovating by offering retailers a new cash management service. It is currently piloting a new automated, secure, in-store cash storage solution with the restaurant chain Chick-fil-A. In addition to storing cash, the solution counts the amount of funds received and allows funds to be credited immediately to the retailer’s account. This system has several advantages: notably, the customer’s account is credited very rapidly, even before the funds are physically transferred, the bank has an immediate real-time view of transactions on the retailer’s account and the system is more secure with fewer fund transfers. Retailers can also withdraw cash from the system as and when needed, with the amount being debited immediately to their account. This new system functions in effect like an ATM dedicated to a single user.
The Banque Postale launchs its first consumer credit A new product available The banking licence granted to Banque Postale, the via mobile phone banking subsidiary of the French Post Office, at the end of 2005 restricted its credit offering to mortgages. However, Banque Postale is to be authorised to expand its range of financial services to include consumer credit and it plans to launch its first consumer credit products at the end of 2009 or in early 2010, once it has selected a partner. This partner, with which it will set up a joint venture to develop products, will be selected via a type of tendering procedure. Banque Postale intends to offer consumer credit products at affordable prices while being particularly attentive to the need to prevent over-indebtedness.
The card issuer Visa Europe and the mobile phone software provider Monitise are working together to offer a prepaid account that can be accessed by mobile phone. Consumers will be able to load the account with funds from either a bank account or a credit or debit card. They will then be able to use their account for online purchases or to send it to a third party via their mobile phone. This new service is expected to be popular with young people and people wanting to offer gifts. Future services planned include checking account balances, money transfers, etc. N°211 - January / February 2008 Efma(g) | 7
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News trends
CARDS AND PAYMENT INSTRUMENTS
Sale of credit card businesses by HSBC The UK banking group HSBC has sold its Marble and Beneficial credit card businesses to SAV Credit, a card issuer owned by the Palamon Capital Partners investment fund, in a deal worth £385 million (€549 million). Marbles, which was launched in 1999, was one of the first British online cards. Beneficial issues affinity cards with more than a hundred partners such as charities, sporting clubs, commercial companies, unions and professional bodies. The two credit card businesses have a total portfolio of 338,000 customers. This sale reflects HSBC’s intention of refocusing its credit card strategy.
Western Union enables cross-border transfers Western Union, the international money transfer specialist, has concluded a partnership agreement with GSMA, a trade association representing mobile phone operators, in order to develop a system which enables cross-border transfers to be made via mobile phones. This new service which is due to be launched in the second quarter of 2008 will enable money to be sent and received via mobile phone, including to and from the Western Union network. Western Union has a network of 312,000 agencies in more than 200 countries and handles approximately 17% of all international money transfers. GSMA is a trade association representing 35 mobile phone operators which have some 800 million customers in a hundred or so countries. 8 | Efma(g) January / February 2008 - N°211
A new European network Six national debit cards have joined forces to set up a new European card payment network called EAPS (Euro Alliance of Payment Schemes). The founding members of EAPS are Cogeban, which operates PagoBancomat and Bancomat in Italy; EPCS (European Card Solutions) which manages Electronic Cash as well as the Deutsches Geldautomatensystem ATM network in Germany; Eufiserv, which processes card and ATM transactions for European banks and savings banks; Euro 6000 in Spain; Link Interchange Network in the United Kingdom and Multibanco in Portugal. EAPS, which is headquartered in Brussels represents more than 222 million cards issued in Europe and almost 190,000 ATMs, is due to begin operations on 1st January 2008.
Halifax is testing Visa’s payWave technology The British bank Halifax is testing a contactless debit card using Visa’s payWave technology with 25,000 customers in London. For low value payments (less than £10 i.e. €14), users simply waive the card over a reader; for payments in excess of ten pounds or to withdraw cash from an ATM, the card is used in the customary way. The new cards can be used in a thousand or so retail outlets in London, including service stations, cafés, bookshops or restaurants such as McDonald’s, Coffee Republic, Threshers, YO!Sushi, etc. According to the APACS, the number of contactless cards issued is expected to exceed five million by the end of 2008 and be accepted by at least 100,000 retailers across the UK.
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The European challenge Regulation
“Solvency II”, issues at stake in Europe How far will the insurance sector reform instituted by the Solvency II directive go? The solvency regime proposed by the European Commission is both ambitious and sophisticated. It now remains to be seen whether this reform will successfully negotiate the hurdle of adoption by Europe’s co-legislators and whether its realisation and implementation will subsequently meet the European Commission’s ambitions. By Marc Jamet Euralia
he European Commission launched its Solvency II directive on 10 July 2007. The Commission’s primary objective is to spur the internal insurance market while ensuring policyholders are protected at European level in case a company Marc Jamet fails. Solvency II is explicitly inspired by the rules established by the Basel II directive for the banking sector, and notably the authorisation given to insurance firms to use internal models to calculate prudential capital requirements. Generally speaking, the Commission has wished to coherently integrate the insurance sector within the framework of internal market regulations, and the internal market for financial services in particular, by taking financial market innovations into greater consideration. The standard ingredients found in Commission initiatives over the last few years are all present: consumer protection, the obligation to ensure proper governance and to keep trade professionals informed, along with a focus on market supervision. The European Commission’s credibility is at stake in this text to a degree since it includes a number of innovations, such as the implementation of group supervision for companies that are active in several Member States. The text has been the object of considerable preparatory work, with input as much from the European Parliament as from the Council, and also from trade professionals and consumers. Since 2005, the CEIOPS (Committee of European Insurance and Occupational Pensions Supervisors) has organised ten consultations concerning the various points in the directive and has published several series of in-depth quantitative impact studies that gradually established the directive’s framework. Insurance professionals have
T
already had numerous occasions to express themselves, either during these investigations or during conferences organised by the European institutions. For all that, it seems that the insurance sector is unevenly prepared for the directive. The major European groups (fourteen companies account for 80% of the European insurance market) became involved early on in preparing the text and they state that they are 90% ready to implement the new prudential regime in 2010 (B&W Deloitte, CEA), while the small and medium-sized insurance companies, as well as the mutual insurance sector, declare that they are much less prepared to withstand the shock of a new regime. Having doubtlessly participated in the debate much later, mutual insurers and small firms are now seeking to influence discussions and particularly at European Parliamentary level, in order to draw attention to the distinctiveness of their own activities. The Parliament and Council are working together to ensure that an agreement is reached as rapidly as possible from the very first reading, although the directive’s adoption by European co-legislators might come up against several fundamental issues. Labourite Peter Skinner, European Parliamentary rapporteur for the draft directive, took part in its deliberations very early on and the sensitive issues in the text quickly became apparent. Among them, the protection of policyholders when an insurance company established in another Member State fails should receive special attention from members of the European Parliament. Some MEPs indeed got their fingers burnt with the failure of the British insurer, Equitable Life. The Council has also begun to work on the directive and it comes as no surprise that the most sensitive subject is the directive’s institution of group supervision. The 4 December ECOFIN Council of Ministers revealed that several Member States, including Spain and some new >>> N°211 - January / February 2008 Efma(g) | 9
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The European challenge
>>> Member States, are worried about their national
authorities losing control over companies operating in their territory but whose headquarters are established in another Member State. The European Commission will have to be very persuasive to incite Member States to relinquish some of their national supervisors’ prerogatives in favour of a group supervisor. It will be able to rely on the support of the European Parliament and of its rapporteur. It hopes that the directive may be adopted before the end of the French presidency in December 2008 and it is therefore remaining optimistic for an entry into force in 2010. Prior to that, the Commission and the CEIOPS will have to show that they did not neglect the fears of the Parliament and of the Council in preparing for the directive’s implementation.
The elaboration of the Solvency II directive has, to date, been exemplary. Nevertheless, the hardest part lies ahead since the new regime must now be implemented. The CEIOPS is already working on level 2 implementation measures. It is, in particular, studying the crucial issue of defining the standard formula to be used in calculating the solvency capital requirement and calibrating risk margins. During the parliamentary commission debates on economic and monetary affairs, European MEPs, who now have a say about implementation measures, warned that they would be very attentive as to the balance among the various segments of the insurance market to be instated by the CEIOPS. Another challenge will be to determine the position of pension funds (currently excluded from the directive). In their work programme for the year 2008, published on 21 November 2007, level 3 committees announced that they wanted to work towards bringing control over financial instruments with similar risk indices, although not governed by the same rules, closer together. In the long term, pension funds could see themselves associated in this way with the prudential rules and market discipline imposed by 10 | Efma(g) January / February 2008 - N°211
Solvency II. The CEIOPS will then have to ensure the directive’s appropriate, coherent implementation in all Member States. This is no simple matter. The Parliamentary rapporteur, Peter Skinner, recalls that the initial 2002 Solvency directive failed to modernise the European insurance market largely because its transposition and its implementation were too disparate within the different Member States. For the directive to be successful, it is essential that the European Commission and the CEIOPS manage to harmonise the way in which Solvency II is implemented. In order to ensure the success of its strategy, the European Commission launched a reform of the Lamfalussy process on 20 November 2007 that foresees, in particular, reinforcing the committees of European supervisors. The Commission’s proposal seeks to increase the financial allocation to the committees and suggests that the committees of European supervisors concentrate on the convergence of national supervision practices to a greater extent so that a genuine European supervision culture can ultimately emerge, which is the only way of guaranteeing the success of Solvency II (as well as of other legislation in the field of financial services). In order to promote the emergence of this culture, the Commission’s programme anticipates, in particular, exchanges of personnel among national authorities and the institution of discussions about group supervision that are as frequent and transparent as possible. We may well wonder whether these measures will be enough to reassure those Member States least inclined to relinquish some powers enjoyed by their supervisors to others. The Solvency II directive is a very ambitious project. We must recognise that its elaboration has, to date, been exemplary. Nevertheless, the hardest part lies ahead since the new regime must now be implemented. The Commission does not wish to stop there, however, and it could subsequently turn its attention to the distribution of insurance products. For 2008, it foresees a possible review of the insurance broking field that might integrate some of the conclusions arrived at in the Directorate-General on Competition’s sectoral investigation about the retail banking and insurance sector. I
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Study Online consumer behaviour
Internet keeps the pressure up The 2007 version of the survey1 carried out by Novamétrie, in partnership with Capgemini, Crédit Agricole, Microsoft, MSN and Efma2, has once again confirmed the development of the Internet as a sales channel for financial products. Unsurprisingly, it has re-affirmed the immaturity of southern Europe in relation to northern Europe, in terms of purchasing behaviour. It has also announced the coming challenges facing financial institutions.
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o time to rest for banks: for those that missed the previous versions, Novamétrie has reinforced the message, by making it clear that online sales of financial products could triple by 2011. In any case, this is the firm belief of the banking executives questioned for the survey. The most popular products with Internet users include car and house insurance policies, the opening of a current account and, close behind, payment cards and savings products. In addition to these conclusions, a single observation has emerged over the years, i.e. a clear disparity between northern Europe (Sweden, the United Kingdom and Holland) and southern Europe (France, Spain and Italy). The survey reveals that online sales forecasts for the latter category are equivalent to the current figures for the northern European countries, representing a gap of four years. The Internet’s impact on the purchasing behaviour of Internet users: for 89% of those questioned, the Internet is today the “primary source of information prior to acquiring a financial product”. This represents an increase of 12 percentage points compared with the 2006 survey. The survey also reveals that the number of Internet users who expressed that they are both autonomous in their decision to purchase financial products and keen to do as much as possible online has significantly increased, rising from 39% in 2006 to 55% in 2007. The “everything online” approach is nevertheless less popular with French Internet users (23%) than with British ones, who are in the lead with 64%, ahead of the Spanish (42%) and the Italians (41%). Developments in the distribution of financial products and services: the Internet is now seen as a strategic priority by the major European banks. These banks have observed that their clients are becoming increasingly numerous and knowledgeable in the use of the Internet. Indeed, more than two thirds of those
questioned have acquired a product online during the last twelve months. The Internet is also contributing to a decrease in the number of clients visiting their local branches. 76% of the clients expressed that, thanks to the Web, they are not obliged to see their advisor so often. These meetings, which are becoming increasingly rare, are also now held in a different spirit. The Internet is intensifying and turning the focus on the price war, notably as a result of the niche players in the market (online specialists and banks). 58% of Internet users also stressed that they use the Internet to find the best pricing conditions. This represents an increase of 26 percentage points, and is the statistic showing the biggest growth since 2006. The development of sales on the Internet and network reconfigurations are currently the major issues preoccupying the main European banks. The acquisition of financial products is experiencing a dematerialisation trend, and the spread of financial products by channel is seeing growth. Thus, in Europe, 86.5% of sales are still carried out via the branch networks (13.5% through online sales). By 2011, however, the development of multi-channel sales and the reconfiguration of these branches should lower the proportion of sales of financial services and products carried out by the networks to 70%. In view of the changes in client behaviour, it is now important to adapt sales practices and consultant skills to the new requirements, and to invest in the remotepayment channels in relation to the expected volumes. I
1. This study is based on in-depth interviews involving more than 50 European senior bank executives and 5,000 online banking services customers in France, Italy, United Kingdom, Sweden and the Netherlands. 2. To receive a free copy of this report reserved to Efma members: vincent@efma.com
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Study WIR 2008
New opportunities emerge for insurers On the surface, mature markets offer insurers few opportunities for growth, but emerging shifts in customer and distribution patterns and preferences could provide significant opportunity for insurers, if they can recognize, embrace and exploit those shifts, says the 2008 World Insurance Report1 (WIR) from Capgemini and Efma. By Scott Mampre Vice-president, Insurance practice David Giblas Partner, Financial services Capgemini consulting
n the surface, customer behavior and network usage seem to be well-established and stable in mature insurance markets. However, emerging signs of change offer insurers new opportunities for growth. Among the report’s key findings: Scott Mampre 1. The insurance sector in mature countries is slowly moving from a very static state, to a more fluid one. Insurance companies can find opportunity in this shift by understanding, capturing and even creating volatile customer clusters in their markets. 2. Behavioral profiling allows insurers to better identify and understand the distinct attributes of different customer clusters. Insurers can more accurately gauge the value of each cluster by taking account of customer volatility, too. 3. Distribution-network2 usage varies greatly by country, and tends to be heavily specialized. Insurers can better address volatile customer clusters, retain full market access, and increase wallet share by adopting a structured multi-distribution strategy.
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The WIR survey asked customers about their actual purchasing habits, expected future purchasing patterns, and their insurance-buying attitudes, preferences and perceptions. The results reveal the tide in mature markets is changing in a way insurers cannot ignore.
12 | Efma(g) January / February 2008 - N°211
Customer inertia has long been an earmark of mature markets. The WIR notes that many mature insurance markets have become saturated, and the basic, existing insurance needs of most customers have largely been met. On average, its survey results show, a mature-market David Giblas customer holds 5.2 policies,1.5 life policies, and 3.7 non-life. Customers from these markets also show clear signs of inertia. On average, they hold the same policy for 9.2 years. Customers tend to hold life contracts longer than non-life products, but even highly commoditized P&C products are usually held for several years. For example, customers hold the same motor insurance for an average of 8.4 years. Longevity is also a manifestation of the underlying apathy on behalf of customers, most of whom (71%) even conceded a bad claims experience was not enough to prompt them to switch insurers. Clearly, then, leading insurers cannot rely on additional market penetration to achieve significant growth. Nor can they expect the underlying markets to expand dramatically.
New signs of volatility are emerging in the customer base. However, new signs of customer volatility are emerging, driven by increased competition, wider access to customers through a variety of distributors, growth in information resources, changes in regulation, and market innovation. Contract turnover is already increasing in some countries, such as Italy, Spain, and the US. For instance, in the UK, customers are switching products far more frequently than average, holding automotive insurance for only three years on average, and household and property insurance for just five years. Insurers can expect trends like those seen in the UK to become the norm in other mature markets in the
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Study
medium-to-long term, potentially leaving insurers with a smaller stable stock of long-term customers, and no easy way to replenish that secure-income segment.
Targeting revenues from volatile segments become a real opportunity. While increased customer volatility is clearly a potential threat to some insurers, it can be an opportunity for others if they can position themselves to capture and retain those high-value volatile segments. However, this approach requires insurers to be able to identify and assess the risks of volatility, and evaluate the potential rewards from enticing newly volatile customers to defect from competitors. The WIR research reveals there are currently four segments of customers in mature markets: Traditionalists, Opportunists, Indifferent and Average users. The segments display important and often distinct customer perceptions and attitudes toward insurance, its value, and potential, as well as actual buying patterns. They also have clearly distinguishable patterns and preferences when it comes to usage of and preference for different types of distribution networks.
breakdowns differ by country, but it generally holds true that countries with large Average and Opportunistic segments, such as France and Switzerland, are likely to see high volatility in a large share of their insurance population.
