INSURANCE GDP PENETRATION – THE MOST IMPORTANT NUMBER YOU’RE NOT WATCHING

The gamut of strategic and tactical options facing an insurer can seem overwhelming. Lines of business, products, customer segments, distribution channels, geographies – each presents its own set of choices. Additionally, there a number of different metrics and approaches which can be used to characterize insurance markets worldwide, in order to guide these decisions.

What if I told you that, knowing only the country you’re operating in, there is one number I can look at and tell you which strategy you should be using?

It’s not quite as simple as that, of course. Disciplined execution is still required for success, and there are outliers and exceptions in every market – we can only speak in terms of statistically significant trends. However, the fact that one metric can so often predict the success or failure of a given strategy in any specific country is an extraordinary and powerful finding.

Four fundamental strategies

ACORD studies over the past several years have shown that there are four fundamental strategic options which drive successful value creation across the global insurance industry.

• Operational Excellence: hone efficiency to compete on price
• Customer Intimacy: enhance customer experience and interaction
• Product Leadership: offer unique and/or high-quality products
• Innovation: engage in discontinuous change to stay “one step ahead”

Historically, successful insurers have focused deeply on only one primary strategy. However, one of the signs of the fundamental transformation currently affecting the industry is the emergence of a Composite strategy among high-performing insurers. ACORD studies have found that committed and thoughtful adoption of new, enterprise-wide technological capabilities has allowed insurers to simultaneously execute across all four fundamental strategies – a previously nearly impossible task. In fact, in some markets, this capability is not only an advantage, but a baseline requirement for success.

The GDP penetration metric

Strategic intent is worthless without allocating the necessary resources to support it. However, insurers worldwide – constrained by challenging macroeconomic climates and pressures of transformation – often find these resources in short supply. How can they tell where to focus their strategic efforts?

The ACORD Global Insurance Marketplace Study found that, among the many metrics used to categorize markets worldwide, the most significant was insurance GDP penetration – the size of the insurance market relative to a country’s economic output. By taking into account both the current level of GDP penetration, and its rate of growth or decline, any insurance market can be segmented into one of three market types.

• Mature Markets where insurance has high penetration, but is either declining or slowing as a percentage of total GDP
• Developing Markets where insurance, typically lower than the global average in penetration, shows strong growth
• Opportunistic Markets where already low penetration is declining, requiring insurers to be very thoughtful about entering the market

One interesting outcome of the study was that, when segmented using these metrics, markets may not fall into the categories one would expect. For example, although Norway and Japan may have robust and developed overall economies, they are both classified as Developing Markets in terms of opportunity space for property & casualty lines. Similarly, New Zealand is a Developing Market for life insurance.

Putting it into practice

Once an insurer determines the market segment in which they’re operating, the obvious next question is, “OK, so what do I do with this information?”

The ACORD Global Insurance Marketplace Study examined nearly 11,000 insurers across 85 countries, and found that market type was the single most effective predictor of successful value creation for each fundamental strategy. In an Opportunistic Market, for instance, Product Leadership strategies have the greatest likelihood of achieving above-average performance, but Customer Intimacy strategies show the greatest potential to maximize market share.

In addition, successful insurers in each market segment, when taken as a group, display certain common capabilities. Winning carriers in Developing Markets, for example, excelled at market education – schooling not only their customers, but their channels as well, about coverage, conditions, and expectations.

In essence, this means that we can build a “profile” of a successful insurer in any given country – strategies, tactics, and capabilities – based on the GDP penetration metric alone.

ACORD has published a report on the Global Insurance Marketplace Study for P&C lines, with Life to follow shortly. Full details of the study are also available to ACORD members. For more information, visit www.acord.org/research.