The significance of the insurance industry
Chairman of the Swiss Insurance Association SIA
Media Conference, 21 January 2004
Hotel Savoy Baur en Ville, Zurich
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Ladies and gentlemen
On behalf of the Swiss Insurance Association (SIA) I would like to welcome you to our media conference today and thank you for your interest in our country’s private insurance industry.
2003 was a very important year for us. Having finished 2002 with heavy losses, any more underwriting losses and negative investment returns would have shaken many insurers to their very foundations. Prompt action became imperative. In some cases recapitalisation was necessary. Companies sold off some of their operations, especially those in foreign markets. Business strategies were revised and management structures optimised. Reorganisational measures were undertaken in several lines of business, unfortunately leading to staff downsizing in some cases. These events ensured the insurance industry a place in the headlines.
In fact, the private insurance industry has been attracting increasing media attention over the past two to three years. For some time now, our industry has been faced with risks which are unprecedented in their nature or scope and which are thus testing our risk management capability to its limits; the most salient example being the threat of terrorism, which has increased significantly. The Swiss insurance industry carried out a detailed analysis of this issue following 11 September 2001 and, as a result, adopted a new cover package for terrorism. The major increase in natural catastrophes, such as floods or storms, represents another challenge for insurers. Climate change is also giving insurers and reinsurers a lot to think about. We are fortunate to have a reliable natural catastrophe insurance system in our country. Incidentally, while on this topic I would add that insurers are planning to extend natural catastrophe cover to include earthquake damage.
Another issue that has been in the headlines recently is the second pillar of private pension provision. The heavy losses incurred on the equity markets, which began almost three years ago, brought some underlying problems out into the open. The insurance industry, and the wider public, were forced to face some fundamental issues regarding key figures pertaining to the BVG (Swiss Federal Law on Occupational Retirement, Survivors’ and Disability Pension Plans). We all know that one outcome of the resulting debate was the realisation that the regulatory conditions, ie the minimum interest rate or conversion rate, had moved further away from economic reality. The first BVG revision, which was passed by parliament last September, redefined some of the parameters. Joe Bättig, Chairman of the SIA Life Committee, will provide you with more information on our assessment of this review.
There is also talk of reorienting the insurance supervisory system, which is an issue of central importance to our sector. The discussions have begun in the relevant committee of the National Council. I imagine that next year we will be able to inform you in more detail about the new financial market supervisory system. It is interesting to note that the concept of an integrated supervisory body suddenly seemed desirable, both in Switzerland and abroad, because bancassurance was the big buzz word. Now we are going to have a restructured supervisory body following several years of debate in expert committees and in parliament, despite the fact that bancassurance has now been generally accepted as a fallacy.
Besides the BVG, we have chosen another contemporary topic for discussion today: gender-specific insurance premiums. They are currently the subject of heavy debate within the EU and a decision on this topic is also pending in the Federal Parliament. Lucius Dürr, CEO of the SIA, will seek to shed some more light on the concept of offering differentiated, risk-appropriate premiums. It is obviously of great relevance for insurers, especially those involved in personal lines.
Unfortunately, private insurance has sometimes been in the headlines for the wrong reasons. I won’t go into further details just now. We have felt that the credibility of private insurance is not as high as we would like. This is a cause for great concern in an industry which depends on the trust of insurers and the insured, ie basically the entire population. We have to endeavour to make our business more transparent. As you are aware, plans are being made to improve the level of information given to insured parties on the subject of the BVG. Mr Bättig will provide you with further details on that.
We, as a sector, need to improve our communication across the board. The public needs to understand the fundamentals of our business model in order to facilitate a more objective dialogue with us over the long term. Of course, insurance is an abstract activity, and calculating risk-appropriate premiums is a complicated business, as is maintaining the necessary reserves etc. However, we can’t take this as a reason for adopting an excessively reserved or passive information policy. Admittedly people’s understanding of the complexities of the second pillar has improved in recent months; nevertheless, this does not change the fact that the SIA remains aware of the need to make more effort to improve our credibility.