Identifying what is at stake for each value/volatility cluster. The value/volatility equation offers insurers additional, important insights on customer strategy. WIR researchers were able to identify four value/volatility clusters of customers. The position and underlying behavioral profile of each cluster reveals what is at stake for insurers (see Figure). In short: • The dependable-income cluster comprises highvalue/average-volatility customers, i.e., Traditionalists. These customers form the mainstay of dependable income and assets, as they are highly equipped, and tend to be more loyal than other segments. For insurers, the key is to preserve that level of loyalty, while using cost-effective service and acquisition strategies. >>>
Each segment has a different value, but volatility risk is a key dimension. Furthermore, each
7
6
5
Number of policies
of these segments rates differently on the value scale. For example, and perhaps not surprisingly, Traditionalists represent the highest value. They are more highly equipped, 20% above national averages for Switzerland, Germany and the US, and between 35% and 45% above national averages for the other countries surveyed. Proportionately, they also share their wallet with fewer networks than other segments. Importantly, customers from this segment also recognize the value of insurance. Opportunists, by contrast, may actually derive more value from insurance than they deliver, because they tend to seek the best value proposition, and try to optimize their portfolios (and thus seek out lower premiums). The value breakdown by country shows that Spain, the UK and the Netherlands have the greatest share of low-value customers, while Italy, the US and the Netherlands have the biggest proportion of high-value customers. However, the WIR notes there is an additional, more dynamic factor in the value equation: The level of volatility in the customer segment. Researchers analyzed several facets of customer volatility, and looked at the preponderance of different clusters on aggregate, and by country. Again, volatility
Average number of policies per customer (by country)
4
3
2
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0
On average, they hold the same policy for 9.2 years. Customers tend to hold life contracts longer than non-life products, but even highly commoditized P&C products are usually held for several years. Source: Capgemini analysis 2007
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>>> • “At risk” customers are from average-value/high-volatility
segments, i.e., Opportunists, and multi-network Average users. While clearly valuable, and of high potential, customers in this cluster may be tough to please, and will require insurers to remain innovative to retain them. Insurers may also be able to exploit the efficiency of the Internet as a distribution network to appeal to this segment. • Customers in the “Stagnant” cluster are from lowvalue/low-volatility segments, i.e., the Indifferent segments. This cluster presents a dilemma, as customer value is low, but so is volatility. Overall, a simple, clear, low-cost value proposition may be the most effective way to attract and serve low-profit customers, but insurers will also need to optimize costs, and find the right balance between the push and pull approaches to service this cluster effectively. • The remaining “Other” customers are from averagevalue/average-volatility segments i.e., Average users using
Value/Volatility clusters of behavioral-based customer segments
physical networks. These customers are characterized by an average volatility level, but the experience of the U.K. and U.S. suggests this cluster is likely to become extinct. Insurers will have to decide whether to try and speed up the evolution of their market, and seek to transform these customers into Opportunists they can capture, or preserve the status quo.
Distribution models are also evolving. The mix and usage of networks varies greatly by country, driven by country-specific customer needs, product usage, regulations, and competitive dynamics. Customers in some countries, such as the US or UK, have a greater propensity to use non-physical networks (e.g., Internet, phone). In other countries, such as France and Italy, customers rely heavily on traditional, physical networks (e.g., agents). Bancassurance has a strong foothold in Spain and France, and multi-tied agents/brokers/IFAs are a major network in the Netherlands. Internet is a clear winner going forward. Clearly, though, the WIR survey results suggest more changes lie ahead for distribution, and the most startling shift is in Internet usage. Internet distribution is perceived as a superior means of delivering the key factors that sway purchasers: price/return, product quality, and brand/trust. In the mature markets studied, 28% of customers said they intended to buy their life-insurance policies online in three years, and 34% said they would buy non-life policies online. Multi-distribution is critical, but is not the only Way to multi-equip customers. The rise of the
The value/volatility equation offers insurers additional, important insights on customer strategy. WIR researchers were able to identify four value/volatility clusters of customers. Source: Capgemini analysis 2007
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Internet clearly puts some existing distribution networks at risk. To evaluate the fallout, WIR researchers used data on customer demographics, usage and attitudes to analyze networks. They found many important differences in network profiles, and identified clearly definable strengths and weaknesses. Notably, they also demonstrated there is a clear trend toward specialization by networks, which realize they need to meet specific customers, products, or needs to thrive. This specialization, in turn, is forcing insurers to multi-distribute to retain access to all major segments of the existing and potential customer base, and to increase wallet share, the WIR reports.
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The WIR researchers went on to analyze network-usage patterns to study the link between multi-distribution3 and multi-equipment4. They found that the number of networks that customers use initially increases proportionally to the number of different policy types they hold. However, once a customer has acquired a comprehensive set of insurance products, their next logical step is to buy additional policies within an existing family of products. In the process, they become far more likely to return to existing networks than to use additional ones. This finding raises some important questions for insurers, which often assume they can multi-equip their customers by using one distributor to sell a range of product types. In fact, our data suggest distributors face a major obstacle in that customers favor the use of multiple specialist distributors, not the use of a single distributor as a multispecialist. In short, insurers certainly need to optimize the multidistribution strategy for a given customer segment, but they also need to know when to switch their efforts to pushing for multi-equipment by distributor, and that push has to begin when the customer reaches a certain, more mature, level of insurance usage.
Conclusion. The insurance landscape is clearly shifting, and three imperatives for insurers are emerging: 1. Managing the business impact of the changing market dynamics. In particular, insurers need to understand when to drive market evolution, and even encourage certain volatile behaviors. Those insurers that properly gauge the value/volatility stakes can define strategy more clearly. 2.Taking a more assertive role in the interplay with and among customers and networks. Insurers will need to be more proactive than they have traditionally been in
Methodology The 2008 WIR bases its findings on a survey of more than 11,000 insurance customers in ten countries, as well as interviews with industry executives in thirteen countries. The mature markets surveyed are France, Germany, Italy, the Netherlands, Spain, Switzerland, the U.K. and U.S. (The 2008 WIR reports separately on the two developing markets surveyed: China and India.)
managing their interactions with and among networks and customers, and work to differentiate their brand and reputation. Optimizing customer profitability will mean optimizing network use by segment, and properly monitoring customer and network value. 3. Embracing IT as both a prerequisite and a lever for overcoming the challenges. Three main IT focus areas can help insurers to overcome these challenges. Enterprise data warehouses, analytics, and customer intelligence can enhance customer knowledge, and hone behavioral-driven customer segmentation. Technology integration and service-oriented architectures (SOAs) could allow insurers to adapt and change their distribution capabilities according to market dynamics. Next-generation customer relationship management (CRM) tools can help insurers and networks to manage customers under a global, enterprise-wide umbrella Of these, the WIR argues, it is most critical for insurers to seek to optimize the complex interplay among the triad of insurers, customers and networks. This, the report says, is an area in which insurers are still struggling to plot a strategy that can maximize value—and it is the one area in which the only wrong action for insurers is to take no action at all. The “2008 World Insurance Report” explores underlying trends in customer behavior and attitudes, the current and future use of distribution networks, and the implications for insurers in eight mature markets. It also dedicates a chapter to Bancassurance, which has become an established and successful distribution model, catering to a specific type of customer and a specific set of needs. The report ends with a detailed spotlight on emerging trends in the key developing markets of China and India. I
1. The 2008 World Insurance Report (WIR) focuses on the retail insurance market. It covers both life and non-life segments (Health is included in non-life). 2. When we refer to “networks”, we mean the intermediaries that distribute insurance products, as opposed to “channels” which are the means of interaction used by networks. For example, tied agents together form a distribution network that can use multiple channels to reach customers (such as point-of-sale, telephone, Internet). The Internet can be a distinct network, or a channel used by networks, but we primarily refer to the Internet as a network. 3. Use of multiple distribution networks. 4. Multiple policies held with a single distributor.
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Banking at the mall UK retailers have led the way in offering financial services. Given their strong brands and customer service skills, retailers were seen as a real threat to retail banks, but a decade on, their impact has been more limited than many first anticipated. Maybe financial services are a poorer fit with mass-marketing retailing than many assumed? By Peter Welch BankEcon Steve Worthington Professor Monash University, Melbourne
n October 2, Tesco announced interim profits of £53 million for Tesco Personal Finance (TPF), its 50/50 banking joint venture with RBS. Tesco’s share was £26.5 million. TPF’s profits are now growing again, after two years of Peter Welch modest decline. But in the context of Group profits after tax of £938 million for first half 2007/08, TPF’s contribution to Tesco’s earnings remains modest. Are there wider lessons here? It is now more than ten years since Tesco sent shivers through UK banks by launching “Clubcard Plus”, a card-based savings account. Sainsbury’s quickly responded, launching Sainsbury’s Bank in partnership with Bank of Scotland (now HBOS). The supermarkets followed Marks & Spencer (M&S), the own-brand clothing, food and household goods retailer, which started offering financial services in the late 1980s. Financially, two of the three retailer banks have proved successful. TPF is now paying its shareholders substantial dividends. M&S sold its financial services business to HSBC in 2004, at a substantial premium to net assets. In contrast, Sainsbury’s Bank has struggled, reporting an underlying operating loss of £10 million in 2005/06 and little more than break even in 2006/07. However, the retailers’ impact has hardly been transformational. Their banking arms remain small compared with both the core retail businesses and major banks and insurance companies. Looking at their track record, two characteristics in particular stand out. First, the retailers have been highly selective in the financial services offered. Though it made a pioneering move into mass-market unit trusts (mutual funds), M&S largely focused on unsecured personal loans. This
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was understandable; it had a lowrisk customer base, and an advanced lending platform from its large, in-house store card operation. TPF and Sainsbury's Bank have focused on credit cards, unsecured loans, savings and insurance. Neither supermarket has competed Steve Worthington head on with the banks by offering a full suite of products based around cheque/current accounts. And both TPF and Sainsbury's Bank have withdrawn from the mortgage market, with neither building a large portfolio (TPF currently offers a mortgage broking service and mortgages from RBS’s First Active). (See tables below) Narrowly defined, a selective approach may make good business sense (the economics of cheque/current accounts in the UK work against new entrants for example). But it limits these retailers to being no more than niche players in financial services. And it sits a little uncomfortably with the supermarkets’ “one stop shop” approach to core household shopping. Second, even in their chosen markets, the retailers' market shares remain small. Both TPF and Sainsbury’s Bank have retail deposit portfolios of more than £2 billion. But these are marginal in the context of a UK deposit market of more than £600 billion. Collectively, the three retailers have unsecured lending (credit card and personal loan) portfolios probably approaching £10 billion. But the UK market is more than £210 billion, implying a combined market share was probably no more than 5%. (See table below) Comparing the retailers against the total market may be a little misleading given that they have grown organically from a standing start. But comparisons suggest that the supermarkets have grown more slowly than other new entrants, for example the internet bank
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Egg in consumer loans and deposits, and ING Direct’s UK arm in retail deposits. All three retailers are also active in the main personal insurance markets (motor, home, life, travel). TPF has built a substantial business, particularly in motor insurance where it is the thirdlargest issuer of car insurance policies in the UK. However, to the extent it can be estimated from available data, the retailers’ overall share of the general insurance business appears comparatively small.
Supermarkets have grown more slowly than other new entrants, such as the internet bank Egg in consumer loans and deposits, and ING Direct’s UK arm in retail deposits. Given their strengths in marketing, innovation and customer service, why have the major retailers not made more of an impact? First, retailers’ banking operations are not immune from the changing reputations of their parents. In the late 1990s, both M&S and Sainsbury’s suffered declines in performance (though both subsequently recovered), weakening their reputational advantage over the banks. Second, the retailer threat may have been blunted by competition from other new entrants, notably, Egg, ING Direct and the US credit card “monolines” MBNA and Capital One. More fundamentally, significant differences remain between retailing goods and providing financial services. TPF has innovated with products such as travel insurance that can be bought ‘off-the-shelf’ by its Clubcard holders. But most account-based financial services remain hard to “retail” in a store environment. And large retailers’ core skills (for example, their sourcing expertise and buying power) account for less in financial services compared with diversification into adjacent retail sectors. Ultimately, UK retailers have ended up partly competing but partly co-operating with the banks. The sale of M&S Money to HSBC left all three major UK retailer ventures at least partly-owned by a major bank. The banks’ willingness to partner the retailers suggests they see only a limited threat to their own core personal business. When we look at
Continental European retailers and their entry into the market for financial services, two examples are worthy of note. Among the large French supermarket chains, Auchan has pushed furthest into banking and the services provided by Auchan’s subsidiary, Banque Accord, include consumer finance, insurance and savings related products. By early 2007, Banque Accord had almost 4.8 million customers (2.6 million of which are in France) and operated in six other European markets plus Russia and China. The financial services business has been consistently profitable for Auchan, earning a return on equity of above 20% during the period 2003-2006. Banque Accord divides its business into three main activities: payment cards, including private label, general use credit cards (it is both a MasterCard and Visa issuer) and gift cards. The general use credit cards include co-branded cards and Banque Accord is likely to be a major beneficiary of the removal of restrictions on co-branded credit cards that took place in France in late 2007. Banque Accord also manages bank payment transactions, authorisation systems and cash dispensers (ATM’s) and as its third arm it distributes other financial services, such as consumer credit, >>>
UK retailer banks: presence by market Current accounts Savings accounts
Mortgages
• No presence • Both TPF and Sainsbury’s Bank with portfolios of over £2 billion • But UK market of over £600 billion at end 2006 • Marginal presence, no meaningful market share • TPF currently offering a “mortgage finder” broking service and mortgages from First Active, part of the RBS Group
• Both M&S Money and TPF have unsecured loan portfolios of over Credit cards and £3 billion consumer loans • But UK market of over £210 billion
Sources: Companies, Office for National Statistics, Bank of England Authors’ analysis
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>>> insurance and savings products. By the end of 2006,
its consumer credit book was €2.2 billion. Banque Accord differs from the UK retailers approach to financial services in that it is both an in-house provider for the Auchan Group and a provider of financial services for other retailers. However in its fundamental respects Banque Accord’s approach is very similar to that of the UK retailer banks, both in terms of the financial products offered and the channels through which it communicates with customers. Though successful, it remains largely a niche player from a wider retail banking perspective, focused mainly on cards and consumer loans. ICA is one of the Nordic region’s leading retail companies, with around 2,300 outlets in Sweden, Norway and the Baltic countries. In 2001, ICA established ICA Banken as a fully owned subsidiary for its Swedish customers and it now offers a full banking service in direct competition with the main Swedish banks. The number of customers using ICA Banken’s banking services increased during 2006 to 285,000 and there were also 213,000 bank cards
Banque Accord and ICA Banken key figures Banque Accord (€ million) 2003 2004 2005 2006 Payments with Accord cards
4,354 5,131 6,179 6,802
Credit outstanding
1,182 1,596 1,910 2,219
Net profit
19
24
34
37
ICA Banken (SEM million) 2003 2004 2005 2006 Total assets
4,902 5,917 6,660 7,365
Deposits
4,451 5,220 5,930 6,394
Operating income
-166
-123 -82 (1) 11(2)
issued by ICA Banken. In addition to providing services to personal customers, ICA Banken has responsibility for the payments infrastructure within ICA, including the payment terminal technology in ICA’s Swedish and Norwegian stores. As with many retailers, ICA’s cardbase has provided an entry to the wider provision of financial services and in total ICA Banken administers 3.1 million card customers for ICA. These vary from loyalty cards, to payment cards, both debit and credit, co-branded with either Maestro or MasterCard. Unlike the UK supermarkets, ICA Banken’s products include cheque/current accounts, enabling it to offer a full range of personal banking services, which also includes savings, unsecured loans and mortgages. Thus ICA Banken is different in two major ways to the UK retailer discussed above. Firstly, ICA Banken is a 100% owned subsidiary of the retailer rather than a joint venture with a bank and secondly, ICA Banken offers a full range of core banking services, including cheque/current accounts and mortgages. However, despite its wider product range and 100% ownership by the retail parent, ICA like the UK supermarkets remains a relatively small player in its domestic retail banking market. In their own terms, Banque Accord and ICA Banken may be judged successful by their retail parents. Banque Accord has been consistently profitable during recent years and has developed into a leading European consumer finance provider. ICA Banken moved into profit in 2006 and ICA reports it has the most satisfied customers of any Swedish bank, according to a survey of the industry by the Swedish Quality Index. However, like the UK supermarkets’ financial services arms, both Banque Accord and ICA Banken remain small players in the context of their wider domestic retail banking markets. Despite the size and strength of their parents, the fact that all the European supermarket banks remain small shows the challenge for retailers of moving beyond niche status in financial services. I
1. ICA Banken operating income for 2005 is restated due to changes in accounting principles for the accrual of card fees (previously reported as SEK –75 million). 2. SEK / € rate averaged 9.2544 in 2006 and was 9.0404 at end 2006 (Source: ECB). Sources: Banque Accord, ICA Group
This article is based on a new research report “Banking at the Checkout 2007/2008”. Visit www.bankecon.com for more information.
