Innovating and Executing.Strategic Management: Successful strategies will depend upon innovation, flexibility, adding value and properly gauging customer preferences.
Three market forces--deregulation, Internet transparency and the impact of globalization--are transforming the competitive landscape of financial services The examples and perspective in this article or section may not represent a worldwide view of the subject.
Please [ improve this article] or discuss the issue on the talk page. . Property/casualty insurers must assess their companies' core competencies A core competency is something that a firm can do well and that meets the following three conditions specified by Hamel and Prahalad (1990):
Strategic management in the 21st century will require all companies to constantly innovate--a difficult task for the historically staid staid
1. Characterized by sedate dignity and often a strait-laced sense of propriety; sober. See Synonyms at serious.
2. property/casualty industry. Innovation requires changing--and sometimes destroying--outdated business models, often accessing external expertise through outsourcing, alliances, joint ventures, and through mergers and acquisitions.
Insurers are in various phases of executing strategic business plans. Market leaders such as American International Group
American International Group, Inc. (AIG) (NYSE: AIG; TYO: 8685 ) is a major American insurance corporation based in New York City. and Travelers continue to sustain competitive advantages and operate at peak performance. They continue to foster innovation by expanding their capabilities in financial services, online and throughout the world.
AIG AIG addressee indicator group (US DoD)
AIG American International Group, Inc
AiG Answers in Genesis (religious group in defense of Scripture)
AIG Artificial Intelligence Group
AIG Australian Industry Group is active on all three fronts. It formed a banking alliance with Wells Fargo Wells Fargo
armored carriers of bullion. [Am. Hist.: Brewer Dictionary, 1147]
See : Protectiveness
company that handled express service to western states; often robbed. [Am. Hist. , an online partnership with aggregator site Autobytel and acquired SunAmerica to cross-sell Sun's annuity products through AIG's vast international network. Travelers is part of the merger that created Citigroup which ranks as the largest financial-service organization in the world. It is also part of Citigroup's integrated broad-based consumer-finance website citi [f/i.sup.SM]; its global marketing alliance with Winterthur Swiss will help both parties service multinational clients throughout the world.
Meanwhile, much of the industry has been relatively quiet on these three fronts. Many have had to rationalize ra·tion·al·ize
1. To make rational.
2. To devise self-satisfying but false or inconsistent reasons for one's behavior, especially as an unconscious defense mechanism through which irrational acts or feelings are made to appear lackluster operating performance, modest organic growth and inefficiency. Some have yet to roll out defensible de·fen·si·ble
Capable of being defended, protected, or justified: defensible arguments.
de·fen market strategies. Others have resorted to under-pricing to secure market share. For many in this category; the financial and strategic strength of their competitors has greatly reduced their prospects for success and market viability.
v. be·held , be·hold·ing, be·holds
a. To perceive by the visual faculty; see: beheld a tiny figure in the distance.
b. the Internet Era
Morgan Stanley To comply with Wikipedia's , the introduction of this article needs a complete rewrite. Dean Witter Dean Witter may refer to:
pertaining to data that have been submitted to standardization procedures.
standardized morbidity rate
see morbidity rate.
standardized mortality rate
see mortality rate. and more than $100 billion of business could be up for grabs each year because of annual or six-month renewals.
Many banks have developed strategic plans to deliver products and services online, but the insurance industry has lagged. Insurers served fewer than 10,000 customers online in 1997, compared with 3.6 million by banks and 2.7 million by the brokerage industry. A survey by Booz-Allen & Hamilton found that most insurance companies spend less than $500,000 per year on Internet-related activities, with most of that invested in customer-service efforts and marketing, rather than in direct sales. This may partly result from the complicated regulatory system that requires brokers and agents to be licensed in all 50 states in order to sell insurance over the Internet, as well as insurers' fear of channel conflict. However, these two obstacles are expected to be gradually overcome.