I would like to make a further comment on these negative headlines: it is important not to lose sight of the role played by private insurance in an advanced society such as ours. Take current auto-mobility levels, for example: how could they be maintained without insurance given that they incurred CHF 3 billion losses in property and personal injury in 2003 alone? Who would run an SME if fire and other natural perils were not insured? How could industrial development, research and production be maintained if there were no cover for the multitude of liability risks involved which often reach far into the future? In other words, economic development would not be possible without insurance.
Important functions of private insurance
I would also draw attention to the important role of insurance in our social and health system. In health and accident insurance private insurers, in addition to the health insurance funds and SUVA (Swiss Accident Insurance), have a key role to play. The same applies to old age and disability benefits. Although it is in need of some adaptation, we remain convinced that the Swiss social security system, with its heavy reliance on the private sector, remains a feasible model for the future.
The insurance industry employs 45,000 staff and creates considerable wealth, making it one of the most important economic sectors in Switzerland. Insurers also play an important role as institutional investors in the equity and capital markets, as well as being heavily involved in residential building programmes. We should never lose sight of private insurers’ economic and social function as seems to have been the case lately.
That concludes my introduction, bringing me to the part where the Chairman looks back over the past year. How does the situation look now that 2003 has passed? How did our fundamental business drivers perform last year: premiums, financial returns, claims, costs? What type of business results can we expect? How is the employment situation? And, finally, what are the prospects for insurance? As is my wont, I will focus on Swiss primary insurance business and just touch on the foreign business of our multinationals. I will not go into much detail on reinsurance either. The companies involved will provide you with enough information on those subjects at their own press conferences.
Have we turned the corner?
Hansjörg Frei, my predecessor as SIA Chairman, was able to report positive results from the 2000 business year when he gave his address three years ago, although some dark clouds were already gathering on the horizon. After 2001, there was talk of a difficult environment and of a big drop in profits. In 2002 the full extent of the crisis became apparent: in that year the SIA member companies registered deficits in the region of CHF 12 billion (at group level). One thing is for sure: the last few years have made a big dent in corporate balance sheets.
Did the industry turn the corner in 2003? It is too early to say for sure. Nevertheless, there are definitely some encouraging signs: we seem to have put the worst behind us, which is, it must be said, partly due to a brighter outlook on the financial markets.
However, the insurance industry is still faced with some major challenges. Its financial strength has suffered. Furthermore, some of the provisions of BVG-related business still deviate from the reality of the situation. Underwriting results in several lines are still negative, and the financial markets have become more volatile (think of the consequences of a sudden rise in interest rates).
The priorities will remain: further developing or refining a highly-developed risk management approach.
Hard market in non-life insurance
Let us now take a look at how business volume has developed. I should incidentally point out that my data are based on preliminary estimates made by the SIA from the results of a study made of the biggest companies. Precise figures will be available at a later date. As painful as developments were on the financial markets, they did have a positive side-effect in that they made underwriters rethink their priorities. We are now experiencing a hard market in various non-life lines. Insurers are therefore in a better position to set risk-appropriate rates, as is now being done in motor and property insurance for private clients, for example. The situation in corporate insurance has particularly improved. Following years of competition to see who could offer the lowest rates, actuarial reality has now taken over to a large extent. Liability insurance has also improved. We are assuming that premium income in Swiss non-life primary business rose by about 5% for 2003. The slide shows the development of non-life premiums over the past 10 years.
Preliminary estimates by the SIA suggest that most companies and non-life lines had a satisfactory year from a claims perspective. There were no major natural disasters in Switzerland in 2003. Even in motor insurance, which still accounts for a quarter of non-life business, the situation at least did not deteriorate any further. However, health costs still give cause for concern, as does the large number of absences due to sickness, which is keeping the level of daily sickness benefit insurance (an important area of private insurance) claims high.