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SME: a high potential target Faced with the prospect of limited growth in the large corporate segment, SEB began in 2003 to craft a new strategy aimed at small-and medium-size enterprises, or SMEs. A key aspect is the application of SEB's corporate banking expertise to the retail market in order to tap into the SME segment. By Stefan P. Andersson Head of Corporate SME, Marketing and Sales SEB
ince then, SEB has made progress with customer acquisition and product penetration in the Swedish SME segment. From an average of 200 new customers per month in 2003, the number jumped to an average of 1,000 per Stefan P Andersson month in 2006. In terms of product penetration, 25% of SEB’s SME customers in 2003 had more than four products; this doubled to 50% last year. In addition, Cash Management gained more than 5,000 new SME customers in 2006, an increase of more than 5% in SEB’s total client base. Although SEB is gradually gaining broader appeal, it remains largely perceived as a bank for the affluent. Roughly 40% of SEB’s income is derived from the 2,500 large companies and financial institutions it serves with a wide range of products. Private individuals in retail banking comprise another stronghold, with five million private customers in Sweden, the Baltic region and Germany generating about 35% of SEB’s annual income. The third customer segment, SME, accounts for some 25% of the bank’s income. So far, SEB has 400,000 small and medium-size companies in its fold, and aims to increase market share in this segment.
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Fiercer market competition. Stagnating growth in corporate and private banking (high-net-worthindividuals) increased competition among established retail banks and led to an influx of niche players, who are gaining a foothold selling occasional products with substantial margins. Other long-standing players such as Nordea, Svenska Handelsbanken and Swedbank are also paying more attention to SMEs, but the playing field remains open as none of the banks has yet
become the main supplier. SEB is in a position to take on this role. By applying its corporate-banking skills to the retail market, it can be at the forefront of SME banking services.
SEB has been a pioneer in internet banking and electronic FX since the mid-1990s. The idea is not to shift focus from the large corporates but to broaden it to include smaller businesses. Besides the changing banking landscape, customer behaviour is also evolving. There has been a general increase in internet banking and in the number of clients using internet services. SEB has been a pioneer in internet banking and electronic FX since the mid1990s. With its clients, the bank has spearheaded development in e-services.
Identifying SME. SEB is aware that 50% of its profits in Sweden come from the SME segment while costs for this business amount only to about 30%. The total SME market in Sweden is valued at roughly €1.2 billion. More than 60% of SME earnings stem from very small customers, of which two-thirds are micros. More than 90% of the SMEs have turnover of less than one million euros. Compared with the private individual market, the SME segment makes up one-tenth of SEB's customers but earnings per SME customer amount to 10/1. Given that the smallest enterprises are three times more profitable than private banking clients, SEB must allocate resources to bolster one-on-one client >>> N°211 - January / February 2008 Efma(g) | 19
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>>> contacts. This also means all SEB staff must be
competent in both private and corporate business.
Segmentation. SEB segments its target market in terms of turnover. But this is not set in stone. There are many reasons to change customer segmentation, of which one is the complexity of earnings. The bottom line is: always ask what the customer needs. SEB provides a clear, uniform offer for each segment in terms of contact policy and services for daily transactions. We say exactly what we offer. For instance, small clients (turnover of €500,000 or less) are offered a full review of their finances once a year. They can use our internet and customer service centre round-the-clock and receive electronic news and proactive contacts with business ideas generated by SEB’s CRM tool. For the medium (turnover of €500,000 to €5 million) and large (more than €5 million) SMEs, SEB provides extra one-on-one marketing and more frequent business meetings each year.
SEB also focuses on client life cycles, identifying events that warrant promotion of suitable offerings.
demands new market volumes which, in turn, require new sales methods, which demand a broader offering with competitive prices. Increased customer inflows require a well-functioning CRM system to manage the rapidly growing customer base, which has to be segmented more efficiently. SEB also focuses on client life cycles, identifying events that warrant promotion of suitable offerings. Instead of selling products individually, they are packaged in clusters to make buying and selling more effective. SEB also customises offerings for selected business groups.
The right offering to the right customer. Like a fisherman's net catching a lot of different fish, SEB offers a wide range of products for different customers and markets them assertively. But proactive sales are expensive, so to get optimal results, SEB prioritises activities for preferred clients. We cannot fish in every pond, so we find the best places to fish. SEB therefore has two complementary strategies: one to attract new customers with competitive products, the other to use the CRM tool to nurture customer loyalty. This twin-strategy approach cuts customer acquisition costs because every marketing resource is used for selling profitable products. This also supports our efforts to shift our local staff from merely selling the next product in the pipeline to holding top-quality meetings with clients.
Tailored products. SEB has a wide range of products for the SME segment, one of which is the small business loan, or “easy loan”, launched in Sweden in 2006. This lets SMEs conveniently borrow up to €30,000 on easier terms. The “easy loan” concept has proven a success, with SEB tripling its sales in one year and boosting its share of loans granted without increasing the bank’s exposure. Building on this success, SEB is launching in October a new small business package for SMEs. Here, SEB has the opportunity to exploit its strong brand to tap the potential of smaller businesses.
New market triggers new thinking. A new market makes us change our thinking in many ways. Margin pressure, particularly on SEB's income-generators, 20 | Efma(g) January / February 2008 - N°211
Quick facts on SEB Group SEB is a North European financial group serving some 400,000 corporate customers and institutions and five million private customers. SEB has a local presence in the Nordic and Baltic countries, Germany, Poland, the Ukraine and Russia, and a global presence through its international network in another ten countries. On 30 June, SEB Group’s total assets amounted to SEK 2,188 bn while its assets under management totalled SEK 1,403 bn. The Group has about 20,000 employees. Read more about SEB at www.sebgroup.com
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The CRM system last year provided business ideas for 470 ongoing activities, resulting in a 70% increase in proactivity. We know what we want to sell and we find the right customer to sell to. And results show a strict correlation between activity and earnings: clients that received two activities each year were more than twice as profitable as clients that had no activities.
Sales culture. SEB has to have a sales culture and create a sales organisation that is ready to meet market competition and changing customer behaviour. Everyone at a branch office, regardless of position, is responsible for ensuring that the right person takes care of the customer. Harnessing staff competence is one thing; having the solid support of management to
ensure the success of the strategy is another. SEB is rallying its central functions to support the SME business. It should allocate resources for this segment and ensure that SME-related topics are discussed at every internal meeting. With higher SME awareness, we can map out a long-term business plan for growth in this segment. It is crucial that we, at heart, want to be the bank for small enterprises. Management has to lead the way. I
er t s i Reg soon as ssible o p s a
Among the global leaders speaking at this exceptional anniversary event George Awad, CEO Global Consumer Group EMEA, Citigroup
Xu Luode, President and CEO, China Unionpay
Rajiv Dutta, President, PayPal
Roberto Nicastro, Group Deputy CEO, Unicredit
Achim Kassow, Member of the Board, Commerzbank and CEO, comdirekt
Ergun Özen, President and CEO, Garanti Bank
Andrei Kazmin, Chairman of the Board and CEO, Sberbank Jan Lidén, President and CEO, Swedbank
Baudouin Prot, CEO, BNP Paribas V. Vaidyanathan, Executive Director, ICICI Bank
Be the first to benchmark your strategy against Efma’s latest exclusive studies World Retail Banking Report 2008 by Efma and Capgemini, endorsed by ING Retail Banking Competitiveness by Efma and Roland Berger
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Interview with Zamir Iqbal, World Bank
“Emphasising the concept of justice” Zamir Iqbal co-wrote An introduction to Islamic finance, theory and practice. This book explains the fundamental principles and functions of “an economic, banking and financial system operating under Shariah (Islamic law)”. It offers a comprehensive and practical guide for anyone interested in Islamic finance and banking and emphasizes the amazing potential at stake (see p. 56). By Charlotte Collonge Efma
amir Iqbal works as Principal financial officer with the Quantitative strategies, risk and analytics department in the Treasury of the World Bank in Washington, D.C. His research interests include Islamic finance, financial engineering, structured finance and international banking.
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Which are the main principles of the Islamic economic system? What differentiates Islam from other systems of thought is its unitary perspective, which refuses to distinguish between the sacred and the profane and which insists that all of its elements must constitute an organic whole. The main principles of Islamic economics include preservation of property rights, sanctity of contracts, risksharing among economic agents, and promotion of social justice in the society through just exchange and distribution. The model encourages a market-based model and recognizes personal interest as long as it does not conflict with the greater interest of the community and the society. It can be claimed that it is the emphasis on justice that distinguishes the Islamic model from all other models. It is via the concept of justice that the raison d’être of the rules governing the economic behavior of the individual and economic institutions in Islam can be understood. How come Islam’s unconditional prohibition of interest do not hamper its functioning? Islam prohibits interest but does not deny any return on capital. It is a misconception that prohibition of interest means no return on capital. An ex-ante pre-determined and fixed rate of interest is replaced by the rate of return on capital as a result of the actual outcome of what capital was used for. The Islamic economic system 22 | Efma(g) January / February 2008 - N°211
recognizes time value of money. The only direct implication of this prohibition is removal of debt security from the system. In theory, it does not hamper the functioning of the financial system and some research has shown that it offers better matching between assets and liabilities and therefore may lead to a more stable system. A modern financial system can be designed without the need for an ex ante determined positive nominal fixed interest rate. In fact, it was shown by Western researchers that there was no satisfactory theory that could explain the existence of a positive nominal ex ante interest rate. Research has also shown that not assuming a nominal fixed ex ante positive interest rate, i.e. no debt contract, did not necessarily mean that there would have to be zero return on capital. How does Islamic banking deal with this prohibition? Islamic banks replace pure debt-based securities with alternative financing and investment activities such as asset-linked securities, trade-financing, leasing and equity partnerships. Many of these securities are well known in the conventional system and existed before the emergence of Islam. Some of these securities were actually introduced to the West through Muslim societies and have become an integral part of modern financial systems. Unlike the depositors of conventional banks who earn a pre-determined interest rate on deposits, the depositors in Islamic banks act as investors who share in the profits and loss of assets maintained by Islamic banks. Could you describe the different evolution steps of Islamic economics and finance through modern Islamic banking gained attention in 1970s when many
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Zamir Iqbal: “Unlike the depositors of conventional banks who earn a pre-determined interest rate on deposits, the depositors in Islamic banks act as investors who share in the profits and loss of assets maintained by Islamic bank.”
Islamic countries were reviving an Islamic identity after independence but it was the boom in oil revenues which gave momentum to the demand for Shariah compliant commercial banking. Since then more than 150 Islamic banks have been offering such services worldwide. More recently, the current oil boom is spurring the demand again, and this time the demand is met by innovative products in commercial and investment banking, capital markets and insurance sector.
Islamic banks have yet to design an instrument such as student loans. For those in times of difficulty, credit is available through short-term simple interest-free loans or Qard Hasan (interest-free loan where principal may not be returned if one cannot afford it).
Islam prohibits interest but does not deny any return on capital. It is a misconception that the prohibition of interest means no return on capital.
Risk management is an area which is critical for Islamic banks for two reasons. First, the instruments used by Islamic banks are based on trade-financing and partnerships which require additional monitoring. Second, the risk culture at enterprise level is not developed yet. By design the Islamic banks are supposed to be “pass-through” institutions where profits and loss on the asset side of the balance sheet is passed on to the depositors who are termed as “investors.” This eliminates typical assets-liability risk of conventional banks. However, in practice, most Islamic banks are not truly pass-through institutions and try to maintain certain expected rate of return which is comparable to prevailing market rates offered by conventional banks. In doing so, Islamic banks sometime maintain reserves and in extreme cases pay out of equity capital. Operational risk is another critical area for Islamic banks as risk models, systems and control procedures are not very well-developed for most Islamic banks. Several regulatory and standards setting agencies have been established in the last decade to provide a framework for Islamic financial institutions. Islamic Financial Services Board (IFSB) has been a leader in addressing these issues. They have issued standards on capital adequacy, risk management and corporate governance. The Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) has focused on addressing issues with accounting standards. Considering the peculiar risks of Islamic banks, I have benefited from a colleague of mine, Dr. Hennie van Greuning who is an expert in banking risks and we have co-authored a forthcoming book titled, “Analyzing Risk for Islamic Banks.”
During the 1990s, equity funds became popular with Islamic investors. Equity funds apply special filters to select stocks which comply with Shariah. For example, stock of a company involved in the production or consumption of alcohol will not be qualified. The introduction of Sukuk (Islamic bond) has been another success story of financial engineering in Islamic finance. Today, Sukuk is equally popular with Islamic as well as conventional borrowers and investors. Sukuk has been issued by corporates, supranationals, sovereigns and multilaterals. Another innovation worth mentioning is the introduction of Shariah compatible mortgages in the West where there is significant demand by local Muslim communities. Such mortgages are being offered under different models in the United Kingdom and the USA. In the case of the USA, Islamic mortgages are being securitized as well. How do Islamic banks deal with economic needs becoming more and more sophisticated and with financial products like consumer credit a priori prohibited by Shariah? I am not aware that Shariah prohibits consumer credit. It depends on the kinds of consumer credit. If the consumer is trying to acquire an asset, it can be financed by Islamic banks through leasing or trade financing. However, there are some forms of consumer credit relating to intangible assets or services for which
What are the peculiarities of Islamic financial institutions’ risk management? What are the specific risks to Islamic banks and financial institutions?
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Analysis
Islamic investment management, the way forward The story of Islamic Finance is one that has clearly grabbed the attention of the global financial markets. With the rise of petro-dollars from the Middle East, significant development within the emerging economies and an overall renewed interest in the practical application of Islamic values within the 1.3 billion Muslim population, Islamic finance now has a solid platform. By Naveed I. Ahmad Head of Investments, Wealth Management Dubai Islamic Bank
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nitially, the attention from most Investment Banks has come due to the emergence of Islamic debt instrument, Sukuks. The Sukuk market today has exceeded $8 billion and many believe this is still the beginning. The Sukuk market seems not only to have participation from Muslim Naveed I. Ahmad investors or institutions, but more recently, Sukuk have had significant participation from non-Muslim western institutional investors who are looking at Alternative investments. As further infrastructure development continues, the opportunity for the Sukuk market remains very promising not just in the Middle East but throughout the developing markets. Within the retail banking segment, the product offering has significantly grown to encompass most if not all the retail financing solutions that can be attained from a conventional bank. As the product selection has grown, we have also seen an enormous growth in new Islamic banks as well as “Islamic windows” within conventional global financial institutions such as: HSBC, ABN AMRO and Deutsche Bank. What has been absent until recently, has been the area of Islamic Investment Management. Over the last two or five years, this segment of Islamic finance has gained significant momentum, particularly in the Middle East where there is a growing affluent Muslim community exploring alternative solutions for their excess funds. Today, there are over 206 Islamic mutual funds globally ranging from global equity funds to regional and sector based funds with some of the top global fund managers participating in this arena. The Dow Jones 24 | Efma(g) January / February 2008 - N°211
Islamic Index (DJII) has been very active at creating a Sharia compliant stock selection criteria that allows both investors and fund managers to invest in Sharia compliant stocks without undertaking a rigorous process of vetting what equity falls within the Islamic guidelines. Alongside the Dow Jones Islamic Index there has been the development of various other standardization mechanisms such as: the Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI) and Islamic International Rating Agency (IIRA) that further legitimize the practices of Islamic finance globally. In comparing what is currently being offered on the conventional side of the investment platform to what we are now able to offer our Islamic investors, one could argue that Islamic investment management now has the ability to provide an equal menu selection. With the creation of Sukuks and real estate funds (that can provide a fixed income stream), to various Equity Fund portfolios to Sharia compliant Capital Protected Notes with an exposure to different underlying assets, today we are truly seeing the emergence of Islamic Wealth Management. This emergence is often being driven by a unique partnership which involves Islamic Scholars from the Middle East and Asia, Western Multinational Banks and Regional and Local Islamic Banks with distribution capabilities (see triangle model).
