Insurers see themselves at a crossroads with very little time to act, says a new report from Andersen Consulting. Market changes, consumer and customer expectations, new competitors and product developments are creating an environment of permanent transformation, says the report.

In the latest of its financial services industry research reports, Andersen Consulting interviewed CEOs and board members of 26 of the top 50 European insurers, representing the life, non-life and reinsurance sectors, to learn what they see as the major challenges ahead and the way forward for them.

European insurers agree that the current trends of consolidation and convergence will continue, and will result in an industry dominated by a small number of global players and some specialists, with no room for the middle player. In tomorrow’s market, fortune is felt to favor the efficient. Pierre Pilorge, head of Andersen’s insurance industry practice in Europe, says, “The large companies that survive will not have to offer everything, but they will have to be good at everything they offer. While there will be scope for truly excellent smaller companies in niche markets, there is no place for average performers in any market.”

While the capital strength of European insurers has been seen as one of their key assets, the way this capital is used has created issues with shareholders, stakeholders and the market, says Andersen. “Insurers are continually challenged to demonstrate that they are using their capital wisely. In their view, the wise use of capital must focus on increasing their customer reach, developing and enhancing their technology, providing more innovative and solutions-based services, while also gaining efficiencies in their operations, manufacturing and distribution. Many respondents felt that the market misunderstood the nature of the insurance business, which has led to divergent expectations between the market and management.

Decisions on how best to reach the customer, whether to concentrate on manufacturing or distributing products, and whether to branch into other financial services must be taken quickly, before they risk losing the capital through poor decision-making or poor markets, states the report. The competition between banks, insurers and other institutions is also increasingly fierce.

Stephen Kingsley, who heads Andersen’s European financial services practice, points out, “Convergence in the financial services has made the battle for the customer paramount, and insurers are responding by placing the customer at the heart of their operations.”

It found the widespread adoption of a multi-channel strategy of using intermediary brokers and agents, telephone and Internet sales, as well as selling insurance products through banking channels, whether through alliances or acquisitions. Yet the cost of maintaining these multiple distribution channels needs to be matched with greater efficiency in the gathering and mining of customer information, an area where insurers lag behind other areas of the industry.

Andersen saw three basic growth strategies: growth by extension of product range, growth by increasing customer base, and geographic expansion. Most companies are chasing a combination of approaches. Most insurers also have international growth strategies, and many saw moving into less-developed
economies as having much more potential than domestic growth. China, Poland and Brazil are being particularly pursued. The common denominator among all of the insurers was that they saw the future of the insurance industry in Europe as much more fluid than in the past.