Insurers have been developing broader, but limited uses for their Web sites as an information conduit. In instances where insurers put more-sophisticated online technology to use, it is usually to generate price quotes so consumers can comparison shop. Only 20% of insurers' Web sites allow customers to research a quote or purchase a policy. To date, sales remain off-line for most insurers.
Clear and Present Danger
The agency-distribution model-both captive and independent-still dominates the property/casualty industry; but e-commerce poses greater opportunities and threats to insurance carriers than ever before.
New Internet-based competitors are developing business models that take on the industry and exploit areas of inefficiency. Insurance marketplaces such as InsWeb and Quicken's site act as online front-ends facilitating insurance shopping services. Many Internet players still require an agent to close the insurance transaction but the e-commerce model is moving toward a new insurance marketplace. That could be in the form of an end-to-end virtual insurance carrier such as eCoverage or to a financial-services superstore such as Merrill Lynch Merrill Lynch & Co., Inc. (NYSE: MER TYO: 8675 ), through its subsidiaries and affiliates, provides capital markets services, investment banking and advisory services, wealth management, asset management, insurance, banking and related products and services on a global basis. Co. or Charles Schwab Charles Schwab can refer to:
Meanwhile, other new entrants aim to unlock economic improvements within the insurance value chain. Collectively, these well-funded and nimble nim·ble
adj. nim·bler, nim·blest
1. Quick, light, or agile in movement or action; deft: nimble fingers. See Synonyms at dexterous.
2. attackers are expected to generate cost savings and capture the attention of insureds renewing insurance policies. New players include InsurQuote, a company that leverages technology for enhanced underwriting Underwriting
1. The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities (both equity and debt).
2. The process of issuing insurance policies. , and AdjustNET, CyberSettle and PRO-Claims, which aim to improve claims effectiveness.
Most insurers have established their own closed-architecture Web sites, but not strayed far beyond that model. Best-of-breed insurers known for features such as service (USAA USAA United Services Automobile Association
USAA Urban Superintendents Association of America
USAA United States Achievement Academy
USAA United States Arbitration Act of 1925
USAA United States Axemen's Association
USAA United States Air-Table-Hockey Association ) or strong branding (Allstate) or product innovation (Progressive) may be best-positioned to exploit portal-based opportunities on the Internet and form financial-service alliances. Organizations like these recognize that the Internet is not a technology fad, but rather a serious environment in which winners are redefining delivery systems and leveraging information to forge valueadded relationships with customers.
Buy, Partner or Outsource
For U.S. insurers, the demise of the Glass-Steagall Act The Glass-Steagall Act, also known as the Banking Act of 1933 (48 Stat. 162), was passed by
Congress in 1933 and prohibits commercial banks from engaging in the investment business. will accelerate convergence in financial services, intensify competition, spur innovation in the application of technology and lead to the development of new products and services. It also will accelerate the erosion of inefficient practices, particularly as state regulation is streamlined and standardized in the wake of commercial lines deregulation Deregulation
The reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry.
Traditional areas that have been deregulated are the telephone and airline industries. .
In the early stages of the deregulated environment, few U.S. property/casualty insurers will seek to buy banks, nor will there be a rush by banks to acquire insurers. Few U.S. insurers have sufficient capital to buy banks. It's also unlikely that banks will aggressively pursue property/casualty insurers, unless they exhibit strong and predictable earnings, sustainable competitive advantages and a well-controlled risk profile. That's a tall order for most insurers. The rapid growth of Internet access See how to access the Internet. and e-commerce has shifted the "bancassurance Bancassurance
A French term referring to the selling of insurance through a bank's established distribution channels.
The result is a bank that can offer banking, insurance, lending, and investment products to a customer. " paradigm from one in which banks buy insurers to an environment in which banks partner with insurers in the establishment of high-traffic financial-service portals offering a wide choice of products.
Citigroup remains an exception to the new market alliances. Formed last year through the merger of Travelers and Citicorp, Citigroup is well-positioned to leverage cross-sector opportunities that will emerge in a deregulated environment. Already, it has demonstrated strong cross-selling among its various financial groups.
