Slide 1

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 2

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 3

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 4

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 5

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 6

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 7

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 8

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 9

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 10

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 11

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 12

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 13

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 14

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 15

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 16

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 17

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 18

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you


Slide 19

III COLÓQUIO INTERNACIONAL
SOBRE SEGUROS E FUNDOS DE
PENSÕES
July 7th, 2004
Denis Duverne
Member of AXA Management Board
Chief Financial Officer

The Future of the Insurance Business :

Challenges and Perspectives

Lisbonne- Denis Duverne - 07/07/04 - Page 2

What happened in the past 10 years...
CONSOLIDATION, DEMUTUALIZATION
 Increased competition, with market share
strategy a strong option
 More capital oriented, with ROE a key theme
 Emergence of sophisticated capital
management
 Increased pressure from regulators
 Increased risk outsourcing (from large
reinsurance capacity to stretched capacities
with selective approach from reinsurers)

DISTRIBUTION


Development of Financial planning
and Asset Allocation advice
 Emergence of :
 Direct insurance,
 Bancassurance,
 Move towards Open-architecture

PRODUCTS





More single premium products
Unit-linked products
Bigger demand for private pensions
Emergence of hedge funds, mutual
funds,derivatives
Blurring distinction between
life insurance and mutual funds

CUSTOMER




More demanding
More risk adverse
Seeking for advice

Lisbonne- Denis Duverne - 07/07/04 - Page 3

Since 2000, the insurance sector has
undergone a more challenging environment
 Life and Savings
 Lower return & uncertain equity market
 Widening pension GAAP
 Volatility & Risk awareness
 Demand for “safer” products
 Relative failure of recent regulatory
changes (stakeholder, riester …)
Property & Casualty
 Unprecedented level of claims
 Sept 11
 Natural catastrophes
 Asbestos
 Judicial inflation : “Deep pocket
syndrome”
 Increasing price of reinsurance

Investment margin squeeze
Lower fees on UL
High level of equity losses
Increased demand for
protection
Low technical margin

Pressure on solvency and
profitability
Lisbonne- Denis Duverne - 07/07/04 - Page 4

In L&S, insurers had to quickly adapt to
lower returns and tight capital
Following the recent financial market collapse, client
turned to safer products, with guaranteed rates.
To face this challenging environment and preserve theirs
margins, insurers had to :
 Reduce credited rates, in line with low fixed income
returns and depleted capital gains
 Reinforce Asset/Liability Management
 Foster unit-linked sales, being less capital intensive
and more profitable products in the long run, while
providing various forms of guarantees
Lisbonne- Denis Duverne - 07/07/04 - Page 5

In P&C, emphasis was on efficiency,
through disciplined underwriting
This challenging environment has forced companies to focus
on underwriting. More and more, P&C insurers are going “Back
to Basics” to reduce expenses, while focusing on profitable
clients through selective price increases. Market share-led
strategies seem no longer to be an option.
Combined ratio
Investment return INCL. capital gains / assets

8%

110%
108%
106%

"BACK to BASICS"

107,6%

7%

106,5%
6,2%

104%

6%

5,9%
4,8%

102%

5%
4%

100%

98,5%

98%

3%

96%

2%

94%

1%
-1%

92%
2001

2002

2003

Source : Average investment return and combined
ratio for Allianz, AXA, Generali and AIG, based on
company public disclosure

Selective underwriting
Increased retention and
cross selling through efficient CRM
Higher productivity through
service centers & call centers
Reduced claims costs through
relationship with approved repairers
and spare parts distributors
Lisbonne- Denis Duverne - 07/07/04 - Page 6

Despite the recent turmoil, worldwide
insurance premiums have increased...
 Worldwide gross insurance
premiums evolution between
2001- 2002 (%)*

 Premiums per capita in USD,
2001- 2002*

1200 +9%

Industrialized countries

Emerging countries

si
a
A
E
S/

Central
Europe

ia

Latine Am.

