Insurance: Consolidation and digital technology reshape the market
While the Romanian market sees companies such as Astra and Carpatica Asig going bankrupt, major shift and a new consolidation is expected during the next years, Ovidiu Demetrescu, partner, London Brokers, tells The Diplomat- Bucharest. And the 400-brokerage market will go down to just 250 players in the next five years.
By Bogdan Tudorache
There are literally no healthy large insurance companies with Romanian capital in the market, says Demetrescu, while explaining that the regulatory body, ASF (The Financial Supervisory Authority) should have been more careful in the past when dealing with the local capital firms on price dumping policies.
The Romanian market standards were tight, however, some of the companies now bankrupt paid little attention to them, luring in clients with lower pricing, especially in the car insurance compulsory segment (RCA).
And the market will undergo a trimming, with capital requirements and a professional capacity adding up to a fierce competition.
"The market will undergo major changes, now, with the digital technology and the new level of the market driving up a major consolidation. With all due respect, some of the players in the market did not understand what is their competition and that only lowering the price is not a solution."
Lowering the price will only distort the market and in the long run will determine some of the players to get out of the market, too. "Players that started aggressive pricing policies will get off the market," he explains.
The local insurance companies that went bankrupt (among which Astra- the market leader- and Carpatica, while Euroins and City Insurance are under special supervision) have seen unprofessional managers forced by shareholders to take wrong decisions which led them into dire straits – and lowering the price to a dumping level has been one of them. Now, the foreign companies that brought in trained professionals are sharing the market at higher, sustainable prices.
While entire Romania has become price-sensitive during the financial crisis, large players had the power to sustain their investments, while mostly smaller players have been affected. But now, when the crisis has seen its final effects and we entered an economic growth period, companies are focusing more on services' quality and less on pricing. Clients have begun to understand the difference between a low-priced service and a quality, more expensive one, but changing the entire market is a lengthy process.
Digitalisation and internet of things to change them all
In the insurance brokerage segments, there are about 400 players right now, but market new demands and tighter regulations are going to reduce their numbers.
"We talk about the fourth technological wave. Digitalisation and internet of things (IoT) gain more and more field and we see major players adapting to them. IoT is here, now and it will affect the insurance market, too."
As the new technology sweeps out the simple services such as the automotive insurance, brokers will take care of more complex, customized policies.
"Probably from 400 players there will be about 250 at the end of the next five-year period," says Demetrescu, explaining that more severe regulations, that ask for more professional training in the market, and the market itself will drive that change.
"A large chunk of our insurance market will move online during the next five years. And the large part of the brokers that currently have more transactional business lines, such as the compulsory or optional automotive insurance will do that too. As a broker, you don't add value to this service. The majority of car users have a mobile device and sales can be done that way."
Also, a new wave, started already in the UK and US, shows the subscription policy closer to the consumer. Usage-based insurance means drawing a rating, a scoring of the car user's habitual trends in driving and customizing the final service. If a driver is more prudent and uses lesser speed and safer routes, that person should benefit from better pricing.
Based on the users' mobile phones, as each device has a sensor for acceleration and a GPS, a map can be drawn with the user's habitual pattern in driving. And the technology will be developed by insurance companies, to allow automated customized policy pricing and issuance, eliminating the brokers from the chain. Big data will be with the insurers and some of the large brokers with extensive networks and this will be the competitive driver of the next decade.
"In Romania about 70 per cent of the insurance is automotive - linked. Once this all will move up online, it is clear that this brokerage segment will greatly diminish."
Meanwhile, London Brokers has only five per cent of retail based services, done occasionally. And 95 per cent is corporate insurance with value adds services.
Consultancy as a service is more and more important
Even if pricing still pulls a lot of weight in client's final decision, there is a growing trend to win tenders by offering more expensive premiums, but better chosen and better explained. Also, customized services and solutions gain field.
"For the past 15 years we have been offering value added consultancy services, and this was our advantage in gaining new clients, even large multinationals. Pricing is not everything in the corporate risk advice. A corporation can bear some risks, but not catastrophic risks, by itself. You have to determine and draw its threshold levels and assist your client in making the optimal choices."
In the end, the risk belongs to the client. Brokers only help them manage it.
"This is the discussion we have with each client: the risk is theirs, we help them manage it in a professional way with the right tools and people. We identify the risk, we measure it, we make a criticality analysis, we map it with sensitivity issues, impact and stress-test scenarios, and we finally make recommendations. If the clients want to follow those, is their decision, but at least they take an informed decision," Demetrescu adds.
And financial risk sensitivity has risen. After the bankruptcies of some of the largest local insurers, the clients have begun thinking more about where to place the risk.
"It is not normal for you to place a financial risk into a company that has a lower financial rating than yours…You cannot transfer your risk on a weaker balance sheet than yours."
London Brokers has an atypical portfolio as compared to the Romanian market.
"We have about 30 per cent property insurance, about 30 per cent liability insurance of all kinds and the rest- a combination of employee benefits and automotive – but the automotive premiums are signed only by client's demand, and linked with other type of services."
"There are some companies giving up, at our advice, optional automotive insurance for their fleets (CASCO), managing their service centres and their employees better and saving money."
At the same time, the employee benefits segment is driven up lately by the demand for optional health and pension, or even investment services.
The demand in employee benefits segments has two drivers: one of sectorial development- as more clients have opened offices in Romania and want to keep their employees motivated, healthy and focused on the job. The approach is consultative in designing the packages and then finding the optimal solution close to the client needs.
"They're looking at medical plans, at the optional pensions funds (third pillar), and investment funds. We have some strong IT companies in our portfolio, and they were the most demanding in this employee benefits segment."
A second driver for growth of the optional pensions was the surge in fiscal deductibility to 400 Euro per employee, annually, meaning that the employee benefits plans are on a rising demand.
And another important driver is the change in the medical marketing: if up to now there were mainly fixed subscription-based services in the market, covering most of the time unwanted or unnecessary services with locked criteria, now the market moves towards more flexible services.
"If you have a major incident, the subscription doesn't serve you for anything. And the medical service providers have changed their philosophy and cover now more flexible domains."
Basically, with medical insurance you get more cover for the events with larger impact such as surgery as compares to the "pre-paid" medical subscriptions for routine simpler medical problems.
The approach is a win-win for all players because the medical providers will only focus on their core capabilities to deliver medical care and insurers focus on their core competencies to evaluate the client's risk, price, it and finance it in case of a claim.