Insurers need to adopt a flexible strategic plan that leverages their organization's core competencies and embraces a forward-looking business model that may involve increased business partnering.
Forming successful strategic partnerships is a skill that requires the same care as executing an effective merger or acquisition. Central to forming an alliance are selecting best-of-breed partners and understanding their operations and the value they add. The permanence Permanence
law of the Medes and Persians
Darius’s execution ordinance; an immutable law. [O.T.: Daniel 6:8–9]
there always, as evilness with evil men. [O.T.: Jeremiah 13:23; Br. Lit. of a strategic partnership is determined by the compatibility of the respective partners' evolving strategies and minimizing the risk of being replaced by a more formidable competitor.
Meanwhile, financial-services companies in the United States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. and United Kingdom have shown a greater acceptance of outsourcing as a strategy, particularly on the asset-management side as insurers seek to improve investment earnings. Outsourcing of this function to thirdparty asset managers will expand as competitors move to keep pace with insurers that are leveraging greater overall investment performance while reducing overall enterprise risk.
Outsourcing of back-office functions can also help insurers remain competitive without increasing their size. Well-conceived outsourcing can offer insurers an opportunity to grow and create "virtual critical mass" because of reduced cost and lead time requirements.
A Global Perspective
The evolution of the world's capital markets has served as a catalyst for globalization globalization
Process by which the experience of everyday life, marked by the diffusion of commodities and ideas, is becoming standardized around the world. Factors that have contributed to globalization include increasingly sophisticated communications and transportation across industry sectors. The world economy is undergoing a long-term transformation from a multitude of local industries confined con·fine
v. con·fined, con·fin·ing, con·fines
1. To keep within bounds; restrict: Please confine your remarks to the issues at hand. See Synonyms at limit. by national economies to a set of integrated industries that operate across geographic boundaries.
The changing dynamics of risk management brought about by deregulation is further driving globalization. U.S. regulatory reform Regulatory Reform concerns improvements to the quality of government regulation.
At the international level, the "OECD Regulatory Reform Programme is aimed at helping governments improve regulatory quality -- that is, reforming regulations that raise unnecessary obstacles to is expected to spark competition among financial-services companies and create a broader choice of products. At the same time, it provides new opportunities for foreign companies to expand their asset-management platforms into the United States. Many of the large European financial-services giants will likely emerge as competitors in the scramble to acquire or form joint ventures with U.S. asset managers or banks. For example, Allianz' announced plan to acquire a 70% stake in California-based Pimco Advisors would make Allianz the sixth-largest asset manager in the world. Other likely competitors include ING, the Dutch insurance and banking giant; Zurich Financial Services Zurich Financial Services Group is a major financial services group based in Zurich, Switzerland. Global operations
The US consumer market is served primarily by Farmers Insurance Group the third largest personal lines property & casualty insurance , Switzerland; Axa, France; and Generali, the large Italian insurer, all of which have well-developed bancassurance capabilities in Europe.
Many European companies It may never be fully completed or, depending on its its nature, it may be that it can never be completed. However, new and revised entries in the list are always welcome.
This is a list of companies from the countries in the European Union. are also preparing for globalization in several ways:
* By adopting International Accounting Standards to provide financial transparency and better comparability to eventually tap the U.S capital markets.
* By increasing public awareness through worldwide advertising and branding programs.
* By changing their management style to foster the flow of ideas throughout the organization.
Many of these groups also have multiple stock-market listings and are in the process of becoming listed on the most prestigious exchange, the New York Stock Exchange New York Stock Exchange (NYSE)
World's largest marketplace for securities. The exchange began as an informal meeting of 24 men in 1792 on what is now Wall Street in New York City. . This would provide organizations with greater financial flexibility to pursue U.S. acquisitions.
The December meeting of the World Trade Organization gathered insurance-industry representatives to address regulatory reform on a global basis. Obtaining transparent regulation across world markets would increase competition by removing costly restrictions.