The future and its challenges. The future of Islamic Investment Management is very bright. As more awareness both from the consumer and the potential distributors is developed, we will see competitive market forces shape the Islamic investment management platform. More specifically, we are going to see a wider selection of investment products with
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improved pricing created at a much greater pace. With a growing number of Islamic banks and Islamic windows, we will see an enhancement of the investment sales force and improvement of their knowledge and advisory capabilities. In ensuring that Islamic investment management remains sustainable, we must sell products “beyond religious belief”. More specifically, the investor confidence in purchasing investment product must not simply come from the product being Islamic, but also must also be purchased for the overall positive performance of the product. Finally the future growth of Islamic investment management will come from constructive innovation and modification of what is currently being offered to conventional investors as long as they fall within the guidelines of Sharia. I believe that in the very near future, we will more so-called alternative Islamic investment solutions that could include Islamic art, Islamic trusts and Islamic discretionary portfolio management. Also, Islamic investment management should take a leadership role in developing socially responsible and ethical investments that will not only be Islamic in nature, provide a positive return to the customer but provide a positive footprint on the environment.
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Perhaps the two greatest challenges to Islamic Investment Management remain the limited number of Sharia advisers and scholars available and the differing views on what is deemed Sharia-compliant and Sharia-repugnant. As practitioners in this industry we must work closely together to develop bridges and institutions within our financial community to ensure proper continuity and success of Islamic finance and more specifically, Islamic investment management.
Islamic investment product distribution model Product Innovation MNC working with Islamic banks Market timing of products ● Pricing and volume ● ●
Knowledge Enhancement
Sharia Coordination
Developing the skill set of the advisers ● Developing the skill set of the customer ● Successful marketing & distribution ● *Regulatory body required Code of Conduct/Ethics
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●
Coordinating between various Sharia Boards STANDARDISATION ● Developing various platforms of information sharing (AAOIFI, DJII) ● Having more Human Ressources ● Timely approves required ●
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Products and markets Wealth management
Serving the UHNWI (Ultra High Net Worth Individuals) Given the growing importance of the family offices and the significant size of the market segment “+$20M” (approximately 35% of the wealth management industry) these models are serving or will be serving, this article will try to give an overview of such players and a more concrete example of the structure and the challenges of Société Internationale de Finance (SIF), one of the largest international family offices. By Francesco D'Amico Member of the executive committee SIF, Zurich
or many decades large wealthy families had the need to establish their own offices in order to manage their complex family wealth structure. These offices were forced to evolve into real wealth management powerhouses Francesco D'Amico (Guggenheim, Rockefeller, etc.) in order to face the ever growing complexity of managing large fortunes (made by a great variety of asset classes, usually very innovative and risky), and to follow the natural growth of the family size (which typically requires dealing with complex legal and fiscal issues in several jurisdictions). In addition to these causes, the polarization process of the wealth management industry is an opportunity for family offices to further develop and expand their own activities. In fact, in the last five years, the wealth management (WM) industry has started a consolidation process, which is continuing at a fast pace and it will most probably lead to clearer market segmentation: a. the very large (predominantly on-shore) private banking players, which will serve in a more efficient way the HNWI (High Net Worth Individuals) with a net asset value of say less than $20 mn, and on the other hand, b. the small niche boutique players deriving from refocused private banks, family offices or independent investment offices mainly serving clients with more than $20 mn. As a consequence of this consolidation process, small private banks will gradually lose their market share as they will merge with or will be taken over by larger banks, or they will lose their traditional attractiveness vis-à-vis to the new clients unless they tailor their offering to specific client segments.
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UHNWI’s segment key facts. Capgemini / Merrill Lynch estimated for 2006 the world wealth of private investors in excess of $1 mn of investable assets being approximately $33.6 trillion. An estimation of Scorpio Partnership, an international management consultancy firm, reveals that clients with more than $20 mn in liquid assets are globally around 133,000 with about $11.5 trillion of assets (approx. 35% of the overall wealth). UBS, the leading WM player- manages/custodies less than 4% of the assets belonging to clients with more than $20 mn; Citibank a global medium-sized player in the wealth management space manages/custodies $150 bn, a bit more than 1%. FOX (Family Office Exchange) a US based Family Office (FO) consultancy firm, estimates that there are three to four thousand family offices in the US, followed by Europe with more than three thousand FOs or similar structures and with some hundreds of Family Offices in Asia. From these figures it is clear that this market segment is extremely fragmented, and it seems highly unlikely that it will have the big players increasing their market share, due to the relatively low margins of this segment (approx. 45-70 bps) compared to the UHNWIs segment margins (90-135 bps), and to the little appreciation of UHNWIs of the continuing standardization of the delivery process and the product pushing approach of these large institutions. On the other hand the lack of brand recognition, the lack of economic resources, the limited operational capabilities and the at times strategic aim of not serving third party clients makes it difficult for family offices to have an organic growth strategy. Nor is the merger activity more foreseeable, since it is not obvious for a UHNWI (Ultra High Net Worth Individuals) owning a FO to sell it or to merge it with an unknown peer. So how can this paradox, or business opportunity for FOs, of having large banks undeserving UHNWIs and small niche players not
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The WM industry has started a consolidation process, which is continuing at a fast pace and it will most probably lead to clearer market segmentation Today there are four different models focused on serving UHNWIs: A. Single family office: manages the wealth of one family only; services could range from pure administration activities (accounting and legal issues) to more complex investment management capabilities. Typically it has very limited resources and it is not publicly known. B. Independent investment office: usually founded by senior wealth/investment management professionals; serving a pool of families with no allegiances to any particular family; the services are typically investment advise on selecting and monitoring third party investment managers. Lean structure with no back office operations, entrepreneurial and marketing oriented structure. C. Multi family office: founded by one family with other families joining progressively; usually offering the full wealth management value chain (from wealth planning to investments, booking and accounting) with some product capability particularly on alternative assets. D. Bank family office: specialized unit within or owned by a bank; leveraging the banks operations and investment advise.
An example of an international multi family office: Société Internationale de Finance. SIF is the family office of a German family, who, in 1888 founded a brewery company in Latin America and became one of the main beer and soft drinks producers and
distributors of Latin America. SIF is part of Quilvest, the financial group of the family listed on the Luxembourg Stock Exchange (over $400 mn market capitalisation), which is focused on wealth management and private equity investments, with more than $6 bn managed by two main subsidiaries: • Banque Privée Quilvest (established in Paris in 1917, licensed by the French Central Bank) and Société Internationale de Finance (established in Zurich in 1932, licensed by the Swiss Banking Commission). The private equity arm (Quilvest Capital France), set up in 1972, manages more than $1 bn globally in both private equity funds and direct transactions. SIF is a licensed security dealer regulated by the Swiss banking commission; it serves today more than 400 individuals and approximately 20 families and employs 70 professionals (12 in investments, 9 in wealth planning, 9 in relationship management, 30 in operations). Since its inception, SIF has worked and grown based on the following principles: • Independence and Transparency. No in-house, off-theshelf products; SIF relies on completely open architecture. Any price advantages negotiated on the basis of the scale of SIF transactions are passed on in full and equally to SIF clients. • Superior long term performance. Since SIF’ inception >>>
Area represents assets held by HNW segment 12.000.000
Number of individuals
being ready to target this segment, could be solved in the near future? To attempt to answer this question, let’s have a closer look at the existing FO models in place, and let’s try to give an answer at the end of this article after having described more in detail a real example of one multi family office and the related growth options.
USD18.5 trillon
10.000.000
55% of total assets
8.000.000 6.000.000 4.000.000 2.000.000
USD7.2 trillon
USD6.3 trillon USD1.6 trillon
45% of total assets
0 -2.000.000 USD1 - 10mn
USD10 - 50mn
USD50 - 100mn
>USD100mn
Net worth
Source: Capgemini and Merrill Lynch World Wealth Report 2006
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>>> absolute return is the guiding principle. This is achieved
by blending traditional asset classes with an extensive usage of alternative asset classes (hedge funds, private equity investments, commodities,etc.). Since the early 1970s the family has invested in private equity asset class (by founding one of the first private equity funds) and in the early 1980’s invested heavily in the hedge funds space. The overall asset allocation of SIF today is: 30% long only, 30% hedge funds, 30% private equity and other. • Equality. All investors share exclusive access - with the same price - to recommended offerings – and no clients are ever offered an opportunity that is not being taken up by SIF shareholders themselves. • Service. To be achieved by continuous investments in enhancing service quality and by limiting access to those families who share the same fiscal philosophy as the founding shareholders. These principles have always been a guideline for management, and today are very much appreciated also by other families who joined the structure. Having experienced this growing interest from third party families/individuals in SIF offering, in 2006 the shareholders strategically decided to consider expanding and becoming a larger player. The main strategic options
foreseeable for SIF and probably for most similar family offices to consider are listed as follows: 1. Become a boutique asset manager (as David Blood, Notz Stucki, Longview): focusing on discretionary mandates and proprietary products, serving HNWI on domestic markets. 2. Become an alternative asset specialist (as Cerberus, Partner’s Group, RMF), creating an own sales force, and targeting UHNWI and institutionals. 3. Become a multi family office specialist (as Flemings and Guggenheim) by targeting UHNWI on an international scale, increasing the capacity of the existing offering. 4. Become an international platform for Family offices, by making Joint Ventures or alliances with complementary Family offices, enhancing reciprocally investment and wealth management capabilities. SIF is currently pursuing the last two strategic options. Like SIF, some of the thousands of family offices will consider an expansion of their client base, by targeting most of the unsatisfied clients of large banks. But given the limitations of resources and the complexity of the M&A lever, the combination of organic growth and alliances with peers seems the fastest and most effective way. I
Comparison between business models SFOs and IVs
MFOs, FOP and PBFOPs
Less accessible
Easier access
Economically autonomous
More commercial
Unofficial gatekeepers
Clearly defined gatekeepers
Better links with other FOs
Acknowledged need for investment ideas
Limited resources
Higher calibre employees
Lower staff turnover
More benchmarking
Self-funded
Need to demonstrate value to win clients
More nimble
More bureaucratic
Source: SIF
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Mortgage credit Barcelona, 3 - 4 April 2008 The following experts will take the floor
Paul C. Ellis, Ecology Building Society Richard Exton, Barclays Bank Otto Feierskov, Nordea BanK GĂŠraldine Ferry, BNP Paribas Francesco Ghizzardi, Banca per la Casa - UniCredit Adrian Holland, Viva Costa International Morgages John Malone, Premier Mortgage Service
Bas Millenaar, De Hypothekers Associatie B.V Dennis Pereira, SNS Reaal Sunil Rohokale, ICICI Bank Ana Rubio, BBVA Alla Tsytovich, Bank of Moscow Paul Wessels, De Hypothekers Associatie B.V.
Product innovation, distribution strategies and operational excellence In the context of the US subprime mortgage market crisis and of new EU regulations to protect the consumer, financial institutions still see mortgage lending as a key enabler for acquiring and retaining customers, and this has led to strong competition in many countries, thus putting further pressure on profitability and cutting margins. - How profitable is the mortgage activity? - What kind of mortgage products should be offered? - Which distribution strategies and distribution costs ? - How to organise multichannel distribution. What is the Internet’s role?
- Intermediaries: their role and how to manage them - Which products are the most suitable for cross-selling? - How can you innovate in this competitive market? - How to organise automated processes - Securitisation - The European Union regulatory context During this event, the Best Mortgage Product in Europe will be rewarded. Financial institutions willing to participate should register before 10 March 2008 at: www.efma.com/mortgageaward
www.efma.com/mortgage
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From subprime to the real economy The correction in the US housing market and the outbreak of the subprime crisis, which has carried over to the money and credit markets, will amplify and extend the US economic slowdown. The real impact of this crisis has spread beyond America’s borders. To rule out the risk of recession is to assume that the Fed will have no qualms about acting boldly. By Philippe d’Arvisenet Chief economist, Economic research department BNP Paribas
ising defaults on subprime loans have sparked fears about the solvency of institutions exposed to the segment via investments in mortgage-backed securities. Indeed, mortgage loans have been widely sold on the market through Philippe d’Arvisenet securitization and their transformation into debt instruments, thanks to the use of greater collateralisation and the division of credit risk into equity (toxic), mezzanine and senior tranches. As a result, these products benefit from higher ratings from the credit rating agencies, and from a broader investor base. Although these techniques have helped pool risks better, they have also led to the dispersion of risks, and to growing uncertainty over the location of losses. These doubts peaked in the first two weeks of August, undermining the interbank market, notably in the eurozone and the United States. Overnight rates soared under the widespread search for liquidity, and reached much higher levels than the central banks’ target rates (4.7% vs 4%, respectively, in the eurozone, and 6% vs 5.25% in the United States). In the United States, the spread widened to 2.5% from 0.5%. The monetary authorities had no other choice but to inject massive amounts of liquidity into the market to restore normal operating conditions and prevent the selloff from spreading to high-quality assets. The ECB injected €95 billion in August and another €61 billion the next day. The Fed injected $24 billion and $38 billion, respectively, bringing the Fed funds rate well below the 5.25% target.
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the $50.5 bn intervention in September 2001. For its part, the ECB lent €50 bn for three months. The operation was conducted at an average rate of 4.50%, whereas three-month Euribor stood at 4.75%. The persistent difference between the three-month interbank rates and the key rates is one of the most tangible signs of the continuation of the crisis. As an exception among the major central banks, the Bank of England was initially rather reluctant in providing extra liquidity to the money markets. It argued that such support would increase moral hazard and may actually sow the seeds for the next crisis. Thus, it continued to refuse to provide liquidity against a wider range collateral. However, the central bank changed its opinion on the latter when solicited by Northern Rock. The Newcastlebased bank started as a relatively small building society, but has managed to become the UK’s fifth mortgage lender and has even been included in the FTSE 100 index. The rapid expansion has been funded by borrowing heavily in the wholesale money markets. It depends for about three-quarters of its funding on these markets, of which just over 40% from market securitisation. This business strategy has been very cost effective as the bank does not need to maintain a large network of branches. However, the reliance on only one major form of funding has led to the current situation. As the market of assetbacked securities dried up, the company had to ask the Bank of England to bail it out. The central bank has allowed Northern Rock to borrow at a penalty rate by posting mortgage-backed securities as collateral. This bail-out package led to a panic reaction among its customers, despite assurance from the FSA concerning the bank’s solvency. In order to restore confidence, the government decided to guarantee all the savings of Northern Rock depositors. In September, the BoE relaxed its position even more by announcing that it would conduct an auction in which it would provide funds at
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three-month maturity against a wider range of collateral, including mortgage collateral.
