Ivo Furrer, Chief Executive Officer Switzerland at Swiss Life, and Thomas Gerber, Head of Life and Executive Committee member at AXA Winterthur, discuss the business environment for life insurance.
Ivo Furrer (IF): I would say that, despite the low-interest environment, we’ve managed to move Swiss Life back to sustainable profitability and growth at the same time. I think a substantial part of our accomplishment is due to the successful realignment of our strategy and the manner in which we interact with our clients. Our employees are proud to work for Swiss Life.
Thomas Gerber (TG): As demographic influences change financial markets, we’ve gained a much better understanding of our customers in recent years and the choices they face. As a result, our individual life products combine both security and upside based on state of the art advice. We also recognize we must revisit existing customers’ needs in order to review their circumstances and requirements arising from the current distinctive interest rate environment. We advise our customers on real choices. In short, we have moved from product financial analysis to putting ourselves much more in our customers’ shoes.
TG: We have a firm, clear strategy for the coming years which is in sync with the record low interest environment. We have clearly confirmed our support for reforming the pension system, as we operate in a very long-term business and this needs far-sighted planning. At the moment, we are taking actions as first mover to shape the future of our market, such as developing a comprehensive advice concept for alternative solutions for our customer as well as reducing the conversion rate for non-mandatory insurance. It’s not always comfortable to move first, but I’m clear that if nobody moves, the whole system fails to develop. It is our role as a market leader to ensure that the industry stays relevant to our customers’ needs not just now, but also decades into the future. I’m also busy thinking about the life business in 2020 and beyond due to the long-term nature of our business (for me, this has a time horizon up to 2030). It must reflect broader changes within the financial services industry, including the needs of our existing and potential distribution partners. And of course it needs to reflect our ultimate objectives of providing true value to our customers.
IF: As CEO I devote my attention primarily to issues concerning the future of our business. Ongoing digitalization will require us life insurers to adapt our business models. Dealing with large volumes of data is complex and challenging and will lead to entirely new conditions for customers as well as new distribution channels. The second major issue on my agenda relates to “Altersvorsorge 2020”. We believe that reforms are imperative, but they need to be appropriately developed and implemented. Hence, we are strongly engaged with the relating political process.
TG: At a macro level, our life business in Switzerland is part of AXA Group’s global life business. As a Swiss market leader, we can contribute to these global perspectives on diversification, risk management and insights into how the life business will develop, as well as leveraging our colleagues’ insights from abroad. We further have a comprehensive understanding of financial and insurance protection and, as a holistic insurer, an effective distribution model, customer segmentation and positioning. That’s an incredibly strong proposition. It has the ultimate impact of ensuring we know our customers and not needing to push sales. Quite often, our customer relationships start on the non-life side and grow from there. This is very rewarding, as we place a strong emphasis on the long-term nature of our business. Transparency and the creation of trust are core elements of this vision.
IF: We adhere to a multi-channel set up, meaning that we offer clients different means of getting in touch with us. With around 1,200 – 1,300 employees, Swiss Life’s distribution capacity is significant and very well developed. We are presently devoting considerable efforts to strengthening it further. We have strong relationships with brokers and partners. In addition, we are investing heavily in digital distribution.Another strength is the considerable independence our Swiss entities enjoy within the group – we live the multi-office approach. We have short decision-making processes that allow us to act swiftly and with great agility compared to our competitors.
IF: Life insurance as a product is losing market share, but the pension segment is gaining momentum on account of the emerging demographic trends. Today, there are a number of clever solutions and products beyond simple life insurance achieving the same objectives. Typical examples are banking investments and similar products, products pertaining to the third pillar segment, but also real estate can be considered as part of a pension plan scheme. In this context we want to generate overall added value for our customers.
