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Motor direct to Consumers – an actuarial perspective Presented by Nicolas Faquet CEO, DirectAsia Hong Kong COO Directasia.com Group

16 November 2012

Overview

How Direct Insurance changes the scope of work of Actuaries.

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1. Overview of distribution of motor insurance

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Motor insurance predominantly distributed by intermediaries in Asia - Motor insurance market in Asia except South Korea is predominantly distributed by agents, brokers and car dealerships • South Korea with an internet penetration of 80% generates more than 20% of premium online • China is embarking in its “direct online” revolution with a few insurers selling motor insurance online following successful outbound calls 2010 Motor Premium (USD$Billion) 47.0

14.5 5.3

China

South Korea

Taiw an

4.0

India

2.5

2.0

Thailand

Malaysia

1.0

0.9

Indonesia Singapore

0.4

0.4

Vietnam

Hong Kong

- Singapore: DirectAsia started its online business in June 2010 following AVIVA. In 2011, more than 3% of motor premium is generated by direct players and about 7% of all private vehicles are insured by Direct Players.

- HK: Pingan launched its online business in 2011 followed by DirectAsia in 2012 - Other markets: no direct players due to low internet penetration, motor insurance not compulsory (Indonesia)…

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UK distribution of motor insurance: Dramatic evolution to direct/online Dominated by brokers up until 1991

1985 Direct Line first direct insurer

Gradual reduction in market share by brokers to about 28% of GWP by 2009

1995 Admiral first direct insurer with internet presence, Direct line (market share =10%)

2008: Distribution of motor insurance sales

Source: EMB “Pricing perspectives on an aggregated future”

2002 Confused.com first aggregator

2006 2008 Sharp uplift Direct: 40% of online Aggregators: purchase 40%

- Based on Datamonitor reports, • By 2010 Private motor insurance are sold mostly online except for older consumers • More than 60% of customers will make use of an aggregator before buying • Aggregator accounts for more than 40% of sales (about 15% are from broker/affinity via an aggregator website) • The rise of aggregators has also seen a significant reduction in profitability 5

Other developed markets: less dramatic revolution to direct/online - In US, the direct revolution has been less dramatic than in UK. Based on comScore reports, • In 2008, the direct market accounts for about 28% of the personal motor insurance market (compared to 4% in 2004) with an estimated 15% brought online • Based on a survey, it was noted that there was a significant growth in number of quotes submitted online in 2009 – 21% increase compared to 2008 and this has remained fairly stable until 2011 • However policies brought online continues to grow

Quotes submitted Policies purchased

2008 -1% 8%

Year-on-year percentage change 2009 2010 21% -3% 22% 1%

2011 5% 6%

- Similarly in Europe, the evolution towards direct has been less dramatic - France, Germany are still marginal direct sales although starting to grow - Italy and Spain have seen much faster take up

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What’s about Asia ???

- It took UK more than 25 years to move from an intermediary-dominated to a direct/aggregators-dominated market - It requires less than 10 years for South Korea to follow a similar evolution in the distribution of motor insurance - With increased accessibility to internet and other mobile technology, it is likely that it would take less time in Asia to follow similar evolutionary process

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2. Implications for product design

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Product design and pricing are restricted to intermediaries preference

- In an intermediary context, • Products are designed and pricing constructed with intermediaries in mind • This places significant limit on questions that can be asked to customers and hence information that can be collected • Actuaries are less involved with the price customer will face and generally tend to be restricted to technical pricing and/or assessment of price changes on top and bottom line • Retention analysis are to some extent dependent on relationship with intermediaries Source: “The Changing Landscape in Motor Insurance Business in Asia - A Snapshot of Innovations and Developments” – Adrian Cheung & Jack Jiang

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Product Differentiation

The Increase possibilities of Direct New Segmentation variables Market place Usage Standard Auto

Driving Offense

Options selected

New Product features Flexible and high value PA

Manual UW

Payment method

GAP

Legal Protectio n

Segments specific products with specific Underwriting Tree

Low mileage

High Risk

Young Drivers

Luxury Cars

2. Increase Actuarial Scope

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Lifecycle of motor products – direct vs intermediaries

Intermediaries centricity (commission)

Shift towards

Customers centricity (price and value proposition)

Source: “The Changing Landscape in Motor Insurance Business in Asia - A Snapshot of Innovations and Developments” – Adrian Cheung & Jack Jiang

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In a direct context, actuarial scope and techniques extend much beyond pricing and reserving

Marketing Offline

Online SEM SEO Ads display Website partnerships

Visitors

TV Radio Billboard Newspaper

Cost per Visitors

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In a direct context, actuaries will need to understand customers to design optimal product/pricing strategy

1) Design Visitors

2) Drop rate by stage : Facts => Analysis => Solution Quote

3) A – B testing

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In a direct context, actuaries will need to understand customers to design optimal product/pricing strategy

Quote

1) 2) 3) 4) 5) 6)

Pricing Conversion ratio by segment Available technical margin by segment Competitors positioning and movement Elasticity Pricing N+1

Sales

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4. Conclusion

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Conclusion

- Distribution channel likely to continue to evolve but the pace in Asia likely to be faster than in other countries particularly as internet and other technologies penetrate Asian countries - Changes in distribution dynamics will likely impact on product designs and offering as insurers develop a better understanding of their customers - Increased competition in a different distribution environment will mean that insurers will need to increase their pricing sophistication and build up their customer analytics skills - Key to success: Know your customers and the right channel to deliver the product to your customer - Acquisition cost are not proportional anymore : Optimizing Cost per Acquisition and identifying activities which increases sales will be keys

Actuarial skills and techniques becoming more critical. A new frontier for actuaries.

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“It is not a task, it is a journey… A well conceived strategy is important, but I would give our strategic plan to our competitors and not worry about it – because it’s all about execution.”

Richard M. Kovacevich, Chairman, Wells Fargo Bank

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