... And to the real economy. What exactly is the subprime market? In recent years, abundant liquidity, the correlative weakening of sensitivity to risk and financial innovations have resulted in a strong increase in mortgage loan distribution in the United States, particularly in the subprime and Alt A segments. This fuelled a significant increase in the homeownership rate. Subprime loans are granted to borrowers with a debt service-to-income (DTI) ratio of over 55% and/or a mortgage loan-to-value (LTV) ratio of over 85%. Distribution of subprime loans climbed to over $600 billion in 2005 and 2006. They accounted for 13% of the $10,000 billion in mortgage loans outstanding last year. Alt A loans are granted to borrowers who do not exceed the above ratios, but who are not required to provide full loan documentation. Jumbo loans exceed the $417,000 ceiling on loans eligible for Freddie Mac and Fannie Mae, the government sponsored housing enterprises (GSE): they account for nearly 15% of total mortgage loans outstanding. All these loan categories are frequently accompanied by easy lending terms: at a time when rising house prices made homeownership less affordable, these “affordability products” spread rapidly with the easing of lending conditions. Two thirds of adjustable rate mortgages (ARM) are so-called 2/28 instruments: they offer below-market fixed rates (teaser rates) during the first two years of the loan, that are transformed into adjustable rate instruments at the end of the period. Resetting the rates naturally increases cost of debt servicing for borrowers, with the risk of driving up the default rate. Interest-only loans offer a deferred amortisation period, typically two to three years for ARMs and ten years for fixed rate instruments. Negative amortisation loans allow borrowers to capitalise interest payments up to a certain proportion of the loan (15% to 25%), after which they are transformed into normal loans. Here, too, the cost of debt servicing rises sharply. Speculation also came into play, and loans were frequently granted based on the anticipated increase in house prices rather than on the borrowers’ debt servicing capacity: if the borrower defaults, the house could be sold to reimburse the principal, but this only works, of course, as long as house prices do not fall. Recent troubles have risen with the upsurge in mortgage defaults. In the
subprime segment, the default rate on ARMs (foreclosures and delinquencies of over 60 days) rose to 13% at the end of last year, from 2.6% in mid 2005. In the Alt A segment, the default rate rose to 2.5% from 0.5%. This trend is even more pronounced for more recent loan originations: after a year, the 60-day delinquency rate for subprime ARMS was 6% for those originating in 2005, but over 10% for those originating in 2006. Considering the terms of these loans, the default rate is bound to continue rising in the quarters ahead. Even before the outbreak of the current financial crisis, it seemed obvious to us that the correction in the housing market was far from over, and that it was yet to exert its full impact on economic growth. Although the decline in home construction has trimmed growth below its long-term potential for several quarters, it has only had a minimal impact on sector employment. As a result, the US economy has continued to benefit from full employment. Moreover, the slowdown in liquidity extraction from higher valued property assets (cash-out refinancing, one of the benefits of the home equity wealth effect) has been offset by a bullish stock market. Households continue to be net sellers of equities in a market bolstered by corporate share buybacks. This situation, combined with a healthy job market and higher real revenues, has fuelled household consumption. Yet it is hard to imagine how this pace could be sustained. The housing market crisis is not over yet. In addition to the subprime crisis and its impact on the households >>>
The home equity wealth Index 1983-100 250
200
New housing to self Old housing to self
150
100
50
83
85 87
89
91
93 95
97
99 01
03
05 07
Homes for sale in the United States. Source: Bureau of Census
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>>> concerned, the housing market correction clearly seems
poised to continue for several quarters, much longer than generally expected. First, inventory of houses for sale are very high. The repricing of risk sparked by the recent financial crisis is straining financing for sector professionals as well as for potential borrowers. The Fed’s banking survey shows that demand for mortgage loans declined and lending conditions tightened as of last spring. The housing market continues to suffer from a supply/demand imbalance. Weak sales continue to hamper the adjustment of unsold housing stocks, which have reached their highest level in sixteen years. Yet growth lacks quality. First, the positive contribution of foreign trade is largely due to domestic demand and its moderating impact on imports, and we can no longer count on exports to accelerate given the negative impact of the financial crisis on the world economy. Second, the boom in construction spending cannot be extrapolated either. The Fed’s Senior Loan Officer Opinion Survey for July (before the outbreak of the crisis) already alludes to tighter lending conditions and easing demand for industrial and commercial loans. With favourable momentum early in the third quarter, growth is expected to exceed 2%. Yet tighter financing terms and uncertainty over demand in the quarters ahead suggest a net slowdown, not only in household consumption but also in investment, despite the high level of corporate profits, and in stock rebuilding (which is partially involuntary). Already the crisis has eroded household confidence. Although the decline in fuel prices has lifted real disposable income by about 0.5%, the job market is bound to deteriorate due to job cutbacks in housingrelated sectors. Job creation figures for August and the downward revision for the previous months confirmed that the situation of the labour market had already changed. 40,000 jobs have been created on a monthly average over the last three months, that is a quarter of the level that was recordered during the previous quarters. Moreover, tighter lending conditions should weaken demand for consumer durables, including such big-ticket items as cars and home furnishings. We can hope, however, that the Fed’s rapid reaction will hold off recession.
lending conditions and progress on the inflation front, the Fed expressed its confidence in ongoing moderate growth, albeit with some downside risks. The dominant point of view was that the crisis in the housing market would not spread to other sectors. Earlier this summer, the monetary policy debate focused on the risk of inflation. Did a core PCE deflator of less than 2% in itself justify easing monetary policy? Some, including the FOMC, wanted this progress to be confirmed, and for core inflation to be trimmed to about 1.5%. Yet even this reference to core inflation was called into question, since headline inflation was holding above core inflation over the long term. Core inflation could no longer be put forward to cut short rumblings about measuring inflation. If this situation were to continue, it risked eroding the underpinnings of expectations. Of course, the subprime crisis brought this debate to a close by changing the ranking of risks. It was necessary to assess the impact of financial turmoil on the real economy, at a time when the housing market correction, and its negative impact on spending at the household and corporate levels, showed no signs of abating. Admittedly, Q2 growth and the strong rise in unit wage costs do not simplify matters, but nonetheless, the economy seems poised for an extended period of growth below potential, which in itself should help ease pressures. In fact, without surprise, the FOMC decided to cut the Fed Funds rates, together with a downward adjustment of the discount rate. The US monetary authorities stressed that the tightening in credit market conditions is to worsen the housing correction and to slow down the economic activity. The Fed underlined that it would continue to assess the impact of the markets developments on growth and that it would act as needed to ensure price stability and sustainable growth. The economy is growing below its long term potential with no signs of improvement in the quarters ahead. Moreover, households have been hard hit this time by the housing market crisis. Eventually, to forego a key rate cut would hurt pension funds and others that invested in securities whose risks were difficult to evaluate, and not those who actually initiated the risk. I
What about monetary policy? In August, the FOMC decided to maintain the Fed funds target rate at 5.25%. While acknowledging higher market volatility, tighter 32 | Efma(g) January / February 2008 - N°211
This article was published in Conjoncture, BNP Paribas’ review, October 2007.
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COVER STORY Insurance Claims management
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Interview
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Staying ahead of customer expectations . . . . . . . . . . . . . . . . p. 46
France
Kingdom
“Pay as you drive” insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..p. 36
Japan
Service offerings improve claimants’ satisfaction . . . . . . . . . p. 48
United
An urgent need to encounter customers . . . . . . . . . . . . . . . . . p. 39
MMA
N
Genworth
with Bernard De Gryse
“From industrialisation to financialisation”. . . . . . . . . . . . . p. 34
United
E
States
Redefining the claims process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 50
Bancassurance
in UK
Outsourced claims handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 42
Reinforcing customers’ loyalty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 53
Spain Repairing instead of financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . p. 44
Next cover story Consumer
credit Efma(g) N° 212. March / April 2008 N°211 -January / February /2008 Efma(g) | 33
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Claims management
with Bernard De Gryse
“From industrialisation to financialisation” Bernard De Gryse has written several books dealing with insurance issues. In his latest book, Le Monde changeant des assurances, he looks upon the changes that the financial sector has gone through in the past twenty years, as well as in the insurance and retail banking sector (see p. 56-57). By Charlotte Collonge Efma
ince 1998, Bernard De Gryse is honorary director of BBL, ING Group. He is also a member of the editorial staff of the Revue bancaire et financière and of Le Monde de l'Assurance. Lastly he is a professor at the ICHEC and EHSAL for a post-graduate course in business management in insurance companies.
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in largely unsaturated markets as well as in ancillary activities likely to increase the mass, and defeasance too. This road to the formation of huge groups generates both strengths and weaknesses; the stronger one is, the more space one conquers, but also the more difficult it is to get organised and remain quick on one's feet. The big players are especially vulnerable, as can currently be observed across the Atlantic.
What main changes have occurred lately in insurance? During the 30 years I have been working in insurance, I have experienced two groundswells which have revolutionised insurance for private individuals. First of all, an industrialisation which is still going on today. We have gone from a situation where policies were assembled and managed as with a manufacturing activity, to industrial processes implemented in factories where standard policies come off the production line bound for diversified distribution networks. The main stimulus bringing on this transformation is, of course, the development of electronics. But the unbridled pursuit of money has contributed just as much, to the extent that the period has also been marked, and this is the second revolution, by the banks bursting into the insurers' preserve, even more specifically by the sector becoming financialised. From sugar-daddy-type insurers, we have moved on to the formation of big financial groups with a tendency to be oligopolistic, transnationally oriented, listed on the Stock Exchange, obsessed by profitability. So, essentially, “industrialisation” and “financialisation”. Of course, next to a great many other induced or relatively secondary phenomena.
How do you consider the treasures of inventiveness that insurers display to attract new customers? In life insurance, the Trophy for Inventiveness goes to those investment-fund-backed policies which succeed in transferring the risk to the customer. In damage insurance, the great trick consists in segmenting populations so much that the risk is skimmed. In both cases, we take advantage of the insurance context to circumvent our grounds for existence: to provide mutual insurance for what is uncertain. It remains difficult, even impossible, to compare European markets, with their distinctive characteristics being so great. For example, it is still almost impossible to export a product, even if it is clever and very efficient. And the first thing that is plainly obvious when you try to analyse and compare is the fragmentation between a more or less large number of companies (in Germany, both bank and insurance players are very dispersed), and the dominance of the intermediation types leading to almost unassailable positions (countries of brokers or countries of agents). Creativity aimed at a mass market finds its sources in large companies which are able to reach these markets.
What are the consequences of mergers and acquisitions? To the extent that mergers & acquisitions proceed from a concern for wild profitability, we must obviously expect rationalisations, cost savings, attempts to get a foothold
What about the American market? Our knowledge of it is poor because we see it from afar, because it is so vast and at the same time so splintered. After an exciting study trip organised by Efma in 2006, focused on life insurance, the main souvenir my book
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Bernard De Gryse: “From sugar-daddytype insurers, we have moved on to the formation of big financial groupswith atendency to be oligopolistic, transnationally oriented, listed on the Stock Exchange, obsessed by profitability.�
brings out is that things are done fundamentally differently over there, where there is an evident liking for policies generating annuities owing to the local consumer's low level of savings. Concomitantly, the Americans also have to face problems similar to ours: trouble recruiting salespeople, a staggering multiplicity of products which defy all comparison, different prudential inspections from state to state, etc. What is the impact of claims management on the banks' image? When the subject is damage insurance claims, a distinction needs to be made between the phase when the claim is declared and that when the claim is managed. In the case of phase 1, I consider that the banking insurers have transformed a handicap into an asset. Bearing in mind the limited opening times of bank branches and the economic impossibility of training a branch employee to accept and keep track of a claim declaration whose occurrences are far too few (processing one, two or three claims per month does not confer any qualification), I for my part and in my company took on assisters as early as 1995, who were able to receive customer phone calls at any time and capacitated to empower within the following hour a professional to undertake small repairs under a comprehensive home insurance policy. Such subcontracting broadens the customer service range, focuses the agency on its sales activity and reduces the cost of claims. What more can you ask for? Obviously, this needs to be done correctly; obviously, the conditions set out in policies need to be adjusted; obviously, you have to pay out without arguing endlessly; and very obviously too, the company's image will suffer if it does not do that. This being said, did the banking insurers need to get involved in distributing property and casualty insurance products? Obviously not, because these products offer little profitability and leverage, whereas bankers aim exactly at an excess of profitability when they launch into insurance, profitability multiplied several times over by marginal cost operations. Banking insurers share call centres for complaints regarding damage claims. How do you see that evolving? This phenomenon fits into the tendency to build factories and whose working can be compared to that of automobile assembly lines. To compress costs, insurers create
platforms which assemble various parts so that they can issue a very large number of relatively standard policies, adorned with such and such an option, fitted with a powerful or average motor drive, and intended to be supplied under appropriate brands and names to different distribution networks. The banking insurers have caught on that it is vain to want to do everything by themselves; indeed, why does each person have to build his own claims "processing plant", whereas it is conceivable to build one together. What future do you foresee for banking insurance? I concluded my first book dedicated to banking insurance, published in 2000, by stressing the perfect stage this economic phenomenon had reached, and the phase of obsolescence it was about to enter. At the top of the curve, and we are just dealing with Belgium here, we can observe that the five biggest deposit banks are at the same time the five biggest insurers, counting for more than 65% of market share (Fortis, KBC, Dexia, ING and AXA are the five in question, and I mentally skip over Ethias, a "mutualist" insurer with no significant involvement in banking). It is therefore obvious in Belgium as elsewhere that the phenomenon is percolating. But the major groups now prefer to represent themselves as financiers, mixing banking activities with insurance, asset management and a host of other activities of a financial nature. To do this, they rely on all the distribution networks within their reach: bank branches, insurance agents and brokers, personal assets consultants, direct and online selling, in their countries of origin and crossing borders. However, the arrival of the Internet combined with the trend towards industrialisation and financialisation already mentioned, is in the process of upsetting the order. The direct is seizing the opportunity and in the medium term will structure the whole organisation. N°211 - January / February 2008 Efma(g) | 35
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every journey and enhancing the trust our customers have in our ability and integrity with their information. This monthly contact itself is a new and unusual step away from the normal insurance interaction with customers. As well as giving a clear insight into how premiums are calculated, it proves our capability and further enhances trust. Over 90% of our customers continue to ask to see their itemised bills each month.
“Pay as you drive” TM insurance breaks the mould not only of the core risk model, but a radical new customer product. But what about the question of privacy? Are our customers worried about that we know about each of their journeys? First of all we are not forcing this product on all our customers now or in the future, therefore if some motorists are concerned they can take conventional products but will not get all those benefits. Our extensive research proved that the vast majority of people are not concerned, and when we point out to our customers that not only can we help save them money but if their car breaks down or is involved in an accident, we can get our recovery and emergency vehicles to them faster knowing exactly where they are. This registered strongly with motorists that the data we collect not only saves them money, it greatly reassured them that in the event of an incident the technology would help us take a great deal of stress out of the situation. A further advantage of this system is that it enables those vehicles equipped with a black box to be located. So weighing up all the benefits sharing journey data with Norwich Union is not seen as a negative but a positive by our customers. On a personal note I was interviewed by Danish TV2 who had one of our customers on camera with us. Having interviewed me about our product the interviewer turned to our customer who they had sourced and said: “So Mrs xxxxx are you not worried that this man is watching every move you make?” For a brief moment I wished I had not agreed to the interview, but without prompting from me our customer just said: “Well actually I lead
quite an ordinary life and which to others may be boring so why would he want to watch what I do…” Other than the immediate relief I reflected on this and thought – me too who would be interested in my journeys … ask yourself. Norwich Union launched their first two “Pay as you drive” TM insurance products: The first is designed for the mass market of low mileage cars. Almost 50% of people in the UK own a second car. Of those with one car two thirds do not use it to commute to work. These subsidise those that drive regularly during the higher risk times of day on the urban roads, until now with “Pay as you drive” TM insurance. Since launching one year ago we have seen clear savings in our claims with the benefit passed to customers with lower premiums: • Norwich Union have seen 30% fewer claims for customers aged 24 and over on “Pay as you drive” TM insurance compared to a conventional policy. • The average saving for Pay as you drive insurance motorists aged 24 and over is 27%. Stephen Sharpe (a “Pay as you drive” TM insurance) customer said: “Norwich Unions’ Pay as you drive insurance has helped me save around 50% on my premiums and I now pay on average £17-£18 per month. I think the policy is a great way of helping to control mileage too. I pay as you go on petrol and tolls, so it is great that I can pay as I go with insurance as well. It allows me to make significant savings every month and fits in perfectly with my low mileage lifestyle.” >>> N°211 - January / February 2008 Efma(g) | 37
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Japan
An urgent need to encounter customers This article aims to provide up-to-date information about general insurance distribution channels in Japan. We analyze changing business environments and show the challenges for the branch distribution system, which is by far the dominant channel, in the face of emerging channels including direct response and bancassurance. the advisor’s role in the claims process is also discussed as a core issue . By Yasuo Okazaki Senior research officer Sompo Japan Research Institute
he branch is the dominant distribution channel of Japanese general insurance. All major general insurers distributes through branch channel. However, the number of branches has declined significantly in this decade. There were Yasuo Okazaki 266,753 branches as of March 2006, compared to 286,576 a year before and 623,741 ten years before. In contrast, the number of sales staff in branches was 1,873,485 compared to 1,797,510 a year before and 1,181,865 ten years before. These figures show that branch selection and consolidation have taken place. By their size, a typical branch used to have two to three people including principal, producer and CSR. But nowadays, the number of branches with five to ten people is growing. The most important driver behind this trend is the reform of the premium rating system. Insurers suffered gradual reduction in their profitability margin due to relaxation of filing and rating regulation in the wake of Japan-US Insurance Talks in the late 1990s. In addition, the general insurance branch system was also amended at the beginning of 2000s. The administrative guidelines concerning personal qualifications and branch classifications, as well as the level of branch commissions which depend on branch classifications, were abolished. Insurers took several measures to improve the efficiency of branch distribution channels including introduction of the minimum requirement of volume of business and profitability, differentiated branch commission rates based on volume, profitability, growth rate and capabilities regarding IT, risk management and other value added services. Several insurers, mostly new entrants like Sony and AXA, are successfully selling auto insurance via direct response channels (call centres and the Internet).