TG: Growth opportunities in the life insurance industry are closely related to the demographic development. Not accounting for migration impacting higher volume of potential business, there is also a greater need in the 50+ years old customer group for more detailed pension planning for the coming 15 years. As life expectancy increases, financial requirements must remain flexible. As people reach retirement, we have the expertise to grow their pension and to help customers meet their personal needs in this active part of their life. Not to mention the prospect of early retirement or flexible retirement. We truly understand the various life cycles of saving and protection needs, and this is an attractive market we expect to continue expanding. To help us fulfil this, we interact much more proactively with customers than many insurers have in the past, and we therefore have attractive overall offerings. This is especially the case on the life side, as life advice is extremely complex. Customer-orientation and regular interaction are critical. In essence, we strive to provide value in a very transparent way, such that the customer responds well and we keep him or her for the long term.
IF: We are actually well positioned for this and have for the past four years pursued sustainable margin and capital management. By mapping and evaluating each product individually, we can react with suitable repricing measures to either rising or falling interest rates. This sort of monitoring is carried out on a monthly basis, with each product being individually analysed, unlike our competitors who I suppose only assess their clients’ overall portfolios. There is no room for compromise in terms of profitability as guarantor, as it were, for meeting our long-term commitments.
We observe a similar scenario in Japan, where they had to deal with deflation. The Japanese have become used to low interest rates, as have the Swiss. As an investor I get a return of 0.2% for a savings account – clearly, life insurance is a very viable alternative!
TG: We are the specialists for all age groups. It’s down to us to provide solutions for our customers. Guarantees remain important to our business and to our customers amid low interest rates. You could say we have fully financed the guarantee we’ve given in individual life, and we have the requisite capital. In group life we are extremely transparent. It’s all about providing long-term security – in capital terms for our business, but also of course indirectly for our customers. The very low interest rate environment requires firm decisions and actions, which are entirely achievable.
TG: In my view, it should happen in a way that does not weaken the three pillar system, as I believe this is one of the best systems. In terms of reform of the three pillars, it’s very much a question of fairness. We must be fair in not placing an excessive burden on the younger generation. Young people are not especially interested in pension planning, but you see in countries without strong pillars of employee benefit and individual life in their pension system, that the economic burden is high.
IF: I lived abroad for ten years and participated in many discussions regarding social security systems. I have come to the conclusion that Switzerland’s social security system is excellent. We must explain to the Swiss people that it is imperative to take care for the 3-pillar-concept. However, equity between generations requires reforms. It is correct that the concept of generational solidarity leads to a working population supporting the retired population. By contrast, it is unacceptable that the employed ought to contribute an average of CHF 1,000 per year to retirees simply because the conversion rate of the second pillar is too high. Not only the older members of the population can be poor, but also young people. This should be made transparent and easy to understand.
IF: In my opinion the pain threshold is at 90%. We can live well with the framework conditions implemented in 2002. The mandatory percentage rate is key. Whether it is 90% or 92% makes a big difference to the asset manager and risk carrying capacity. If the quote increases to 92% the overall size of the cake will diminish. At first glance, the insured receive more, but on a second look it is actually less. This is counterproductive for the insured as well as bad for insurers.
TG: When the second pillar started, there were 26 companies in this business. Only six are now left. Any change in the Legal Quote will provoke discussions. At AXA we continuously assess the situation and find solutions to effect the changes needed to continue providing customer value, whatever the circumstance. However, I believe if the legal quote is increased, the whole system loses value. We would need to take out risk from our assets. That means the main part of our customers and customers of the life insurance industry who choose the full insurance model (e.g. all the smaller and mid sized companies) would be negatively affected. This is because the guarantee provided in the full insurance model would be more costly and the performance lower.
IF: Our market is highly competitive - flexibility is a must. Financial security and resultant reliability has its price, which our customers understand. We need an enormous amount of capital, more than some foreign insurers consider justifiable; a fact that led to the decision to exit the market on account of the desired return on equity.
TG: The Swiss Solvency Test (SST), as it is much more demanding than Solvency II in Europe. On the one hand we have grown a stable and healthy capital base. On the other hand it puts pressure on the return on capital. However, we live with this. We discuss it with the regulatory authorities to ensure it serves the purpose for which it was created, and it does not overload capital requirements.