Resilient BVG business
How did life insurance fare in Switzerland last year? The hard-and-fast answer would be «passably». You have read a lot lately – and written in some cases – about problems in BVG-related business. Some providers have pulled out of, or reduced their share in, this major business segment: in 2002 premium volume was CHF 23.3 billion. Other players are advocating a very conservative and selective underwriting policy. It is thus clear that the autonomous pension funds, which enjoy a privileged legal position in the Swiss occupational pension system, have had an opportunity to consolidate their position. However, the private insurers have behaved most graciously. In group life policies we expect premium income to remain unchanged. The resilience displayed by our members’ BVG-related business has caused surprise in some quarters. It is true that our clients have generally been understanding and accepting when policy contributions have had to be revalued. In addition there are naturally always policies which offer more in return for a higher premium. Salary volumes in 2003 actually rose slightly. Finally, there are always new companies starting up, even when times are hard, which helps to sustain BVG business.
With group life insurance, the private insurer’s problem is obviously not one of volume, but rather of fixing appropriate and sustainable parameters.
Major decline in individual life business
Individual life insurance, which generated CHF 11.3 billion in 2002, was very disappointing last year. Preliminary estimates are pointing to a 12% drop in premium volume. The fall in single premium business was particularly severe. Some companies reported a drop of 50% or more in this segment. Fortunately, periodic premiums, which increased slightly in individual business, helped to counter the downward trend. It seems that many clients were anticipating an imminent rise in interest rates. This impacts our business because life insurance is not seen as an attractive investment for retirement. Speculation on interest rates has been going on for some time now, because of the positive economic outlook and inflationary pressure. However, there have been no clear signs of significantly higher bond yields to date. For life insurance (group and individual) we expect a fall of 4% in 2003. The slide shows life premiums over recent years.
On the subject of benefits, 2002 also witnessed adverse developments in disability. You are aware of the major problems in national disability insurance, ie the first pillar; between 2000-2002 it accumulated a budget deficit of over CHF 3 billion. Psychological factors are making a growing contribution to the number of disability claimants: redundancies, reorganisations, mergers etc are triggering psychological problems. This is of course also a factor in occupational pension disability insurance. Life insurers will have to take counter measures to deal with these problems, ie adjust premiums and review the type of care given to the disabled.
A falling workforce
Cost management has been everybody’s favourite motto in recent years. It would be erroneous to assume that the insurance industry was slow to exercise the necessary cost restraint. We are careful not to employ too many people during a growth phase. In 2002, nevertheless, we reduced our workforce by a large amount compared to our normal standards. We expect this realignment to have continued in 2003, albeit to a smaller extent. Our office is currently consolidating the data from our member companies; we will provide further information on the most important trends in February as usual.
It is difficult to say how staffing levels will develop over the coming years. Personally, I do not agree with those who predict another significant fall in our sector’s workforce. Of course, there are certain streamlining measures which can be taken to remain competitive. IT and proposal processing departments, claims services, product development and other areas will continue to have their savings potential exploited. Sales staff, who have so far remained unaffected by job cuts, could also come under more pressure over the next few years. There are usually 10,000 sales staff employed in the Swiss private insurance industry (of which only 6% are women; insurance advising seems to be a man’s job). The most pressure on field staff may not come from alternative sales channels, such as e-commerce, telephone business, direct mailing etc. These alternatives have maintained a fairly low profile. The scope for job cutting will come from the administration side of processing mass business. However, a countertrend that we are also seeing is rising expenditure on advising and after-sales service for complex products, pension-related products for example, which requires specialised knowledge. This trend could even bring about an increase in staffing levels. The increased demand for staff in risk and asset-liability management, communication, HR etc is also significant. In short, insurance is still definitely a people-intensive industry.