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Characteristics of the Japanese branch system. There are three ways to classify Japanese advisors that incidentally shed light on the characteristics of the Japanese branch system. One is full-time (called “pro” advisor) and part-time, the second is corporate and individual, and the last is exclusive and multirepresentative.
All major general insurers distribute through branch channels. a) Full-time and part-time Full-time advisors have a 16.3% share compared with 83.7% held by part-time advisors. Nonetheless, the core of the distribution channel is believed to be full-time or “pro” (a short form of “professional”) advisors. Major insurers have “special trainee system” (Kenshu-sei) for recruitment and education of prospective “pro” advisor, which started in the late 1960s after the advisor training system of State Farm and other captive advisor companies in the U.S. The part-time advisor (Sub-specialty advisor) is the advisor whose main business is not insurance. The auto dealer is prominent among them and there are many other businesses that can take advantage of the opportunity to sell insurance in the course of their main business, including real-estate advisors and utilities companies. Due to the lesser importance of risk selection (field underwriting) in personal lines insurance compared to that of the US, the auto dealer is considered to be a reliable channel with further growth potential for insurers. b) Corporate and individual The corporate advisor is the advisor owned by a corporation whose aim is to take part in managing the >>> N°211 - January / February 2008 Efma(g) | 39
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>>> insurance program of the parent company and also sells
to its employees. It also has an important meaning, i.e. job opportunities for the retired managers and executives of its parent company. Regardless of the fact that most one-person or papa-mama advisors take a corporate form for the purpose of tax, they are individual advisors in this classification. c) Exclusive and Multi-representative Many full-time advisors, special training course alumni remain exclusive to an insurance company, though there is neither a legal nor contractual barrier for them to be multi-representative advisors. Some advisors devote themselves to the company which offers them a longstanding relationship and support, and others may be satisfied with the quality of support and the strength of the insurer’s brand. Additionally, a few insurers have inhouse (employed) advisors.
The changing environment surrounding the branch channel and its challenges. According to Mr. Akio Nakazaki, a veteran journalist and consultant specialized in the insurance field, a seismic shift in the branch distribution system is going on. Insurance companies traditionally put emphasis on their exclusive branches as the core of their distribution channels. However, as competition among insurers and branches intensifies, inevitably manufacturing and distribution will be more separate, increasing the share of independent branches. a) Direct response Direct response, the combination of large-scale mass media advertisement with call centres and the Internet site, started selling voluntary automobile insurance in 1996. The channel said it had market share of approximately 4% of the general insurance market. The value proposition of direct insurers, including Sony and AXA, used to concern the savings made on the premium. But these days, they are putting more emphasis on superiority of service quality of claims processing in their advertisements. b) Bancassurance In 2001, banks were allowed to sell limited types of insurance including housing loan–related products and overseas travel insurance. The types of insurance banks can sell has expanded since then. The most popular insurance product sold by banks is variable life insurance, which bank clerks can sell as an alternative to savings 40 | Efma(g) January / February 2008 - N°211
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products. Banks should be allowed to sell a full range of insurance products in the coming years despite strong opposition especially from the life insurance sector. Banks are preparing to take advantage of cross-selling to the existing customer base, by training their clerks, as well as hiring former advisors and insurance company employees.
Direct insurers generally score better than branch companies. Japan Post has a large network of sales offices nationwide. For insurance branches, their sales of insurance products also would be a significant threat. Kampo Life and Yucho Bank took over the life insurance and postal savings operations, respectively, when Japan's postal services were privatized in October 2007. Japan Post is reported to be planning to expand its range of products offering nursing care and cancer insurance along with life insurance as part of the company privatization plan. c) Insurance shops As mentioned above, insurance advisors were principally mobile. In contrast, “Insurance shops”, a store on the high street or in the shopping mall where customers can drop by not only for insurance transactions but also for protection or investment consulting, seminars or even just chatting while drinking tea. The main business of those shops is life insurance and asset management, but they also deal with general insurance. Operators of such shops are larger corporate agencies including Life Plaza and Hoken-Ichiba (insurance marketplace, in Japanese). In contrast, brandassurance, in which retailers who have the powerful brands sell insurance products under their brand, which is prevalent in UK, has not been tried in Japan, except for that for credit card holders.
Advisors’ role in claims handling. As the value of advisors is relationship and service, advisors are ideally to respond to the first notice of loss, visit the site immediately, and continue to help the policyholder in the claims process. However, the non-payment of claims issue, which triggered massive media coverage after 2005, cast a shadow on such a trust. In the general
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insurance context, it was found that in a large number of cases, insurers paid only the amount of main coverage, but failed to pay the amount of riders, which were added during the competition to enhance coverage after liberalization in 1998. The policy has become so complex that not only advisors but also insurer claims personnel cannot fully understand every rider, which resulted in such non-payment. As for customer satisfaction with claims handling, according to a J.D. Power survey, direct insurers generally score better than branch companies. One hypothesis is that their claims call centres handle claims better than advisors or branch company’s local claims offices. If so, the challenge for branch companies would be to enhance quality by improving claims processes, training claims personnel and advisors, or finding an optimal balance of branch and insurer roles, including increased usage of insurer call centres to assist advisors.
Insurers’ strategy. Amidst the seismic shift from the integrated model to separation of manufacturing and sales, what strategy an insurer can take? For traditional insurers, investing in emerging channels would be an option, depending on their view on the speed and timing of the growth and profit potential of such channels. What the market would look like in the future and how insurers are coping with the change remains to be seen.
Seismic shift in branch distribution system
In-house advisors Exclusive branches
In-house advisors Exclusive branches Emphasis on exclusiveness
Insurance Companies
Seismic Shift in insurance distribution
Competition by Excellence in Products & Services
Insurance Companies manufacturers
Separation of manufacturing and distribution
Independent agencies Independent agencies
As competition among insurers and branches intensifies, inevitably manufacturing and distribution will be more separate, increasing the share of independent branches. Source: Akio Nakazaki, “Insurance agency system in Japan”, 2007.
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Claims management
in UK
Outsourced claims handling MMA chose to outsource its claims handling mainly due to the flexibility doing so brings to managing its business as a whole. It means that we are not tied to a particular way of conducting business and lets us look for the best service providers in the market. By Bob Still Claims manager MMA Insurance
t MMA UK we outsource the bulk of claims handling, retaining in house management of claims above a financial limit. In practical terms this means: • All motor claims • All property damage claims Bob Still • All minor injury claims Recruiting people with the right level of insurance experience is difficult in and around where MMA is based, so we look to other parts of the UK where staff costs are lower and recruitment is easier. Outsourcing brings additional benefits such as shifting costs from a fixed basis to variable. This brings more certainty into planning and the headache of resourcing how to deal with staff turnover, sickness and the effect of a major weather event falls to the outsourcer. MMA uses three specialist outsourcing companies, all based in the UK. One company manages motor claims from first notification of loss through to conclusion of a customer’s claim for damage to their car and for third party damage claims. Another one manages our property/casualty damage claims on a similar basis. A third company manages injury claims arising from our motor and property/casualty accounts. Each of the outsource companies are experts in their own field and are able to provide a 24 hour/365 day claim notification/emergency service more cost effectively than MMA would be able to. We calculate that the outsource people costs are 80% of what it would cost MMA.
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Service delivery and best practice. Customers expect their claim to be managed in a professional manner and the outsourcers are often able to bring benefits the insurer is not able to achieve. For example, 42 | Efma(g) January / February 2008 - N°211
our property/casualty outsourcer works for many insurance clients and is able to bring the best of each into its operations. Similarly, in managing such matters as financial crime, the outsourcer will have experience across other lines of business that will be beneficial.
Measuring Performance. We have service level agreements with the outsourcers. At MMA we believe our customers are at the heart of how we manage our business and therefore target the two outsourcers that deal with claim notification to achieve percentages of inbound telephone calls to be answered in a certain time, with calls abandoned within agreed limits. Usual measures like how much work there is outstanding and how old it is are also used. However, key to successful customer delivery are the numbers of complaints we receive, and MMA takes part in independent customer experience surveys that seek customer feedback on service delivery and benchmark that against how other insurers perform. The results highlight any areas that customers tell us are important to them, such as keeping them informed of the progress of their claim and how MMA performed. With motor claims, our repairers leave a “mirror hanger” in their car for customers to complete. This provides valuable feedback on the performance of our repairers and the process as a whole. For instance, if a repairer receives consistently good customer feedback it usually means all our quality and cost measures are being met and we will give that repairer more authority to authorise work. Doing this means they will spend less time on MMA jobs so they will “earn” more per job. However, repairers who receive consistently poor feedback will see a drop in what is paid for their labour and ultimately they will receive no new jobs. We also regularly audit our outsourcers where we sample individual cases and as ascertain they have been
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managed against agreed criteria such as the quality of communication with our customers and how long it takes to agree a claim.
into agreed best practice. However, we also give feedback that lets the outsourcer know if any quality improvement is required.
Cost management. As well as service to customers,
Is outsourcing an option for all companies? It
cost is, of course, key to managing claims. The same cost control methods are used with our outsourcers as would be used if we were managing the claims ourselves. Skilled and experienced claim handlers combined with appropriate technical people who have the knowledge to investigate individual claims and examine trends in claims development are key to keeping claims leakage costs to a minimum.
depends on what you are looking to achieve. MMA UK’s experience in looking at the UK market is that there are not many companies who would be able to offer outsourcing capabilities beyond dealing with first notification of a claim incident. Handling a claim after first notification generally requires specialist skills not freely available in the market place outside of insurance companies. Larger companies may not, at first, see outsourcing as a serious alternative to their current process simply because potential outsourcers do not have sufficient scale. However, MMA UK firmly believes the advantages of outsourcing, particularly resourcing and variable costing, outweigh any disadvantages. There may be opportunities to ramp up scale of an operation over time, indeed there are good reasons for doing so. A slow build-up gives each party an opportunity to test processes and procedure and fix any as required; much easier to do when the volume is low.
We calculate that the outsource people costs are 80% of what it would cost MMA. With financial crime a feature of claims management MMA passes details of all new and amended claims to a company that matches the claims information against several databases that may indicate that the claim is not genuine. For instance, does the database that records peoples’ addresses match the name address for our customer? Does the customer have bad credit references? Has the theft of their car been logged on to the police national database? We also match new injury claims, looking for previous claims which may indicate a serial claimant and when matched with details of lawyers and doctors can show that a motor claim may be “staged” or false.
Retaining control. When considering the outsource option, we recommend examining the risks involved. For example, what if the outsourcer is taken over by a competitor? How do you ensure your service standards are met and how is quality managed? Does the outsourcer provide fair and ethical treatment of its staff? Is there a culture of quality management in the outsourcer? With a shared focus on quality we are able to work closely with our outsourcer as we share the same objectives in making our customers’ lives easier when they have a claim. There is daily contact with our outsourcers and we are careful to give them sufficient room and freedom to make decisions on claims that fall
An actual example. In June and July 2007, parts of the United Kingdom were severely affected by floods. The sheer scale of these events coming so close together presented us with problems we had never experienced before. It was a real test for our outsourcing partner who manages our property claims. With all flood-affected homes not suitable to be lived in until repaired, arranging alternative accommodation for our customers has been difficult. Many customers want to be near their home and we have purchased caravans for the family to live in until repairs are complete. Our loss adjusters have put in place accelerated repair programmes but even so, the minimum repair times are estimated to be six months. Most of the flood claims involve a total strip out of the ground floor of our customers’ homes. With around 3,600 storm and flood claims arising from these two events, the overall cost of the claims is running into many millions of euros and is still rising. Our outsourcer has had to put huge amounts of additional resources into managing these events by way of staff working additional hours and temporary workers. It is calculated that staff costs alone exceed 600% of what would normally be paid. N°211 - January / February 2008 Efma(g) | 43
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Spain
Repairing instead of financing Mapfre Seguros Generales, one of the operational units in the Mapfre system, is a member of the Mapfre Caja MAdrid Holding de Entidades Aseguradoras company and is specialised in insurance policy sales to private individuals, having substantial activities in the Home insurance branch with over 2,200,000 policies written, and thereby allowing it to hold a leadership position in the Spanish insurance market. By Juan Francisco Ortega Martinez Claims director Mapfre Seguros Generales
n order to develop its services, Mapfre Seguros Generales has four customer-service call centres located in Madrid, Valencia, Teruel and Las Palmas de Gran Canaria that are dedicated to this activity (Services Department). In 2006, these call centres Juan Francisco generated a volume of Ortega Martinez approximately seven million calls. According to the latest survey by ICEA (Association for research cooperation among insurance companies) entitled “In-depth survey of customers in the home insurance branch, 2006”, the availability and speed of services were seen in a very positive light by our customers. 94.7% of our customers show a high degree of satisfaction with the services provided. Mapfre Seguros Generales’ commitment to quality is reflected at every stage in the life-cycle of customercompany relations and from the very moment the customer comes into contact with “the voice of Mapfre Seguros Generales.” The ISO 9001 certification of the call centre guarantees that all customer-relations management processes are overseen by a Quality management system.
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From the Claims department to the services department: a change in philosophy. Generally speaking, the department that handles an insurance company’s services is the Claims department. As of December 2003 at Mapfre Seguros Generales, it is the Services department that has been in charge of this area. This change in name results from an internal evolution: the need to graduate to a more positive form of management, i.e. one that is no longer associated with a loss, an unfavourable element, but with a service that reflects customer expectations. It is in this way 44 | Efma(g) January / February 2008 - N°211
that we can focus on the customer by setting aside the notion of “loss,” which bears negative connotations.
Dealing with “technical” variables is not enough. As a “standard” claims management service, we can achieve a high level of control over so-called “technical” management variables, but most of the latter are neither visible nor necessarily fully appreciated by our customers. Are we very well positioned where premium collecting is concerned? Can we assert that we control claim provisions discrepancies very well? Have we implemented an effective cost control policy? Is our fight to combat fraud efficient? We fear that these issues are not among top priority topics for our customers who expect us, above all, to make judicious decisions and meet their expectations.
Indemnification versus repair. In order to facilitate the resolution of claims, Mapfre has favoured having recourse to outsourcing since the end of the 1980s because such external suppliers can provide a concrete service versus a simple indemnity. To this end, the company has put together a network of trade professionals and partner businesses in various theatres of operation, which has led to the establishment of a vast network of repair services, health services, legal services, etc. As a result and based on the coverage selected, we offer concerted services for our members. In case of damage, we offer the possibility of sending policyholders a repairer. In case of personal injury, we offer the assistance of our concerted network of clinics and health services. When our customers need legal assistance, our network of partner solicitors is at their disposal. We are gradually integrating services, and trade professionals are helping us to provide new services. That’s why Mapfre Seguros
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Generales has developed a network of 6,500 partner suppliers, trade professionals and businesses in different theatres of operation: repair services, health services, legal services, etc. Among these, we should emphasize its excellent network of repairers, composed of over 3,100 trade professionals and companies that are headed by 140 technical managers who, each year, conduct over 2,000,000 interventions. In one year, we have replaced 86,000 metres of piping, painted a surface area equivalent to 377 football stadiums, changed a lock every twelve minutes and replaced a window every four minutes.
Improving the customer’s perception of cost and quality. Thanks to this system, we are managing to improve our control over the cost of claims by handling volumes that, on one hand, allow us to negotiate prices on a more advantageous basis and, on the other hand, to increase our customers’ degree of satisfaction since they can perceive the service provided by their insurance company more clearly. The solution in hand is both more complete and more customised. It is the service as opposed to the price that becomes the differentiating factor.
An overall quality strategy. The principles we apply in developing an overall quality management system in this sector are based on the following commitments: We are not simply content with being an insurance firm. We are a service company. When one of our customers considers a service, he or she must think Mapfre. Our Services department provides suggestions about the assistance and services that can be marketed. We are involved in the development of these products. It is not enough to implement good technical management. Developing a quality management system that can be assessed by the customer is fundamental. In all our processes, we much seek internal indicators that reflect quality. We must subsequently measure them, inspect them, and comply with improvement objectives. The Quality and Process Planning Departments are interdependent. The processes cannot be improved without taking quality into account and it is impossible
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to improve quality without paying attention to process planning. All personnel in charge of handling service must feel strongly involved in this commitment. Their personal objectives must include certain general or specific quality indicators, depending on their tasks and level of responsibility. It is appropriate to draw up a list of standards and criteria that improve the perception our customers have about the quality of our services. Our internal staff, as well as personnel in our outsourcing networks, know what these are and must apply them. In the case of an urgent repair, for instance, we must contact the customer within the hour and within twenty four hours. if the repair is not urgent. It is necessary for the members of our permanent staff to be responsible for the control and supervision of the outsourced networks. The networks must be recognised as networks dedicated to after-sales service, in the same capacity as sales networks. Endeavouring to ensure customer loyalty is essential. Although each agent is responsible for his or her own decisions and complies with the customer service principles they are expected to heed, we have established Quality Manager positions at departmental level. These employees are in charge of preventing and dealing with all incidents likely to lead to a grievance or complaint, not only by resolving such situations but also by converting them into improvement opportunities by suggesting corrective measures. It is appropriate to assess the opinion of customers through objective satisfaction surveys, followed by result analyses and the implementation of improvement plans. Finally, the Mapfre system has a centralised department to handle the grievances and complaints of end-users of its financial services as a whole. It also has a Policyholder’s Defence Commission, established in 1984, that gratuitously and entirely independently resolves complaints from, among others, insurance buyers, policyholders and beneficiaries (individuals) of insurance policies taken out with insurance companies that are members of the Mapfre System.
