Monday, January 2, 2012

Health Insurance Deductible Self Employed - Sustaining Margin Pressure

Health Insurance Deductible Self Employed

We believe it is unlikely that the current high levels of profitability in Asia's life insurance business, relative to the more developed Western markets, will be sustainable in the long run. Competition is already eating away at profit margins and will continue to do so. This has been most visible in bancassurance, where the banks have squeezed the margins of the Life insurers. On the other hand, in the agent channel and in more traditional life insurance, many of the features of life insurance products continue to be opaque to customers, so the compression of margins will most likely be a much slower process. While the margins of Asian life insurers will gradually decrease in the long term, in the context of global Life insurance, this region will still be significantly superior in terms of profitability in the years to come.

What we do not anticipate in the next several years is major consolidation in the industry. Asia is still very much a growth market, and for many of the players, throwing in the towel and selling to competitors is not an option. In fact, the slowdown in their home markets has prompted many international players to double down on their Asian efforts. In the longer term - and it may be quite a long term - consolidation in the industry may happen, but no one should be waiting for consolidation to play their cards.

In this market context, life insurers across Asia in particular, many of the local players need to shift from a growth to a value paradigm. Many life companies are still mainly focused on growing the top line. This is only natural, since the current market valuations of these companies assume that 70-80 percent of their value will be from future growth expectations. But even in markets such as China and India it is becoming increasingly clear that high growth alone is not sustainable in the long term, and is no guarantee for success. What investors are looking for are sustainable business models and long-term, value creation opportunities. To take a value perspective, life companies will need to adopt some of the initiatives described above, which include maximizing the product and channel economics, introducing a cost perspective into operations management, and rationalizing investment decisions from a risk perspective.

Challenges and Opportunities for Life Insurers in Asia
Above we have looked at the five key success factors for winning in Asia. The following section will describe the specific challenges and opportunities for life insurers in Asia. The strategy for every company will of course be different and each one's success will depend on its ability to leverage its natural strengths and adapt its competitive positioning to capture value creation opportunities. The nature of the response will very much depend on the starting point of the many players in the market. At the risk of over-generalizing, the starting point of life insurers in Asia can be roughly divided into four groups:
  • Large local incumbents - Characterized by major market positions, first-mover advantage, close regulatory relationships and seen as national champions, these organizations usually have a large agency force with numbers in the tens or hundreds of thousands.
  • Smaller foreign and local players - These are usually companies which are much smaller and nimbler than the large local incumbents, burdened with far fewer historical legacies, and have strengths in particular localities or product areas.
  • Well-established foreign multinational companies - These are companies with long experience in Asia, usually the first overseas movers in local markets, well-positioned across several Asian markets, and operate a well-staffed Asia headquarters.
  • Emerging foreign multinational companies - These are small latecomers to individual markets and typically have a limited footprint, focusing only on a few markets.
The following details the top strategic priorities for each of these types of players.

Large Local Incumbents
Most Asian markets are dominated by a handful of large local incumbents. These companies are very well established and often had a near, or actual, monopoly in the past. Their corporate culture and practices were nurtured in a time when they faced little competition. Among the many advantages they retain are: strong relations with a range of partners and official bodies, strong brand awareness, and large sales forces. Companies that fall into this category are China Life in China, Samsung Life and Kyobo in South Korea, Cathay Life and Shin Kong in Taiwan, LIC in India, and Nippon Life and Dai-ichi in Japan.

These local incumbents are increasingly being squeezed by more nimble foreign players and local competitors. As deregulation accelerates and competition intensifies, this pressure on the incumbents will continue to build up and a proactive response is needed. In general, we believe that these incumbent players have two broad priorities: transforming the core, and creating new growth horizons.

Transforming the Core
Many of Asia's local incumbent life insurers have enjoyed a quasi-monopoly, or at least a dominant market position, in the past. This has led to very large sales forces, but also to more bureaucratic and hierarchical organizations, slower decision-making, and often lower productivity. As a consequence, many of these incumbents have continually lost market share to smaller attackers and foreign entrants when their home markets were opened up. Many of them are now in need of a massive transformation program to protect their market position buttons outlined above - they need to perform a fundamental and extensive upgrade of their sales forces and create a more sustainable model. Furthermore, they need to systematically address weaknesses in other parts of the business system - for example, in IT, operations, and investment management. And they need to strengthen the management bench - renewing the top team and hiring and developing top talent at all levels of the organization.

Given the scale of these companies, this is an enormous task - but it can be done. We have found that a strong leader, a clear vision, a detailed road map, and a strong implementation setup are the ingredients required to succeed. This kind of transformation program usually takes three to five years and requires the whole organization and key stakeholders to be aligned behind the ultimate goals. There has yet to be an example of a completed transformation of an incumbent life insurer in Asia, but there are some encouraging signs. For example, Samsung Life has made remarkable progress in increasing the productivity of their housewife sales force.

There are also success cases in other financial sectors, for example, the transformation of ICICI Bank into a market leader in India. We believe some of Asia's incumbent life insurers will follow this path and a few will regain their strength and market-dominating position. Just as many incumbents though, will not be so successful - it may be difficult to imagine now - but in 10 years time, it is possible that some of these incumbents may become marginal players in their own markets. This in turn will open up new opportunities for smaller attackers and foreign players. Next post, we'll talk about creating new growth horizons. At mean time, you can check out Health Insurance Deductible Self Employed.

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