ce
an

S/E Asia

O

Japan

e

North Am. W Europe

+9%

ro
p

0

+3%

Eu

+17%

200

W

400

er
ic
a

2001
2002

-1,5%

A
m

600

N

+3,5%

800

4000
3500
3000
2500
2000
1500
1000
500
0

Ja
pa
n

1000

...with emerging markets posting a particularly
strong growth, especially in Asia
*Source: Swiss Re, Economic Research & Consulting, sigma No. 8/2003 and No. 6/2002

Lisbonne- Denis Duverne - 07/07/04 - Page 7

Future and challenges for the insurance
sector ?
To remain attractive, the insurance sector has to
grow profitably while satifying client needs…
 What future in terms of growth?

 What future in terms of distribution ?
 What future in terms of offer ?
 What future in terms of margins ?
 What future in terms of required capital ?
Lisbonne- Denis Duverne - 07/07/04 - Page 8

Emerging markets represent a sizeable
growth engine...
 Geographical mix is the key variable with emerging markets
offering the highest margins and the highest growth rates
Life density: GWP per capita

3,000

Japan
Switzerland

United Kingdom
2,500

2,000
Finland

Ireland

+30%

United States

1,500

Netherlands Sweden
Denmark North America
France
Hong Kong
+3500%
Australia
Belgium
1,000
Western Europe
South Korea
Singapore
Norway
Australia &
Canada
Taiwan
Luxembourg
Italy
NZ
Germany Austria
500
South Africa Portugal
Spain Israel
Middle East
South East Asia
New Zealand
0
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Central & Eastern
Latin America
GDP per capita
Source: Swiss Re; World Bank.
Europe
and Caribbean

Lisbonne- Denis Duverne - 07/07/04 - Page 9

...while developed countries will see further
rationalizations

Average western European market
share outside home country

Many potentially sub-scale local positions
within top players’ portfolios

 Due to capital
requirements, strategic
fit, minimum size and
profitability, the insurance
sector continues to
rationalize.

(European premiums from markets with >5% market share)

8%

Allianz (91.8%)
2003

7%

2002

Generali (89.8%)

6%

AXA (67.3%)
5%

ING
4%

ZFS

3%

Winterthur
Aviva

Baloise

2%

ERGO (Munich Re)
1%

Fortis2

0%
0

2

4

6

8

10

12

14

16

18

Number of western European markets outside home country 1
1

Life and P&C markets in UK, Germany, France, Italy, Spain, Netherlands,
Switzerland, Belgium and Austria
2 Two home markets: Netherlands & Belgium
Source: Boston Consulting Group, companies, press

According to a study by
The Boston Consulting
Group*, many insurance
groups suffer from highly
fragmented European
portfolios, consisting of
sub-critical units that have
“severe structural
disadvantages”.
* Back to the Future: The European
Insurance Landscape

Lisbonne- Denis Duverne - 07/07/04 - Page 10

Changing demographics will provide
opportunities for Life & Savings products
 Recent market studies* indicate
that in the US for example, variable
and fixed life insurance should grow
as baby boomers enter retirement

100
1950
50

2000
2025

0

Franc
e

UK

Germa Belgiu
ny
m

1950

66,5

69,2

67,5

67,5

2000

78,8

77,8

78,1

77,8

2025

81,8

81,1

81,2

2050

83,5

83,1

83,2

Austr
China
alia

Italy

US

Japan

66

68,9

63,9

69,6

40,8

80,6

79,8

71,4

81,2

79,1 76,6
Life 80,5
81,9

82,8

82,3

77,4

83,2

83,5

84

83,8

81

83,9

2050

Countries

Source: United Nations, US Census bureau

 82% of baby boomers believe their
lifestyle would decline upon the death of a
spouse
 72% of baby boomers who own life
insurance believe they don’t own enough
 7 of 10 non-buyers believe they still
need to buy life insurance