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Staying ahead of customer expectations Genworth Financial helps 11 million customers across Europe who have purchased one of their insurance products. We provide policies that cover personal accident, payment protection and a variety of other covers including the ability to protect the value of your car should it be written off in an accident. By Mike O’Sullivan Service Director Genworth Financial
onsumers may buy insurance for a number of reasons: some for peace of mind, others wishing to protect themselves and their families against the unexpected. Yet they only really get to experience and use the product Mike O’Sullivan they have purchased if they make a claim. That is why claims management is so important to the consumer, and equally why insurance companies should be judged above all else on how they treat their customers who, in unfortunate circumstances, need to make a claim. We have extensive experience of claims management, and dealing with customers who unfortunately become ill or have an accident, lose their job through no fault of their own, or even die with debts that are left to their family and next of kin to resolve. In 2006 alone, our experienced claims administration teams in 15 centres across Europe answered 1.3 million phone calls, and paid out in excess of $300 million in benefits to customers in these circumstances.
C
A core competency. At Genworth Financial, claims management revolves around a customer service ethos where a claim is viewed as a unique opportunity for Genworth staff to demonstrate that we can be fair to the customer, as well as protecting the interest of the underwriting company against fraudulent or invalid claims. We consider the management of claims and the associated customer servicing that surrounds it to be a core competency for our business. We also believe that it is important to have local knowledge and expertise, and therefore we manage this entire process within the business in most cases. Developing customer satisfaction for insurance 46 | Efma(g) January / February 2008 - N°211
products is a difficult task, and investment in the skills and knowledge of our people as well as good process management and technology is required to be able to stay ahead of customer expectations. There are a number of different facets to managing claims while at the same time improving the customer experience: • We make sure our contact centres are well equipped with staff, who have the right data and technology to respond to the customer very quickly. We are able to deliver a consistent customer experience to all our policyholders across Europe, even though we manage the claims from 15 different centres and in 22 languages. This is achieved by managing the teams to well defined service targets in terms of call answering standards, and deploying enterprise technology to help the staff achieve their goals. • Even though the customer has received a specific policy document, and should have discussed the product with a sales person when they purchased the policy, in reality most customers like the additional re assurance of checking their entitlement and cover during the initial claims call, and our processes are equipped to deal with this requirement quickly and efficiently. They also need advice and guidance on how they can progress their claim with Genworth, and what is expected from them. • We have set specific targets by product for the amount of claims we expect to be able to complete even in the first run through the process. This philosophy and approach not only drives a mindset of continuous improvement in claims management, but also encourages teams to call the customer or the external party if some piece of information is missing, and deal with it immediately, rather than for example writing another letter. We have
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discovered that we can make a final decision on a sizeable percentage of some claims on the phone, without any paper or claim form requirement. A diary and document management system tracks all of this activity, and will prompt the employee to follow up with the customer or related third parties at a future date if the claim is not finalised.
Consumers only really get to experience and use the product they have purchased if they make a claim. • We try and keep the customer informed as much as possible about the status of their claim. Modern technology has really helped in this regard. We are no longer just reliant on a phone call and letters to help us in this challenge. The proliferation of the mobile phone enables SMS messaging for example as an effective communication tool, and we are also developing web applications to give the internetsavvy user more access and information in the future. Transaction web sites allowing the customer to complete their claim on line is also on the horizon, although for our products, the pilot studies show a reluctance to use the Web as the first and only point of contact for a sensitive issue like an unemployment or sickness claim. In most cases, people want to deal with a real company and real staff rather than an entirely virtual process, when dealing with traumatic events like accidents, sickness or unemployment.
Key drivers. We also survey our customers on how they rate the claims service experience with Genworth. Typically these surveys indicate that the speed and efficiency of claims handling coupled with being kept informed and ease of access are key drivers of customer satisfaction for our products. We know that we can only sustain customer satisfaction during this sensitive claims process by developing our people, processes and technology to make the consumer experience as simple, fast and reliable as possible. One of our corporate values at Genworth Financial is
“Heart”. Through this value we never forget the human dimension. We help people throughout their lives, especially when they need us the most. Effective businesses rely on robust process management, however, the successful ones, those that are preferred by consumers, understand how a personal touch gives purpose to every product and service that they offer.
Genworth Financial Genworth Financial Inc. is a leading financial security company meeting the retirement, lifestyle protection, investment and mortgage insurance needs of more than 15 million customers across 25 countries. Genworth (NYSE: GNW) reported 2006 net income of $1,328 billion and is a member of the S&P 500.
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Service offerings improve claimants’ satisfaction Each year, AXA France handles 1.6 million claims, representing a considerable commercial and financial commitment. The major challenges regarding claims management are to improve the quality of service as seen by our customers and sales networks and to bring technical expenses as well as handling costs under control. By Pierre-Yves Thiriez Claims technical manager AXA France
o confront these challenges, AXA France has launched OPTCICSE*, an ambitious project to remodel general insurance claims management, the aim of which is to transform the service we render to our claimants and have greater control over our Pierre-Yves Thiriez processes and technical expenses: - OP as in “OPtimization”: our processes, working practices and tools need to be improved for greater efficiency and quality of service. - T as in “Transformation”: because our customers are evolving, because technologies are being transformed and because we ourselves are changing too, we need to invent tomorrow's working practices to modernise the ways we exchange with our policyholders, distributors and outside partners. On this account, the OPTCICSE programme covers the longer-term surveys and projects in order to transform the compensation business line. - CICSE as in “Compensation for an Improved Customer Service Enhancement”. For our policyholder to recommend AXA after a disaster, we must innovate: the compensation process is the time when we have to lend our ears, accept to handle and honour the claim and when we commit to providing the customer with the services that will knock him over with surprise! The filing of a claim is a moment of truth in our relationship with the customer. We must remain serene when faced with anguish due to what has happened. Our role as the insurer is to provide our policyholder/claimant with the best-quality service when he most needs it. That is why we have wished to expand the service offerings, so as to be in a position to suggest a solution to his problem, rather than financial compensation. As far as motor vehicles are concerned, we offer our customer the
T
48 | Efma(g) January / February 2008 - N°211
possibility of having his car repaired in a service garage. There are certain advantages here for him, the foremost being a courtesy car lent for the whole repair duration and a shorter vehicle immobilisation time owing to the expert carrying out his assessment remotely. Regarding a vehicle which is damaged but still able to run, we offer a service to the claimant's home: the automobile repairman will come and pick the vehicle up from the customer's chosen location (e.g. his home or workplace). He will leave a replacement vehicle and take the damaged one away for repairs. Once the work is done, the repairman will bring the repaired vehicle back to the customer's chosen location, and this time pick up the courtesy car. This new service guarantees that our policyholder/claimant remains mobile right through to the end of repairs, and the process is optimised so as to minimise the trouble and bother that always follows an accident. Should any glass parts of his vehicle be broken, our policyholder/claimant will be authorised to have his windscreen changed or repaired by one of our network partners. The information given to the service provider replaces the notice of damage and the dossier is processed entirely by computer. As part of our home insurance offer, we have developed a network of 1,200 service companies. These provide general services, painting, electrical work, glazing or any other task involved in rehabilitating housing. The company is called to the site of the damage to carry out repairs. Our policyholder/claimant does not have to worry about finding a company, asking for an estimate and obtaining our agreement for the work to go ahead. We directly assign the company which will carry out the work according to the specifications defined by us. Thus, by the end of 2007, we will have been involved in over 70,000 worksites. The customer for whom emergency service has been provided (on the assister's initiative), or who has been offered reparation in kind by the insurer,
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feels reassured. His problem is handled and there is no longer any question of the insurance benefit amount. No advance payment of expenses, no discussion about values.
The filing of a claim is a moment of truth in our relationship with the customer. Of course, these services were first of all introduced for simple material claims on policyholders' cars or homes. These are the areas in which we can develop effective partnerships with service provider networks covering the whole country. The approvals have been around for a long time for vehicles, but they are now moving towards a partnership between a service provider who commits himself with regard to the service and price on the one hand, and a contractor who commits himself as to the volume. For home insurance, the partnership between a painter and AXA provides the former with regular work on small sites for which he does not need to draw up an estimate, because he works on the basis of a standard rate and he can be sure that his invoices will be paid – and paid within the agreed time period. Do these services apply only to our customers and small material claims? Not at all! Our ambition is to win our customers' preference. For that, we must be able to provide them with assistance in all life's difficult situations, however serious the disaster, and even when there is no need for a claim. And third party risks? We can offer them repair solutions, as we do for our customers. And the victim of an accident causing bodily injury? We have to make available the services he/she truly requires: home help or transportation and, for a victim who is more seriously injured, adjustments to his/her home or vehicle as well as accompaniment for everyday activities and at the workplace. We are using this same approach to service development in all the countries of Europe, which enables us to share our best practices. But the levels of market maturity and customer expectations vary greatly from country to country. In Great Britain, the use of service provider networks is almost systematic for vehicle, as for home, related claims. In Spain, this is the case for the home, but not for vehicles. In Germany, compensation remains
essentially financial. In no country have service to victims of bodily injury or reparation in kind for significant damage caused to buildings been made systematic. This profound change in our role as an insurer is occurring at the same time as other changes in our environment and which have a strong and immediate impact on our activity (expansion of the Internet, the dematerialisation of exchanges, globalisation of the economy, etc.), and requires us to quickly adapt our tools, our organisation and our mentalities. It faces us with numerous questions about our positioning in the value chain as well as how our role is perceived by the customer or the society. How can multiple and complex services be integrated? How can a constant and impeccable quality of service be universally guaranteed? How can the value of our role be enhanced when confronted with a customer who sees us as nothing more than a service provider? Should we extend our business line to the service itself? Several answers are possible for each of these questions, but the consistency and effectiveness of the procedure must be guaranteed along with its economic equilibrium.
AXA services garage visitation 55%
50%
50%
52%
47% 43%
45% 40% 35%
34%
30% dec-03
dec-04
dec-05
dec-06
sep-07
As far as motor vehicles are concerned, we offer our customer the possibility of having his car repaired in a service garage. There are certain advantages here for him, the foremost being a courtesy car lent for the whole repair duration and a shorter vehicle immobilisation time owing to the expert carrying out his assessment remotely. Source : AXA France
* Translation of the french acronym OPTIMVS for “Optimisation Transformation et Indemnisation pour une Meilleure Valorisation du Service au client”.
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States
Redefining the claims processs The Progressive Group of Insurance Companies has been called a visionary, a maverick leading a wave of change within the insurance industry. In business since 1937, Progressive is now the nation's third largest auto insurance group with more than twelve million customers. By Sylvie Marc Freelance journalist Transatlantic Ventures, United States
n 1988, in California, Proposition 103, a law designed by consumers to punish autoinsurance companies, passed. Proponents of it, led by Ralph Nader, spent $2 million, and they won handily. Peter Lewis, CEO of Progressive, met with Ralph Nader Sylvie Marc and realized that claim service was inadequate. He decided to change Progressive’s delivery. Progressive invented the 24/7 immediate response claims and customer service. Peter Lewis saw a competitive opportunity: If Progressive does it first and better, Progressive will get all the business. So Progressive got a fleet of emergency response vehicles, hooked them up to global positioning satellites and equipped them with laptops and printers and cell phones and Net connections. All of that helps Progressive get claim representatives to the scene fast, makes a quick estimation, settlement checks written on-site and all sorts of other advantages. The first one debuted in 1994. Giving good service in the insurance industry creates a customer who is satisfied and who tlks to others about it. Customers say: “Progressive gets there before the police, before the tow truck. It's amazing!”
I
Concierge Level of Claims Service (see charts). “It used to be that when we'd write a check for a claim, our work would end and the customer's work would begin”, said Brian Passell, claims group president for the Progressive group of insurance companies. “Then we asked ourselves why? and changed it all. What used to be the customer's problems are now our problems, and that's the way it should be.” In 2000, it started as an idea for a new level of service 50 | Efma(g) January / February 2008 - N°211
that could help save drivers lots of time managing the claims/repair process following a crash. At that time, Progressive put a construction trailer on a car lot, called it a service center, and began a test of its new concierge level of claims service. The concept was simple: test whether drivers wanted their car insurance company to manage the claims/repair process for them, eliminating the need for them to have to get estimates, find a shop, arrange for alternate transportation, and manage the repairs themselves. It worked: Today, by using the concierge level of service, drivers can spend about 15 minutes instead of the four days it can generally take dealing with the aftermath of crashes.
“We got into the business of reducing human trauma and the economic cost of auto accidents in a cost-effective and profitable way.” Peter Lewis, CEO of Progressive Six more test sites would open between February 2000 and December 2002 before the decision was made to expand this level of service and offer it to all Progressive customers, and those with whom they are involved in crashes, throughout the country. Today, the “Concierge level of claims services”is available through more than 50 state-of-the-art facilities throughout the U.S. CEO and President Glenn Renwick comments “It signifies how far we have come with a simple idea: save people time and make the claims process easier. And, it reflects drivers' widespread acceptance of that idea.” How the service center works: • The customer calls 1-800-PROGRESSIVE to report
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the claim any time of the day or night, and brings the vehicle to the new center. The centers are conveniently located for most customers in markets where Progressive has a center. • At the claims center, in about 15 minutes, the customer can be on his or her way in a rental car with the assurance that Progressive will keep him or her informed of the status of the claim throughout the repair process. • A Progressive claims representative prepares a repair estimate and contacts an auto body shop based on its track record of providing superior service and doing quality repairs, as well as its ability to begin and complete work promptly. Both Progressive and the shop reach agreement on the cost of the repairs; the shop then transports the vehicle from the Service Center to its facility and the repair work begins. • When the work is finished, the vehicle is returned to the Service Center where representatives from both Progressive and the body shop inspect the quality of repairs. • Once satisfied with the repair quality, Progressive calls the customer and asks him or her to return to the Service Center where, together with the claims representative, the customer inspects the repairs. • The customer then leaves with a written guarantee on the repairs that both Progressive and the body shop stand behind as long as the customer owns the vehicle.
Total loss concierge service. In 2006, Progressive expanded its concierge level of service to address the special needs of drivers whose vehicles are unrepairable as the result of an accident. Progressive's new total loss concierge service helps customers find a replacement vehicle at a competitive price, and helps them find financing, too. Most insurance companies hand you a check when your car is totaled. Progressive understands that, while you need the check, you also need another car. Progressive has designed a total loss concierge service to help get you into a replacement car quickly. If you choose to use the total loss concierge service, a concierge specialist will be assigned to you to find out exactly what type of vehicle you are looking for, including make, model, color, year and price range. Your specialist will even ask you how you would like to finance the
vehicle. Once Progressive knows what you're looking for, they contact a carefully chosen network of dealers and lenders with proven track records for great service and good values. Network dealers and lenders will work directly with you, but your concierge specialist will always be available to answer questions or provide additional information. In most cases, Progressive has found cars that meet customers' needs within six days. “The process is getting rave reviews, and we believe this is the future of auto insurance,” said Passell. The service is not just for Progressive policyholders, it is also available to anyone involved in a claim with a Progressive policyholder. In addition to the new claims centers providing one-stop handling of vehicle repair claims, Progressive operates more than 350 claims offices in all 50 states and employs more than 13,200 claims people. More than 28,000 Progressive people work in more than 460 offices throughout the United States. Progressive has redefined the claims process but also the auto insurance industry. Peter Lewis concludes “We got out of the car-insurance business, and we got into the business of reducing human trauma and the >>>
Core operations comes first 11% Operations support
59% Core operations
3% Support services 27% Distribution
US insurance industry 2006 IT spending budget by business operation. IT spending by the US insurance industry is focused first on making improvements to core operations that directly affect the customer experience. Source: TowerGroup 2006
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>>> economic cost of auto accidents in a cost-effective and
profitable way.”
