Arthur D. Little: Nordic Providers Top the List of Europe´s Most Efficient Insurance Companies

Arthur D. Little has measured operative expense ratios in 50 of Europe´s largest non–life insurers over a period of 36 months. As the immediate fallout from the credit crisis becomes evident, the insurance industry must shift its focus to more long term financial sustainability. One way to view this is to measure cost efficiency. Having identified those providers with fundamentally low expense ratios, the report is able to predict which European insurers will be likely to perform reasonably well in the business down–turn and who appears to be more exposed. The new study reveals that Nordic insurance companies lead Europe in cost–efficiency, while their peers in central Europe lag behind.

The French company Macif Assurances tops the list of Europe´s most cost–efficient non–life insurance companies, according to a new study released today by Arthur D. Little. Topdanmark, from Denmark, and Swedish insurance company Trygg–Hansa are in the 2nd and 3rd place respectively on the list, which ranks Europe´s largest non–life insurance companies by cost–efficiency based on their net expense ratio (NER).

Mapping efficiency in insurance across Europe - low performers would need to improve 12 per cent to reach top

The study, which analyzed consolidated data from 14 European countries, found that the Netherlands´ non–life insurance companies, on average, are the least cost–efficient in Europe, with an average NER of 30.23 per cent. Denmark tops the list at 17.50 per cent NER, and is following closely by its Nordic neighbors Sweden and Norway in boasting some of Europe´s most efficient insurance industries (17.75 and 20.01 per cent NER respectively).

Overall, non–life insurance companies based in central European countries such as Austria and The Netherlands do not perform as well as those from the north and the south of Europe. The most efficient companies are based in the Nordic countries; whilst the UK, France, and Germany´s largest non–life insurers all perform close to the European average of 25.18 per cent.

"With an average net expense ratio between 14 to 25 per cent, the Nordic and Mediterranean players are the most cost efficient non–life insurers in Europe whilst players from the Netherlands, Belgium and Germany are being left behind explains," said Dr. Gerrit Seidel, Global Head Financial Services at Arthur D. Little. "For them size does not always matter: While often being considerably larger in terms of premiums written, they are still suffering from highly unconsolidated markets. Obviously there is a significant cost–premium that insurance clients have to pay if markets are fragmented"

"In order to meet the European average, insurers in Germany and the Benelux countries would need to cut between 11 and 17 per cent of their labor force in the medium–term," says Gerrit Seidel. "Unlike in banking, where the Internet penetration rate in the economy is already key to bring down transaction costs, the Internet remains only a minor explanatory factor for the insurance sector´s cost–efficiency. However, online transactions are becoming an increasingly popular mechanism for reducing costs in the non–life insurance market."

Market share strongly correlates with cost–efficiency

Arthur D. Little´s latest report goes on to identify the external factors that have an impact on each insurer´s performance. In the case of market share, the report finds that countries where a few dominant players hold a very large market share often have a lower average cost ratio. This is due to their greater ability to leverage economies of scale as compared to those operating in more fragmented markets.

The Internet has only just started to bring down insurance costs

Even though the Internet was relatively recently introduced as a distribution channel to European insurers, companies that use it have already begun to leverage it as a major transaction and sales channel in order to service a large number of customers at a low cost, thereby reducing their distribution costs. The Internet is also used as a way to improve service quality by delivering services more efficiently. Despite the potential benefits of using the Internet as a distribution channel, there is still only a relatively week correlation between Internet penetration and cost–efficiency in the insurance industry. While the Nordic countries and The Netherlands are in the forefront of Internet usage, only the Nordic insurance companies exploit the Internet´s potential.

A combination of cost cutting and productivity improvements required

One way of improving NER is to reduce operational cost. Since operational costs are largely made up of staff expenditure, lay–offs would be a way of achieving the necessary savings. For the six least efficient European insurance markets studied in the report, their total workforces would have to be cut by between ten and seventeen per cent in order to reach the European average cost ratio. Another way for those companies to improve their expense ratios would be to increase productivity and generate additional revenue with the existing workforce. A combination of staff reductions and productivity improvements is highlighted as the most realistic solution.

"As the focus shifts from counting the immediate fallout from the credit crisis to long–term financial sustainability operating efficiency will be a key area for the insurance industry. Flat hierarchies, automated processes, decentralized decision–making, centralized support functions and full use of efficient channels such as bancassurance, phone and Internet are all factors that are crucial to reach a high level of operational efficiency", reflected Erik Almqvist, Head of Arthur D. Little Financial Services in the Nordic region.

He adds: "Balancing innovation with complexity reduction will further be crucial for the winners of tomorrow to increase revenues whilst keeping costs in check. Companies should aim to reach a NER well below 25 per cent to stay competitive. This does not mean keeping costs down per se but wisely embracing revenue enhancing costs whilst shunning costs that bring little benefit to the consumer"

RBS Insurance: 5th most efficient in Europe up for sale

As our report goes into print, RBS Insurance is currently for sale. From what can be judged from the outside this chain of events was started by actions and decisions taken on the banking side of the group rather than the insurance arm. RBS Insurance has historically achieved its high operative efficiency by taking advantage of the shared support functions existing within the RBS Group which gives them access to resources not affordable otherwise.

The Arthur D. Little report "Sleeker by Design" also includes case studies of non–life insurance companies that appear at the top of the survey ranking describing their journey to reach the highest levels of efficiency.

"Sleeker by Design" is now available for download at www.adl.com/costefficientinsurance

About Arthur D. Little

Arthur D. Little, founded in 1886, is a global leader in management consultancy, linking strategy, innovation and technology with deep industry knowledge. We offer our clients sustainable solutions to their most complex business problems. Arthur D. Little has a collaborative client engagement style, exceptional people and a firm–wide commitment to quality and integrity. The firm has over 30 offices worldwide. With its partner Altran Technologies, Arthur D. Little has access to a network of over 16,000 professionals. Arthur D. Little is proud to serve many of the Fortune 100 companies globally, in addition to many other leading firms and public sector organizations. For further information please visit www.adl.com.