A return to profitability
I raised the question of whether we turned the corner in 2003. A comparison with the annual results from 2002 would indeed suggest that we have. The interim reports on the first half-year and third quarter of 2003, backed up by preliminary trends identified at some of our member companies, lead us to believe that we are again starting to make profits. Investment returns started to rise again in most insurance companies over the past year and there are several reasons for this. Investments increased overall, the shifting of investments to fixed-interest securities yielded a cash flow surplus (even allowing for some lower returns), an upbeat stock market brought profits and the record write-downs of 2002 were not repeated. Underwriting results, as I mentioned earlier, have improved in some lines, particularly in non-life insurance, which has yielded some good combined ratios. Nevertheless, the results achieved by individual companies obviously differ greatly, depending on their portfolio composition and sales/marketing strategies. Last year, for example, this applied particularly to individual life business.
Business is improving; we are making profits again and strengthening our capital base. This all sounds good and I am pleased to be able to make these statements. Moreover, this cyclical improvement didn’t just happen by itself. Admittedly, the equity markets are improving, which is an exogenous factor over which the insurance industry has no influence and which would not, in any case, have been sufficient to bring about this consolidation. It took a big effort at all hierarchical levels to turn the business around and point it towards the high corporate goals set following the trough at the end of 2002. Some painful adjustments had to be made to established structures to achieve this improvement. Nevertheless, I feel that the Swiss insurance industry has taken the social perspective into account during this period of fundamental change.
A positive outlook
One thing is for sure, the recovery is far from complete. It will still take some time, in Switzerland and elsewhere, to return insurers’ financial stability to 2000 levels. It is true that share prices have been appreciating for a year now, which is most encouraging. Listed Swiss insurance shares are also rising, which is another sign of the sector’s recovery. However, as you are all aware, prices are still well below their past levels. There are also other reasons suggesting caution when estimating future growth. Economic activity in Switzerland, and in many other industrialised countries, is still rather sluggish. More investment in building and equipment and increased private consumption, ie higher corporate and household income, are strong drivers for the insurance industry. We are not seeing much sign of any of these things from our insurance sales.
We can assume the following over the short term:
- In life insurance we can expect restrained, but steady, growth in business volume. We maintain that individual life products are an important component of the third pillar of our pension provision. In addition, life insurers will remain in demand as partners and service providers of BVG business.
- Anticipated economic growth will also create a modest rise in non-life premium volume. It is a matter of conjecture as to whether the hard market will last. One thing, however, is certain: there is no more scope for cash-flow underwriting, ie selling premiums at any price. On the contrary, it seems that further premium revisions will be called for in some lines, eg motor or personal insurance (daily sickness benefit insurance, disability).
- In some cases claims and benefits will grow by more than premiums. Longer average life expectancy is bound to impact current pension levels. The trend of rising claims payments for automobile accidents may also persist, for both repair costs and, even more so, for medical costs and disability. There is also the high rate of people who are unable to work due to illness and disability; a reversal of this trend will only occur when there is sustained growth on the economic and employment front. Finally, meteorologists are warning of the increasing probability of major natural disasters.
- Cost management will remain high among insurers’ priorities. However, we do not anticipate any more major downsizing. Nor are any major outsourcing projects to external service providers being planned to our knowledge. However, the current strategic orientation being adopted by many companies involves focusing on core competencies and core markets, which may provide potential for the implementation of further efficiency measures.
- Regarding financial investments, the main priority is consistent risk and asset liability management. In spite of the upbeat stock markets in evidence since the second quarter of 2003, insurers will continue to be relatively frugal in their equity investments. The main challenges may well lie in interest rate developments and currency risks. The risk tendency of insurers has been amended to reflect their reduced risk tolerance, and this does not allow aiming for high financial returns on speculative investments.
- To conclude, a more consistent effort to achieve balanced underwriting results and a more conservative approach to investing should have provided the basis for good potential earnings for the insurance industry in the past year. Needless to say, this is subject to there being no extraordinary loss events that would wipe out all this good work.
Thank you for your attention.