On the spot: claims processing from the field. Claims accounts for the largest single portion of an insurer's financial results: around 60% to 70% of total premium revenue. A 5% reduction in claims costs rolls through the income statement as about a 3% improvement in the bottom line. Although relative newcomers to mobile computing, US insurers are investing heavily in enterprise-wide strategies that will make quick, efficient claims resolution a reality (see chart, “Steady growth in insurance IT spending”). Speedy processing has immediate applications in auto insurance, where claims are typically smaller in value and have fewer variables. Equipping agents with mobile technology can pay big dividends in terms of increased productivity and otherwise reduced costs. The industry’s embrace of mobile technology is recent but enthusiastic. “In terms of claims management systems, there has been a transformational effort over the last couple of years,” says Karen Pauli, senior analyst for the TowerGroup. Automated claims administration systems, for example, now allow multiple
Steady growth in insurance IT spending $41.7* $40.5* $39.4* $38.2
IT spending (in $ billions) The US insurance industry’s growing attention to field claims processing is a contributor to growth in IT spending.
2006 *projected
Source: TowerGroup 2006
52 | Efma(g) January / February 2008 - N°211
2007
2008 2009
people to simultaneously review a file. That means members of the special investigation unit as well as the claims manager and the adjuster can all look at and discuss a case file at the same time. Claims adjusters are now routinely equipped with cell phones and digital cameras. Many companies are now adding global positioning system (GPS) devices to help adjusters pinpoint locations more efficiently. The change underscores the evolving role of superior claims processing as a competitive weapon. “It turns out that the quality of the customer experience during the claims process, such as when that pipe breaks or when a car accident occurs, largely determines whether that customer will stay with his or her insurance company,” says Tony Jacob, Microsoft industry marketing director for worldwide financial services. “So the insurance carriers are trying to figure out how to improve the quality of the claims process, and of course speed the settlement process as a way of retaining customers.” Chad Hersh, Celent analyst, estimates only 10% of insurers employ wireless networking to process claims from the field. Fewer still remotely approve claims while the adjusters are on site, he says. Only a handful support systems that give adjusters the ability to print checks from their cars. But Hersh predicts that the insurance industry’s increasing investments in core operational changes will produce a surge in technology adoption between 2008 and 2010 (see chart, “Core operations comes first”). Improvements will appear as combinations of expanded wireless coverage, advances in upload speeds and security, and the slimming of claims applications to more Web-friendly size. In addition, recent catastrophes have highlighted technology challenges that are now being addressed and will benefit claims processing. “Hurricane Katrina showed the value and the limitations of mobile technologies,” says Microsoft's Jacob. “Claims adjusters working in decimated areas had the mobile technology to fill out forms, take digital photos, and then sync up to the corporate database. The challenge was that cell towers were destroyed and power sources were limited in many areas, so it pointed out the need for better battery life and sync technology.”
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Reinforcing customers’ loyalty Ever since the company was founded in 1990, Pacifica has innovated through the management of claims by telephone. As a result, the property and casualty insurance branch of the Crédit Agricole has enjoyed increasing success, reporting 15% growth over the last two years, whereas the property and casualty insurance market in general has shown growth of 2% over the same period. By Patrick Duplan General manager Pacifica
hen Pacifica was launched 17 years ago, almost all the banks already offered life insurance, which they had incorporated by creating their own insurance company. In the property and casualty banking insurance Patrick Duplan sector, only two banks opted for total integration, the Crédit Mutuel and the Crédit Agricole. When these two institutions joined the market, they both adopted an identical strategy, which would prove to be the most profitable in the long term, i.e. the complete integration of the property and casualty insurance branch, with regard to both upstream (product design and marketing) and downstream activities (claim distribution and management). Other banks entered the market by joining forces with an insurance partner, and some have simply stayed away. The Crédit Agricole has developed an innovative concept, i.e. integrated banking insurance rather than an alliance with a conventional insurer. This strategy has enabled the bank to control the entire value chain, with fluid management procedures, uncomplicated products that are easy to sell, fine-tuned management of the technical results, assistance for the sales force and a totally innovative approach to claims management.
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A claims management approach based around quality of service. Curiously, conventional insurers have never really considered claims management to be a fundamental avenue for development. Yet this is the moment when the quality of the relationship between the insurer and its client can best be assessed. Insurers have always taken a more financial than marketing approach to the business. They receive premiums and subscriptions to financial products, and then pay out for claims when necessary. Insurance
company executives are obsessed by a simple equation: optimisation of earnings = maximisation of premiums and reduction of total claims. Unfortunately, there is a stumbling block for both sides of this equation, in the form of the client! The real essence of the insurance profession is also (and perhaps above all) working alongside the client and providing him with a genuine quality service when a claim occurs. From this perspective, it is entirely reasonable to expect a fair return for the service provided. Ultimately, claims management is the finished product for a property and casualty insurance company.
France is probably the most advanced country in terms of property and casualty banking insurance. Pacifica offers the client a direct telephone relationship and this service (which promotes a positive image) represents its core business and the focus of its organisation. Capacity for reaction, innovation, customisation, close physical presence, quality of service, and control over technical and management costs are the key aspects to its strategy. In addition to its head office, Pacifica has 15 decentralised claims management units, which are close to the distributors of our products (i.e. the regional branches of the Crédit Agricole and soon the LCL) and close to the clients, assessors, repairers and victims. Pacifica currently employs a staff of approximately 300 at the head office, and 700 outside, who have handled 3.5 million claims since the creation of Pacifica. A survey is carried out every year on a sample of 1,000 claimants. This survey reveals a satisfaction rate >>> N°211 - January / February 2008 Efma(g) | 53
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>>> of between 93 and 97% (depending on the year).
Moreover, 50% of these clients consider that their confidence in the Crédit Agricole has been increased since they have received payment for their claim. This is clearly not a direct and immediate financial result, but it clearly contributes to reinforcing the loyalty of clients, and enhances the likelihood of them recommending this service to their family and friends.
Innovative products. Pacifica was the first insurance company to introduce the concept of the “new” replacement of possessions in the housing insurance sector in France. This involves, firstly, abandoning the concept of dilapidation, which tends to create misunderstandings with clients, and secondly, replacing the client’s possessions in his home. This service is provided by a network of partners that directly replaces the client’s possessions in his home, within an extremely short timeframe. This type of innovative product, combined with a genuine service, is particularly appreciated by our clients. The General accident guarantee is another example of innovation. Its success shows that a real client requirement already existed. The Crédit Agricole, with a more polished offer than that of its competitors, has seized an opportunity to conquer an untapped market, where it is now by far the leading player, with annual revenue of nearly €118 million in 2006, representing a market share of 32%. Finally, the concept of banking insurance introduced by the Crédit Agricole five years ago, together with its strategic approach, consists in becoming a universal banker/insurer in all the proximity markets (private individuals, farmers, small shopkeepers, professional people etc). Pacifica now offers a complete package that targets both the agricultural and nonagricultural professions, and has set very ambitious targets in both these markets.
Claims management
notably Italy and Greece. The teams operating within the International Insurance Department, reporting to Bernard Delas, are particularly mobilised with regard to duplicating the two Pacifica and Predica models. Pacifica’s challenge over the next five years is to double its revenue. The implementing of a complete multichannel approach, developed with its partners, should contribute to this ambitious objective being attained. Indeed, in 2007, out of 1.3 million new business transactions, 10% were generated via the telephone platforms. Today, the regional branches of Crédit Agricole offer an on-line quote simulator, in addition to a telephone connection. In 2008, it will be possible to go through the entire subscription process on the Internet. Pacifica’s other asset is the integration of a second distribution network. Since September 2007, it is the full owner of the Assurances Fédérales Iard. By the end of 2007, an acquisition-merger will be completed, and LCL will possess, with Pacifica, a powerful integrated banking insurance mechanism.
Pacifica key figures in 2006 New business (all products)
1,272,000 contracts
Stock of portfolio contracts
5,333,000
Number of open claims
492,160
Turnover
€1,206 million
Commissions paid to the distribution networks
€312 million
Earnings (after corporate tax)
€45.4 million
Roll-out abroad. France is probably the most advanced country in terms of property and casualty banking insurance. In Europe, there have been no trials as integrated and thorough as those implemented by the Crédit Agricole and the Crédit Mutuel, which, together, represent 80% of the volume of business carried out in the property and casualty banking insurance sector. The Pacifica model has recently been rolled-out in Portugal, with the objective of extending it to cover other countries, 54 | Efma(g) January / February 2008 - N°211
Source: Pacifica
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People Two of our latest conferences
Athens and Barcelona Efma reasserted its ambition to promote innovation in retail finance by fostering debate and discussion among peers through two conferences. In Athens first, during its 35th Congress (25 and 26 October 2007), the Efma Grand Prix rewarded the best advertising in retail banking. And then in Barcelona (from 27 to 30 November 2007), the “Best online or mobile banking service or product in Europe” have been presented. Each time, the audience has voted for the winner. The four nominated entrants to the 2nd “Best online or mobile banking service or product in Europe” (from left to right): Pedro de Sousa Cardoso (Head of marketing division, Banco Best), Constantinos Stivaros (Business development manager, Piraeus Bank), Audrius Kurcevicius (Electronic banking subdepartment, Hansabankas) and Dennis Pereira (Head of eCommerce, SNS Reaal).
Eventually Constantinos Stivaros won the award (here next to Philippe Van Fraechem and Jean-Guillaume Desprès from the Efma staff) during the “Online financial services” conference which took place in Barcelona.
More than 400 advertisements (spots and posters) forwarded by 100 institutions from more than 30 different countries have been presented during the 32th Efma Grand Prix. Sotiris Anastasiadis (Advertising and communication manager, Eurobank Cards) won the spot award he received from Patrick Desmarès, Executive director, Efma.
Deborah Davis (Relationship manager, Department Commercial Telephony, Lloyds TSB) and Thomas Ericson (Executive Vice President, Head of Contact Centre, Nordea) took the floor during the “Customer contact centres” conference to the cheers of the audience.
From left to right: Aleksey Marey (Member of the executive board, Head of retail business, Alfa Bank), V. Vaidyanathan (Executive director, head of retail banking, ICICI Bank), Richard Lowrie (Director of banking strategy, SAP) and Michael Mischker (Director of banking solution marketing, SAP). All of them took the floor during Efma 35th Congress dedicated to Multidistribution which took place in Athens.
Daan Josephus Jitta (Director of direct channels and innovation for commercial banking, ABN AMRO Bank) during its presentation at the “Online financial services” conference.
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Books The future of investing in Europe’s markets after MiFID CHRIS SKINNER The MiFID (Markets in Financial Instruments Directive) reform establishes a new regulatory framework for markets in derivative instruments. The aim of this directive is to promote crossborder investment services while increasing consumer protection. In order to understand these changes, Chris Skinner has collected in this book the views of several specialists in this field. The contributions are classified according to four major themes: the principles of the directive; will this system work?; MiFID: the end of exchanges?; technology and MiFID.
Comportements du consommateur DENIS DARPY, PIERRE VOLLE This book is based on the principle of studying consumers in order to improve marketing decisions. The authors rely on several disciplines (economics, psychology, etc.) to illustrate the three parts of their demonstration: the conceptual foundations (needs and motivation, attitudes and preferences, persuasion); the consumer’s decisions (choice process, buying and consumption behaviour); individuals and their social environment (socioeconomic characteristics, psycho-cultural characteristics). Dunod, 10/2007, 370 p. www.dunod.com
John Wiley and Sons, 06/2007, 261 p. www.wiley.com
An introduction to Islamic finance: theory and practice ZAMIR IQBAL, ABBAS MIRAKHOR The global demand for ethical investments has driven the rapid development of Islamic finance. Several leading banking groups such as HSBC and Citigroup have announced their intention to become major players on this market. This book explains the fundamental principles of an economic and financial system governed by Sharia Islamic law. Numerous Islamic principles are examined (social justice, the sacred nature of contracts, the prohibition of interest) and examined in relation to the economic behaviour of individuals and society. See our focus page 22 to 23. John Wiley and Sons, 12/2006, 332 p. www.wiley.com
Banken-Handbuch Firmenkundenmarketing
Business knowledge for IT in retail banking
BERNHARD BERGMANS Corporate customers are particularly important for banks. To succeed on this market banks need precise marketing knowledge and a practical customer oriented approach. That is why this book presents a consistent customer marketing approach, from the design phase to its implementation, in which the target customer, namely corporate accounts, and the objectives to be achieved are systematically taken into consideration.
This book is intended to be a guide to IT and new technologies in the retail banking sector. In a dozen chapters, it describes first of all how retail banking works (principles, players, products) before looking at the latest innovations in the sector: SEPA, process automation, Islamic banks, SWIFT, banks in the virtual world, etc.
Erich Schmidt Verlag, 2007, 385 p. www.esv.info
Essvale Corporation Limited, 08/2007, 228 p. www.essvale.com
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Le marketing adulescent CORINNE MAILLET “Kidults” are young adults who, because they feel nostalgic for their childhood, try to relive it by buying products that are predominantly aimed at children and brands with which they are familiar from their childhood. Considered initially as a passing fashion, this phenomenon has lasted and its economic dimension has attracted the interest of advertisers and marketing experts. Village Mondial, 09/2007, 271 p. www.pearsoneducation.fr
Banking sector development in transition countries RALPH DE HAAS Since the fall of the Berlin Wall, the former socialist countries of Eastern Europe have initiated far-reaching economic reforms. The creation of a dynamic banking sector has been an important part of this process. This book examines the impact of multinational banks on the development of the banking sectors in several of these countries. VDM Verlag Dr. Müller, 09/2007, 231 p. www.vdm-verlag.de
Integration der Vertriebswege Herausforderungen im Dynamischen retail banking MARKUS KECK, MARCO HAHN This book entitled “The integration of distribution channels” looks at the strategic positioning of distribution channels, which is a challenge facing the retail banking market in Germany. The themes addressed include in particular multichannel distribution in the framework of bank marketing, the theory of complexity as a guiding line for strategy processes and changes in sales strategies. Finally, the book looks at the major aspects of multichannel management and its efficiency. Gable
Deposit insurance ANDREW CAMPBELL, JOHN RAYMOND L ABROSSE, DAVID G. MAYES, DALVINDER SINGH This book is a collection of publications by various authors who assess the benefits of deposit insurance systems. In addition to protecting depositors, these systems are an essential aspect of a country’s financial stability. The authors cover several subjects: the promotion of financial stability by protecting depositors; setting up a deposit insurance system: why? how?; general advice on resolving bank bankruptcies; encouraging international cooperation to deal with bank bankruptcies. Palgrave, 06/2007, 350 p. www.palgrave.co.uk
Monde changeant des assurances BERNARD DE GRYSE The last twenty years have been a period of almost non-stop change for the financial sector. This book reviews the insurance market and retail banking sector in Belgium while placing them in an international context. A special chapter is devoted to the new competitors and mutual insurers. It is to be noted that the last chapter is devoted to the place of women in insurance. See interview page 34 to 35. Larcier, 02/2007, 215 p. www.larcier.be
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Efma 30 Convention Paris, 13 - 14 March 2008 Among the global leaders speaking at this exceptional anniversary event
George Awad, CEO, Global Consumer Group EMEA, Citigroup Karel de Boeck, Vice Chairman, ABN AMRO Rajiv Dutta, President, PayPal Achim Kassow, CEO, comdirect and Member of the Board, Commerzbank Andrei Kazmin, Director General, Russian Post Jan Lidén, President and CEO, Swedbank Xu Luode, President and CEO, China UnionPay Lars G Nordström, Chairman, Efma and former CEO, Nordea Bank Roberto Nicastro, Group deputy CEO, Unicredit Ergun Özen, President and CEO, Garanti Bank Baudouin Prot, CEO, BNP Paribas V. Vaidyanathan, Executive Director, ICICI Bank
Leadership in retail finance Driving value creation strategies After several years of record profits, more turbulent markets are challenging finance firms to redefine how they create sustainable value for all stakeholders: shareholders, customers and society at large. The Convention is Efma's most strategic event and the foremost international gathering of decision makers in European financial services - the place where executives draw lessons from the past, project a vision of the future and devise the strategies that will make it happen. Some of the most influential leaders in retail finance will share their insights and vision about how they intend to create value in mature and emerging markets. Exclusive Efma reports will be discussed and distributed to participants: World Retail Banking Report 2008 Retail Banking Competitiveness Report
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