IF: I would draw a distinction between the solvency regime and the more consumer-oriented regulations. With regard to solvency we have always supported the Swiss Solvency Test (SST) although it is clearly more capital-intensive than Solvency II. A defined threshold is necessary, which – for life insurers - manifests itself primarily in the SST. However, comparing SST und Solvency II and then observing the massive variances raises a number of questions. Put differently, excessive capital requirements lead to a clear-cut competitive disadvantage of Swiss insurers.
TG: In terms of FIDLEG: this is a law the insurance industry neither wants nor needs. It was created for the banking industry. The insurance industry already has a good basis in the VVG. Revision of the VVG may give certain improvements from a customer protection or transparency point of view. The introduction of FIDLEG will exclusively create additional bureaucracy in insurance and lead to a loss of clarity and increased cost. I firmly believe transparency will be a key driver of success going forward; we must not jeopardise this.
IF: I am less sceptical about FIDLEG. Insurers and their customer relationships are sufficiently regulated. FIDLEG can only lead to additional protection regarding products. For example, instruction leaflets similar to those used by the pharmaceutical industry, or additional records of advice. I consider this fair – after all, we have a vested interest in satisfied customers; we want to provide them with good advice through our distribution channels, which the client confirms with his or her signature.
TG: That’s an important question. If we look at our customer surveys, we find a very high level of customer satisfaction. I believe we need to maintain a level of advice that helps to further build customers’ trust to strengthen the savings. In terms of the distribution approach, I believe it’s a question of promoting the right level of transparency, creating real customer value while allowing a distribution partner to develop his model on a long-term basis.
IF: I consider myself to be liberal and I tend to be sceptical of regulatory measures. Regulations aim at curtailing excesses – excesses that have undisputedly occurred in the past. However, I doubt that this will enhance customers’ trust. Experience gained from our daily work indicates that the sources of trust are our agents, our systems and ultimately the Swiss Life brand.
IF: This is a highly relevant subject for us and reflects one of our strategic approaches. We participate in a project called „Face-To-Customer“, which allows customer simulations and drives the finance process via portals. Protection of customers’ data and the pertaining rights of the customer are very important when considering digitalization. The customer alone decides which information he or she provides, in which format it will be captured by the portal, who has access to the information and how it may be utilized. If a customer decides to use the portal, we can initiate a dialogue with him or her on the basis of his or her behaviour pattern and develop bespoke offers.
TG: Our primary focus for the next couple of years is very much on the group life side and on services. There’s great potential to provide more information in a more efficient manner that will help our customers as well as reduce costs. We should address both the data processing aspects and the customer sales and service aspects. Digital is a great driver of efficiency and effectiveness throughout the value chain.
TG: With a traditional product it’s easy to say there is a guarantee and a bonus, though the mechanics are complicated. Our individual life product range has a guarantee on one side and on the other an upside that is linked to the development of the financial markets. Across the market, we believe it’s better to focus on key products at each stage of the life cycle. You could say that the complexity of the entire product range has been reduced, yielding a clear focus on the offering and advice for the accumulation, protection and retirement phases. In the long-term there seems to be a significant opportunity to reduce complexity where it does not provide any value to the customer. But to be honest it’s not an easy area to tackle.
IF: We are creating new and more transparent products, which are more readily understandable to the client. These are replacing traditional products (with full guarantees). We are talking about more flexible, rather than more complex, solutions. The customer decides whether full investment protection or participation, an SMI or SPI-related product or a fixed interest rate will best meet his or her needs. There is the additional option of revising the portfolio structure annually
IF: Actually, I have not yet decided. A hybrid pension scheme is generally not a bad idea, particularly for people who can clearly assess the risk carrying capacity of a capital payment. For me, this is an important prerequisite for managing and investing ones own assets. On the other hand, a pension at a conversion rate of 5.5% or 5% is still pretty good. Where else can one get a secure 5% yield over many years?
TG: I’m probably too young to answer the question today… I will seek advice from one of our advisors. And of course I will consider my wife’s opinion.
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