A lot has been said and written about the political and economic situation in Europe. Interesting news came from Oslo last week with the Nobel Committee awarding the Peace Nobel Prize to the European Union. While I reckon that some may be right to believe that the 70-year period of peaceful time we have been experiencing in Europe since the end of World War II could have been the fruit of the European Union construction, I have my doubts that what has been true in the past decades can be verified in the future. Being Swiss and therefore not part of the European Union, I think it would be worth providing my thoughts on the topic and what it means for insurers who are about to invest in Europe today and in the near future.
Obviously there is a “BEFORE” and an “AFTER” the financial crisis and I think it is important to analyse what has changed since 2008 and the collapse of US subprime bubble, the bailout of major financial institutions including banks and insurers and the downturn in the economy experienced immediately after that.
In terms of political stability we have to admit that the situation has been pretty shaky in certain EU member countries. Actually there is a rule that applies in a majority of them: governing politicians or political parties have lost power following the financial crisis. Examples include: Spain with the defeat of the Socialist party of prime minister Zapatero, Italy with the forced resignation of Silvio Berlusconi, France with the defeat of the UMP party and president Nicolas Sarkozy, Greece with the emergence of the fragile coalition following this year’s elections. This is without saying claims from regions asking for more independence like Catalonia in Spain or Flanders in Belgium.
With regard to the economic situation, some countries parts of the Euro-zone are cause of worries. With more than 25% unemployment, Spain and Greece top this list. But what is still more worrying is not the state of their economy but its dynamic. Indeed, not only the number of unemployed people is high in these countries but the increase in unemployment is very fast. For instance the unemployment rate in Greece has been increasing at a 1% pace over the past few months. More than a debt issue, the problem faced by countries such as Spain, Greece, Portugal, Italy and to certain extend France is a lack of competitiveness and with the recession looming I fear the situation could not improve.It is in this tough environment that insurers are planning new investments in Europe. What we have already predicted in terms of investment in new core insurance systems in the life insurance sector seems to materialize. Uncertainty seems to hit less severely the general insurance sector (property and casualty) but the industry has still to generate underwriting profits in key lines of business for instance motor insurance in France and United Kingdom. I personally think that identifying and investing in innovative business models is key to grow and generate profit in the long term in this difficult market environment and I encourage insurance companies to challenge their traditional business model.
My colleague Jamie Macgregor and I have published the Celent’s regular report profiling policy administration system (PAS) vendors in the life and pension space in Europe Middle East and Africa (EMEA) back in November 2011. This report profiles 34 systems offered to EMEA insurers on the market. Beside this research we thought it would be valuable for our subscribers to understand our view of this market. To do so we have decided to add three other pieces of research, whose objective is to explain the dynamics of the life and pension PAS market in EMEA:
1. Deal trends: First of all we have tried to have a deeper look at past life and pension PAS deals in EMEA and to evaluate how this market might evolve in terms of size going forward. In the frame of this analysis, we have identified which vendors were having good traction in the recent past and evaluated PAS provider’s market shares. The EMEA life and pension PAS market is highly fragmented with a downward trend in terms of new deals. Therefore we expect the market to rationalize going forward.
2. Insurer’s perception: It is difficult to comprehend the dynamics of a market for a PAS provider without understanding what customers think and what are the differences of perception across regions. In this report, we identify how customer satisfaction and perception of IT vendors capabilities as well as life and pension PAS has evolved recently in three geographies: UK, Continental and Eastern Europe. Through this analysis it appears clear that PASs are not uniformly used across regions and that a core feature for a specific insurer could just be perceived to be a simple support function for another one conducting business in a different geography.
3. Functionality and technology trends: The last piece of our work around life and pension PAS in EMEA consists in providing our views on solution’s functionality and technology aspects. While the deal trends and insurer’s perception rely mainly on factual data, our view on the future of PAS in terms of functionality and features as well as technology is an extrapolation of what we have been seeing on the market over the past few years based on our discussions with IT vendors and insurers.
Jamie Macgregor and I are going to present a webinar on the functionality and technology trends tomorrow. If you are interested in joining us then do not hesitate to register here: http://www.celent.com/node/29433
49 insurers from 20 different European countries have contributed to provide their evaluation of various life policy administration systems offered on the market. Celent has classified the respondents in three geographical categories (UK, Continental Europe and Eastern Europe) and tried to identify what were the main differences in terms of value perceived by companies in each region.The above chart shows clearly some important differences in terms of new technology adoption between regions. For instance, it seems that UK insurers are in advance in terms of PAS replacement. Indeed, around 80% of them have been using their PAS for more than 3 years. Celent thinks that this figure demonstrates clearly that UK companies are a step ahead in terms of core applications replacement and modernization. In addition, it might also be a good proof that UK insurance companies have a higher acceptance of value of buy over the build approach. This figure also demonstrates that Eastern European insurers are currently adopting new technology. In opposite to insurers based in the UK, the majority of Eastern European companies having contributed to our survey have been using their PAS for less than 12 months. In other words, it seems that Eastern European based insurance companies are currently in the process of upgrading their core applications to new technologies. Finally, there are laggards in Continental Europe. If we trust the sample of our participating companies based in Continental Europe, it seems that there is a clear difference between insurers having already replaced their PAS (almost two thirds of the respondents from this region) and the ones that have just completed this exercise during the last 12 months period.
