Insurance News

Insurers Push Prevention To Prune Costs and Claims

Posted on: April 5, 2009

ZURICH (Dow Jones)–Insurers are learning that prevention is better than cure. It keeps costs and claims in check, shields corporate profits and costumers like it too.

Instead of just paying out claims after a disaster strikes, some insurers are telling clients how to avoid being hit by a calamity in the first place.

Analysts say this model may emerge as a viable business approach as firms seek to curb expenses as a way of countering fallout from the economic downturn and weak financial markets.

“Another slump of financial markets could pose a big threat to insurers and their solvency,” said Rainer Skierka, financial analyst at Bank Sarasin in Zurich. “But reshaped business models can help stem against the economic downturn to some extent.”

Insurers were hit by billions of dollars worth of write-downs in 2008, putting share valuations at record lows with price-earnings ratios – denoting a company’s future profitability – at about six times, sharply below the multi-year average of about 12 times.

Worse, the economic downturn is reducing business volumes fast at many companies. To counter this trend, insurers are attempting to lure customers with extra services that are aimed at protection and prevention.

Swiss insurer Zurich Financial Services AG (ZURN.VX) was among the first to deal more closely with costumers and the strategy has met with success in Europe and the U.S.

During the U.K. floods in the 2007, for example, the insurer rang up motor insurance clients to tell them where to park their cars. After the flood, Zurich Financial, one of Europe’s largest insurers, also made sure that clients received industrial driers to repair their swamped basements.

The strategy worked. Despite flood claims of more than $2 billion that hit the entire sector back then, Zurich Financial was able to churn out a profit and attract fresh costumers.

In recent months, Zurich Financial has broadened the concept, offering car insurance clients repair services at its Help Points in Switzerland. Rather than bringing a damaged car to a mechanic, clients can ring up the insurer, who will ensure the vehicle is repaired.

Such costumer-focused services helped Zurich in 2008, even as the insurer accrued heavy investment losses. Besides a net profit of $3 billion, the insurer was able to increase premiums by around 3% last year to around $58 billion, while many of its competitors were faced with declining revenue.

Now, with the onset of the financial crisis, this business model is attracting new followers. Baloise Holding AG (BALN.VX) has introduced a program dubbed Safety World under which the insurer gives away safety equipment such as smoke detectors and fire blankets.

In Austria, the insurer said, a woman’s life was saved thanks to the smoke detector, while another customer avoided his new computer going up in flames by installing an excess voltage protection gadget that he received with Baloise’ safety package along with the non-life insurance contract.

“With Safety World we want to tackle new market segments,” said Baloise Chief Executive Officer Martin Strobel. “This should help us grow but also keep costs in check.”

In 2008, the strategy already worked out fine. The company’s combined ratio – a key industry figure that compares costs and claims to premium income – stood below 91%, a level rarely achieved in the sector.

The new costumer-focused business model also promises to retain existing clients and attract new ones. “Baloise Safety World intends to bind customers by giving them more importance,” said Rene Locher, insurance analyst at Sal. Oppenheim in Zurich. “If policyholders stick to Baloise, the company can save costs, as nothing is more expensive than acquiring new customers.”

At French insurer Axa SA (AXA) “prevention is key and runs trough all our business unit,” said spokesman Emmanuel Touzeau. “In fact, it’s a win-win type of action, as prevention makes costumers more prudent.”

In Switzerland the insurer offers young car drivers a so-called crash-recorder, which like a black box in an airplane, registers a car’s movements. “People who accept the recorder are automatically more self-conscious and less prone to accidents,” Touzeau said. Young car owners generally produce the highest claims for an insurer.

Other services include cab services for young drivers in France or crisis communication offers in Belgium for small and medium-sized firms that are hit by calamities such as a fire. All these efforts have helped Axa reduce claims and costs in 2008, when the company’s combined ratio fell to 95.5%, its best level ever.

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