The European insurance industry has been through a challenging few years; pressure is being applied to both the assets insurers manage and their capability to ensure returns on investments. In this difficult environment of negative interest rates and greater customer expectations, insurers are finding they need to innovate in order to survive.
Whereas insurers were once able to count on their cash to be a steady revenue stream, the highly challenging global economic climate has proven to be a risky environment in which to invest. Adding to insurer’s difficulties was the introduction of the European Union’s Solvency II regulations at the beginning of this year. They are a stringent set of rules governing capital requirements and the levels of risk insurers are able to expose themselves to. While designed to give customers extra confidence in insurers and modernise the way regulators supervise the industry, they have made competition a far more challenging task.
It is clear that not all companies will survive the current climate
In order to remain competitive, insurers are finding ways to offer more compelling products that can meet the changing expectations of customers. With Millennials expecting a more immediate and dynamic service from their insurers, some companies are struggling to modernise their offerings. This is a particular challenge for insurers who are still relying on outdated and inefficient data systems. In 2016, modernisation has become the key to survival.
Despite the challenges, the sector is presenting significant opportunities as well. World Finance had the opportunity to speak to Pekka Luukkanen, CEO of Nordea Life Finland, about Finland’s insurance sector, and how the company is taking advantage of digital technologies to stay ahead of competitors.
What are the biggest challenges for the insurance business?
European companies have been struggling with initially low and now negative interest rates for almost eight years. It is clear that not all companies will survive the current climate, especially since forecasts show that no significant changes to interest rates are to be expected in the next few years. The companies that have been unable to adapt in time, or have done the same thing for too long, are now in trouble. Unfortunately, the number of these companies is set to grow in the near future. An alternative scenario is that EU-wide insurance sector regulations will be loosened with the aim of providing relief to some companies. This would not be an easy decision: neither is it a desired development.
In general, it can be said that the prolonged period of low interest rates is making it harder to gain returns in the investment markets, forcing many insurance companies to develop their operations more rapidly than before. Challenges to operations are posed by stricter regulation, which despite its aims does not always improve the protection and service experience of customers, but instead makes operations more complex and increases costs for insurance companies.
In addition, operations are affected by demographic factors, such as an ageing population and longer life expectancies. This will increase indemnity costs for certain types of cover, including serious illness and permanent disability, in risk life assurance policies. Generally speaking, customers changing to doing business digitally will pose obstacles to companies operating legacy IT systems, thereby limiting their competitiveness. This means that those who simplify their operations will have a competitive edge.
What are the biggest opportunities for insurers?
A low rate of risk life assurance uptake, together with the inadequacy of social security will increase demand for the product. This is especially the case in Finland. Moreover, there is still a great need for saving and preparing for retirement, and in this area, the insurance sector will continue to play a key role. Companies with modern IT systems can take advantage of the acceleration of digitalisation in their operations. Insurers will be able to offer better customer experiences by analysing customer needs in more detail than before.
How is it that Nordea Life Finland differs from its competitors?
Nordea Life Finland has modern IT systems and, as the only major operator in Finland, it will have a single core insurance management system in the future. This will give us an overwhelming competitive edge, enabling us to carry out agile system development to reconcile great customer experiences with regulatory requirements. In addition, Nordea Life Finland has the best and most efficient insurance distribution channel, namely Nordea Bank Finland. Nordea Life Finland has also been able to renew its operations far better than its competitors and to adjust its business operations to meet the challenges of the operating environment, an example of which are the effects of Solvency II regulations. The company has also managed to improve the general quality of its operations, including in the European Foundation for Quality Management and ISO 9001, much better than its competitors.
How are you meeting changing customer needs and expectations?
Customer expectations will increasingly focus on the service experience and a customisable service package. Customers are no longer satisfied with just having an insurance product; needs arise after the product has been bought and customers will increasingly emphasise the benefits they gain from their insurance solution. This change is already very clearly visible in how customers do business with us: they want a full-service package that is available at any time, any place. There will no longer be any demand for traditional service concepts in insurance solutions that are not deemed absolutely necessary. In this kind of competition, the winner will be the service provider that is able to not only exceed customer expectations, but to demonstrate clearly to the customers the benefits they gain and, overall, to manage the flow of information available on its clientele as a whole.
How important is digitalisation in doing this?