For those of you who are interested in what life insurers think about policy administration systems and IT vendors on the European market, I invite you to read my report.
Celent is publishing two reports reviewing Policy Administration Systems (PAS) and IT vendors in Europe later this year. The first one will profile solutions available in the general insurance sector and the second one in the life and pension sector. For insurers the selection of a PAS requires the analysis of different parameters that have all their importance. Prioritizing decision elements is a crucial task in order to minimize the risk of choosing an inappropriate PAS and to face ultimately time-consuming and expensive customization efforts. In the frame of recent discussions with European insurers, I have noticed that European insurance companies conducting business in multiple countries are also facing difficulties to decide between two strategic alternatives when replacing their existing policy administration systems:
– Implement a single application in all geographies where they conduct business, or
– Select one specific vendor in each geographical region.
Knowing that insurers have their own specificity and objectives in terms of future expansion and strategy, I recommend them to define and rank priorities around four major key decision elements when reviewing this important question:
Functionality: I recommend insurers to define functionality priorities. To do so and based on our PAS reports, they should be able to build their own functionality matrix. This exercise can particularly support them to identify which functionality elements are more important than others and how they can support their strategic objectives in the long run.
Technology: I consider that technological flexibility is an important factor insurers should clearly assess when making the decision to replace their policy administration systems. Therefore, I encourage insurers to consider technology factors when prioritizing their IT requirements.
Experience: Since replacing a policy administration system can require considerable efforts in terms of customization, choosing an experienced IT vendor is important. Therefore insurers should emphasize factors related to insurance business know-how and expertise when evaluating vendors.
Geographical expertise: The insurance industry in Europe can be very different from one country to another and understanding insurance business drivers and challenges affecting a specific region is a must for IT vendors offering their solutions and services in a dedicated European insurance market. Regardless of their size, I recommend insurers not to neglect local and small IT vendors having specific expertise and knowledge in dedicated geographies.
Choosing the best alternative represents a key challenge for insurers’ CIOs since this decision can strongly impact their company’s ability to achieve strategic goals in the long run and I hope that our PAS reports will be helpful to them.
In April 2008, Celent published a report about the new regulatory approach for insurers and reinsurers operating in the European Union called Solvency II.
Surprisingly or not, the draft text submitted to and approved in the beginning of December by the European Council of Economic and Finance Ministers (ECOFIN) does not contain the group supervision provision any longer. With Solvency II, capital requirement is based on a risk-based system as risk is measured on consistent principles. Knowing that, the removal of the group supervision requirement is an important change to the overall Solvency II regulation. Indeed, the idea behind Solvency II is to encourage large and diversified groups because they can pool their capital resources which should in turn benefits to policyholders. This approach is directly derived from the Basel II regulation implemented for the bank industry.
In other words, it seems that some factors have played an important role during the last six-month period and led the policy makers to reconsider the pros and cons of the group supervision provision. First of all, a few internationally diversified banks have nearly collapsed in the recent past demonstrating that the Basel II regulation could not prevent even well-diversified institutions from experiencing solvency problems. In the insurance sector, the American International Group (AIG) has been seriously hit due to its vast financial exposures that were written at the group level. In addition, after the massive interventions of governments to save some of the biggest European financial institutions, political pressures have emerged. France, for instance, seems to be in favor of the deletion of the group support element of the directive. This decision is also due to the fact that mutuals – which are preponderant in France – tend to have lower solvency ratios and capital requirements. Smaller countries in Eastern Europe are also concerned since they fear losing control over some of the entities. According to a report published by FSA in April 2008 (Enhancing group supervision under Solvency II), foreign insurance subsidiaries own 98.6% of market share in the Slovakian life sector and 100% in the non-life. These figures help us better understand the small Eastern European countries concern.
Overall, the immediate consequence of the ECOFIN decision could trigger new rounds of political discussions and delay the effective implementation of the Solvency II directive. In this context, Celent thinks that 2012 might be a too optimistic objective. However, we still encourage insurers to prepare for the Solvency II implementation because the new set of capital requirement regulation means changes and will trigger new investments anyway.