Elderly Population (aged 60 & over) as a % of total
population
% of elderly

Life expectancy

Life expectancy at birth by country

50%

0%

1950
Franc
e

Germ Belgiu
Italy
any
m

UK

1950 16%

Austr
Japan
China
alia

Spain

US

16%

15%

16%

12%

11%

13%

8%

13%

8%

2000 21%

21%

23%

22%

24%

21%

16%

23%

16%

10%

2025 28%

26%

32%

30%

34%

30%

24%

36%

25%

20%

2050 32%

30%

35%

33%

41%

41%

26%

42%

30%

30%

2000
2025
2050

Countries
Source: United Nations

*Sources: AXA Financial Nest Egg Study (2003), LIMRA 2003

Lisbonne- Denis Duverne - 07/07/04 - Page 11

2 business models emerge in L&S, with
insurers well positionned on Mass Affluent
 Towards a more segmented and differentiated distribution
High quality network
Advice tools

Focus of
business model

Wide product offer (innovation,

Mass Affluent

performance…)
Rich Internet proposition

Advice &
Relationship

(value added services, information…)
Standardised product offer
Recruiting machine

Mass market

Cost-effective channel management
Low cost / streamlined back-office

Sales and
Service
industrialization

operations
“Off-the-shelf” selling proposition

Source: McKinsey & Company, “Reinventing for growth”

Lisbonne- Denis Duverne - 07/07/04 - Page 12

Partnerships are increasingly important,
notably in bancassurance
 Bancassurance, one of the avenues for third-party distribution
can be dealt with three different approaches...
Full Ownership
Bancassurance

•
•

Capital intensive
Potential conflict of interest
(capital allocation)

Co-Ownership of a separate
entity to cross-sell products:

Joint-Ventures

Distribution
Agreements

•
•

Alignment of interests
Governance is key

• Capital allocation similar

to proprietary distribution

• Allocation of profits

between manufacturer
and distributor is key
Lisbonne- Denis Duverne - 07/07/04 - Page 13

Offering innovative and tailor made
products and services will be key
Insurers will have to focus on

…to answer clients needs for

Innovative & tailor made products
 Development of unit-linked
business with guarantees (GMIB, WB…)
 Development of protection products
 Development of tailor-made offering in P&C



Specialized and trained life agents
 Open-architecture


Improved customer service
 IT investment (consolidated customer view)
 Expanded internet proposition


advice/education

transparency
availability
faster

settlements
quality
broad range
products and s
protection
retirement incom
elderly care
solutions
Lisbonne- Denis Duverne - 07/07/04 - Page 14

Maintaining margins will require :


A better leverage of technology investments



A constant discipline to improve internal processes



A more rigourous analysis of opportunities offered by
outsourcing (components of risk as well as components of
the service proposition)



Improved risk management and capital allocation
practices



A focus on market segments where sustainable
competitive advantages can be gained
Lisbonne- Denis Duverne - 07/07/04 - Page 15

What future in terms of required capital ?
 After softening rules during the market turmoil, European
Regulators are revisiting their models

Solvency II project aims at developing a more risk sensitive
system for assessing the overall solvency and risk
management discipline of the industry


What is the true level of capital required








Existing regulatory capital
Risk Based Capital (RBC)
Internal models
Rating agencies’ models
Adequacy of reserves

?

What adjustements are needed to reflect the quality of
risk management
Lisbonne- Denis Duverne - 07/07/04 - Page 16

Key success factors Capital management and discipline ...
 Capital should be allocated  Financial protection only
to one core business
 Capital is a very expensive
resources that need to be
tightly managed

 Economic capital

 Capital is the last currency
you need to use

 Selective expansion and

methodology

divestments

Lisbonne- Denis Duverne - 07/07/04 - Page 17

Conclusion
 Insurance will remain a growth business
 Thanks to a reduced capitalization and improved risk
management practices, future cycles should be less
pronounced
 The unbundling of the various components of the value
proposition will be key to the future success of insurance
companies
Lisbonne- Denis Duverne - 07/07/04 - Page 18

Thank you