Wake up, the “Knowledge Economy” is here

The stage for debate at the Insurance Institute of Ontario’s (IIO) Centennial Symposium was set by Nuala Beck, a North American economist and “futurist”, her immediate prediction of the future being that the drive for globalization in financial services has reached the end. Future growth, although significantly different in terms of a changing financial landscape, lies at home in North America, she predicts.

However, many of the p&c speakers adopted alternative perspectives of events shaping the industry, the most conflicting and generally shared consensus being that globalization has far from run its course. In the words of Patrick Ryan, president of global brokers AON Corporation, “both AON and Marsh have spent considerable amounts in global expansion, if indeed globalization is over, then we’re in for a nasty surprise”.

Beck’s argument to what is likely to shape the future of financial services is based on two premises, the first being that the world, and in particular North America, has entered a new economic era of “the knowledge economy”. Most of the speakers agreed with Beck’s view that technology and dissemination of information has promoted a more astute and expectant customer.

Technology has also opened traditional barriers — in terms of products specific suppliers were previously limited to deliver, as well as their geographical reach — which, from a buyer perspective, has advanced convenience from being a “competitive edge” to become a necessary part of doing business. Ongoing investment in technology and a knowledge-based workforce have become critical survival tools, they agree. As Beck phrases, “to stay in the game, you have to be as smart as your customer base”.

Beck’s second and more controversial outlook is that global expansion is yesterday’s news. Increased global financial volatility and polarization of trade blocs, coupled with fundamental shifts of the social-economic interests of Europe, North America and the Far East, will result in a huge influx of returning capital to North America, she believes. Already the top 38 industry sectors in North America are currently growing faster than the “hottest” emerging markets, she observes. “There is an enormous split in the objectives of the G-7 members at the moment…I expect the G-7 will fragment with Canada, the U.K. and the U.S. pushing for further deregulation and privatization [of business sectors] while Japan, Germany, France and Italy are focusing on the status quo and social solidarity.”

The contrast in growth between these three major economic markets will enhance the attractiveness of doing business in North America, Beck states. In addition, she believes that Canada has an advantage over the U.S. in this regard due to a higher per capita knowledge workforce. “North America is on the brink of the biggest economical period of growth…it is expected to dominate the world in the first quarter of the next century…if you’re looking for growth opportunities, it’s happening right under our nose. And, we’re just warming up to the beginning of the information age…North America accounts for 48% of the computers in the world and we have the lowest telecommunication costs — this will be the future driver of growth.”

Industry perspectives

Captains of North American p&c operations took a different perspective of the scenario painted by Beck. Heidi Hutter, president of Swiss Re America, Robert Scott, the group CEO of CGU Worldwide, and AON’s Ryan expect global trends will continue to dictate developments in the North American market. Terry Squire, president of Canada’s largest “home” insurer the Co-operators General Insurance Company, voices support of this argument, noting that consolidation and increased competition from foreign new entrants to the Canadian market will continue. Technology application and product branding are key to future prosperity, they concur.

From a reinsurance market perspective, events are definitely being driven at a global level, observes Hutter. Worldwide consolidation of the p&c market has already resulted in a significant separation between large general carriers and regional specialist operators. And, with global capacity remaining excessive, further consolidation on the world stage of p&c can be expected, she predicts.

The Canadian market will continue to be influenced by global trends, Squire surmises, with consolidation already having shifted more than 50% of the premium base into the hands of the top ten primary companies. Expect further rationalization on the Canadian front, he says. In addition, the future will likely place greater emphasis on diversity of product range, branding and multi-distribution, with distribution and access to the consumer becoming critical components of the business. Technology, he adds, will significantly influence modes of distribution as well as the ability of insurers to remain cost-effective. Companies will increasingly find it difficult to support only one distribution channel with one product line, Squire states.

This position was carried forward by Scott, suggesting that, at an international level, product diversity is becoming critical to survival. The market is shaping around delivery of “financial services” not specific pillars. The barriers between the different financial service disciplines are disappearing rapidly, he observes, reflected by new players entering the field, strategic alliances being formed, and the drive on the regulatory side for more open markets. For insurers, this means competition has to be managed on several fronts, notably traditional relationships between companies/brokers have been affected with a crossing of activities.

In addition, the impact of “bankassurers” will continue, their advantage resting on development and convenience of electronic multi-product delivery. Against this backdrop, three factors are vital for large general insurers to survive: “big really is better” in terms of achieving cost-efficiencies which, combined with maintaining a global position of service coupled with diversity of product, will produce clear benefits.

In a similar vein, Ryan points out that AON’s goal is not to be the world’s biggest insurance brokerage firm, but the largest distributor of financial service products. “I believe the battle of insurance will be about who will be in control of distribution of insurance, direct or through vertically-linked markets. For the time being, insurers will focus on multi-channels of distribution, but, in order to survive, brokers will become more distributors or agents, including alliances with the banks.”

The future of insurance, Ryan expects, will see brokers focusing on distribution advantages, enhancing their role by developing new products and means of delivery. In this regard, direct partnerships between brokers and the suppliers of product will continue to grow.

Furthermore, Ryan believes E-commerce will play a significant role, “AON recently launched its ‘AON Financial Network’ allowing consumers to buy products over the Internet. Will consumers of the future buy electronically and just on price? I don’t know, we’re all betting that won’t be the case. However, we do believe that if you can reach the end user, then you will continue to hold a relevant role.”

As to globalization, Ryan is emphatic, “I don’t believe that globalization is dead, the rest of the world is not going to go away”. Global consolidation in the brokerage market has, and will continue to be driven by customer expectations, he says, with clients demanding global reach and coverage. “They [buyers] want more resources and ground presence.”