The convergence of the insurance, reinsurance The contract made between an insurance company and a third party to protect the insurance company from losses. The contract provides for the third party to pay for the loss sustained by the insurance company when the company makes a payment on the original contract. and capital markets continues. Reinsurers recognized these emerging market trends earlier. They have ignored the boundaries of the past and adopted a more holistic view toward risk financing. This has resulted in significant consolidation within this sector as reinsurers create new platforms to access and service the ultimate client. As a result, few U.S.-only reinsurers exist today. Recent transactions have taken on an increasingly cross-market flavor as top-tier reinsurers expand their global positions.
Financial service and commercial lines deregulation is a powerful combination that will accelerate change in the U.S. insurance marketplace. Under proposed commercial lines deregulation, Fortune 500 policyholders could be exempt from long-standing consumer-protection-oriented regulations, freeing insurers from regulatory oversight and giving them greater ability to create customized coverages and pricing that better suits organizations' risk-management needs. As regulatory constraints are removed and pricing becomes increasingly transparent, opportunities to globalize glob·al·ize
tr.v. glob·al·ized, glob·al·iz·ing, glob·al·iz·es
To make global or worldwide in scope or application.
glob products and relationships are increasing.
Competition remains intense for larger accounts. Roughly one-third of the commercial market is handled through alternative-market programs. However, these programs are concentrated among larger accounts, with greater than three-fourths of all national accounts using some form of alternative risk transfer. Despite prolonged soft pricing, there has been little return to the traditional insurance market among groups. New capital-market-oriented units such as Arrow Re and Lehman Re are placing pressure on the industry to increase competitive efficiency.
Fortune 1000 companies have historically led insurers into major changes, from the adoption of paid loss retros in the 1970s to the globalization of the 1990s. Companies such as AIG, Allianz and many reinsurers operate almost as entrepreneurs and are quick to adapt strategies and capitalize on Cap´i`tal`ize on`
v. t. 1. To turn (an opportunity) to one's advantage; to take advantage of (a situation); to profit from; as, to capitalize on an opponent's mistakes s>. emerging needs. Their willingness to assume risk through innovative insurance products, to provide purely financial solutions to their Fortune 1000 clients and their global presence distinguishes them in the marketplace and places them in a league of their own. While many companies continue to provide capacity for traditional risk-transfer products, insurers are increasingly developing customized solutions designed to manage enterprise risks.
Competitors such as Cigna, Travelers and Liberty Mutual also adapt well to change, but in a more systematic fashion. They focus on building service capabilities and follow a strategy of acquiring, merging or aligning with other companies to achieve global stature. ACE's recent merger with Cigna, Travelers' strategic alliance with Winterthur Swiss and Liberty Mutual's ongoing acquisition of prominent insurers in non-U.S. domiciles illustrate this point.
Remaining commercial insurers such as CNA (Certified NetWare Administrator) See Novell certification. and Chubb have reduced their emphasis on the Fortune 1000 market-in-favor-of national and middle-market accounts. These market segments need the sophisticated underwriting and risk-financing expertise that these companies can offer, as well as some multinational presence. However, this market segment remains very price-sensitive. As national and middle-market companies redefine their business models to compete in an ever-increasing global economy and as their needs--and insurance dollars--shift to insurers that are also global in nature, national-account and middle-market-oriented insurers will come under pressure. Any significant hardening hardening, in metallurgy, treatment of metals to increase their resistance to penetration. A metal is harder when it has small grains, which result when the metal is cooled rapidly. in pricing will drive part of this segment into the alternative markets. Past experience shows that once risks move to alternative markets they are unlikely to return to traditional insurance. Accordingly, many property/casualty insurers serving this market segment are likely to become part of the consolidation wave.
The U.S. nonlife insurance industry has yet to experience the widespread consolidation that is reshaping the life insurance and banking industries. A number of smaller, more nimble competitors likely will continue to operate profitably by virtue of their strong local brands or because they are attacking inefficiencies in traditional domestic markets.