Digitalisation offers the chance to do business with the insurance company at any time, anywhere. But it also requires simplification of the insurance solutions offered. Services must be extremely easy to use; every click or minute spent on accessing the service package becomes more important from the customer’s point of view. Digitalisation creates the expectation of the possibility for customers to personalise the service experience, which means we are no longer able to serve customers with exactly the same concept, just like many companies have done with traditional service models.
What are the benefits of migrating to a single insurance system?
A single core insurance system provides Nordea Life Finland with a unique competitive edge that enables us to develop our services extremely quickly and nimbly, with a focus on customer experiences. Moreover, a single insurance system will simplify the company’s operations, as every change needs to be implemented only once, unlike in a situation where we have many systems. The existence of a single, modern system also makes digitalisation development easier since it would be extremely difficult and expensive to build new service concepts into the old systems.
Likewise, what are the benefits of automating company processes?
Raising the rate of automation speeds up the handling of simple, high frequency tasks, freeing up employee resources for duties that require thinking and creativity. In addition, automation improves quality by minimising the risk of human error, thus lowering the overall operational risk. Moreover, a higher rate of automation enables us to comply with regulatory requirements without the need for additional resources since, for instance, all the work resulting from reporting requirements does not have to be done manually.
What are your plans for the future?
By pioneering new technologies we can devote more resources to improving the customer experience. We seek growth and are expanding into business areas where we can best take advantage of our strengths. For example, we have recently submitted a licence application to the Finnish Financial Supervisory Authority for establishing a captive non-life company that will complement our current risk insurance offering. The new company, being a subsidiary of Nordea Life Finland, will utilise our newly developed core insurance system. My prediction is that, five years from now, life assurance operations in Finland will look very different from today.
In the future, our company’s goal is to further increase our efforts in boosting growth in risk life assurance and to further develop insurance-linked saving through digital means in order to meet our customers’ changing needs. Our personnel, who are committed to their goals, will play a key role in these efforts. The company’s permanent goal is to continuously improve quality, which will continue to be channelled into great customer experiences.
Rather than focusing simply on the face of the product, Nooyi initiated a completely new approach to marketing. For instance, one of the project’s new creations is the Pepsi Spire, a unique touchscreen fountain vending machine. While competitors’ dispensing machines have focused on adding a few more buttons and different combinations of flavours, Pepsi has created a fundamentally different interaction between consumer and machine: the Spire is essentially a large iPad that communicates with the user, inviting them to interact with it. It tracks the customer’s habits, so that when purchasers swipe their ID, the machine reminds them of the flavour combinations they tried last time and suggests new ones, while at the same time displaying screenshots of the product being created.
In 1996, Pepsi was forced to swallow a special charge of $576m in relation to international write-offs and restructurings, while its international arm posted a huge operating loss of $846m. Among the moves initiated to turn around its international beverage operations was a drive to increase emphasis on emerging markets, including India, China, eastern Europe and Russia. Cola drinks had a less entrenched reputation in these areas, and so the opportunity to focus more on Pepsi or franchise-owned bottling operations – rather than relying on securing joint ventures – was seen as a lucrative expansion opportunity for the company.
US sales of full-calorie soft drinks have declined by more than 25 percent in the last two decades: soda consumption peaked between the early 1960s and the late 1990s, but is now in a sustained decline. In 2014, for the 10th consecutive year, consumption of soda fell by 0.9 percent in the US – Pepsi’s largest market (see Fig 3). Traditional soda consumers are increasingly turning to alternatives they perceive as being healthier, such as energy drinks, bottled water and coffee – all of which have seen a spike in sales in recent years. It is this trend that has led PepsiCo down its new path of focusing on healthier food and beverages in place of previous consumer favourites.
In addition to the cost savings achieved, in December PetroRio completed the purchase of Maersk’s remaining stake of Polvo in order to start a well-succeeded revitalisation programme. After the completion of the first phase in July 2016, which involved an intervention in two producing wells and the revitalisation of a third one that had been abandoned in 2008, a productivity gain of 20 percent was observed.
In addition to Polvo Field’s optimisation, another area that should be highlighted is PetroRio’s innovative capacity and entrepreneurial culture. This has proven to be of vital importance as the energy company has now become the first in Brazil to use a new technology for oil containment and collection in case of oil spills. At the same time, the new equipment, Side Collector, increases oil collection capacity, as well as being able to eliminate the need for a second dedicated vessel. This then goes towards promoting the firm’s expected annual cost savings of approximately $3m. This strong culture, focused on results, will consolidate PetroRio as Brazil’s largest independent oil and gas production company.