New World, New Rules
Financial-services deregulation paves the way for the convergence of banks, investment firms and insurance companies to manufacture, market and distribute a broad range of products, either through cross-ownership or by forming marketing alliances. Market shifts are inevitable. A.M. Best believes that organizations that focus on core strengths, leverage best-in-class specialty insurance products and service and access external expertise through partnering, outsourcing and through mergers and acquisitions are most likely to "stay ahead of the curve."
To succeed in this new period of "controlled chaos" insurers must adopt flexible business models that respond to more-sophisticated and empowered customers. In commodity-like segments such as personal lines and small commercial coverage, insurers will have to respond to consumers and small-business owners' increased demands for service, low-cost and convenience. The greater price transparency Price Transparency
The accessibility of information on the order flow for a particular stock, allowing knowledge of the quantities of stock being offered and the bids at the various price levels. Also referred to as "market depth. and wealth of information made available by the Internet will fuel these demands.
In the mid-to-large commercial segments, insurers will have to respond to risk managers' requirements for financial security and innovative products. Those range from alternative-risk-financing options, to integrated insurance and capital market products, to highly individualized in·di·vid·u·al·ize
tr.v. in·di·vid·u·al·ized, in·di·vid·u·al·iz·ing, in·di·vid·u·al·iz·es
1. To give individuality to.
2. To consider or treat individually; particularize.
3. business risk solutions.
In the final analysis, the successful organizations will be those that are innovative, flexible, add value and properly gauge customer preferences.
Online Financial Services Revenue ($billions) Compound Segment 1998E 2003E Growth Consumer Banking 24.0 235.0 58% Brokerage 2.5 32.0 67% Term Life Insurance 0.0 0.7 181% Auto Insurance 1.0 18.0 78% Mortgages 75.0 147.2 14% Credit Card 0.1 3.5 104% Total $102.6 $436.4 34% Source: Morgan Stanley Dean Witter Equity Research
As corporations adopt a holistic approach holistic approach A term used in alternative health for a philosophical approach to health care, in which the entire Pt is evaluated and treated. See Alternative medicine, Holistic medicine. to managing enterprise risk, the new risk manager is seeking a partner that can provide cost-effective and innovative risk-management solutions, superior and timely service, and stable long-term capacity. Enterprise risks can encompass potential losses arising from fire, litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute.
When a person begins a civil lawsuit, the person enters into a process called litigation. , interest-rate fluctuations, computer-virus invasions or political risk. Commerce is becoming more global, finding new venues online and creating exposures that never existed previously. These new exposures create opportunities for financial-services organizations that possess the intellectual capital to craft integrated risk solutions that effectively meet the customer's demands.
Insurer, reinsurer re·in·sure
tr.v. re·in·sured, re·in·sur·ing, re·in·sures
To insure again, especially by transferring all or part of the risk in a contract to a new contract with another insurance company. , guarantor guarantor n. a person or entity that agrees to be responsible for another's debt or performance under a contract, if the other fails to pay or perform. (See: guarantee)
GUARANTOR, contracts. He who makes a guaranty.
2. , counterparty Counterparty
The other participant, including intermediaries, in a swap or contract. , investor--these terms can be used interchangeably to describe the emerging financial-services company. Already, insurance organizations such as Centre Re Solutions, part of Zurich Financial Services; XL Capital; AIG and Munich-American Risk Partners are responding to the challenge to create unconventional products that address customers' unique objectives and circumstances.
Integrated-risk solutions blend standard insurable risks An insurable risk is a risk that meets the ideal criteria for efficient insurance. The concept of insurable risk underlies nearly all insurance decisions.
For a risk to be insurable, several things need to be true:
The process of creating a financial instrument by combining other financial assets and then marketing them to investors.
Mortgage backed securities are a perfect example of securitization.
May also be spelled as "securitisation. in the form of insurance bonds or derivative transactions, contingent capital and counterparty credit are other new financial products that have emerged.
These nontraditional products help corporations manage critical business risks, protect balance sheets and income statements from unforeseen events, and remove unwanted liabilities thereby imporving their market value.