Insurance Industry in the UK - Essay Example

? Insurance Industry in the UK Table of contents Introduction 3 2. Insurance Industry Overview – Market segmentation 3 3. Strengths and challengesof the industry 5 4. Porter’s Five Forces analysis 6 5. PESTEL analysis 8 6 Recommendations 9 7. Conclusion 10 References Appendix 1. Introduction In the context of the modern market, the development of business activities in all industrial sectors has become a challenging task – mostly because of the global financial crisis but also of the increase of competition. The insurance industry is one of the business sectors which has managed to keep its competitiveness – compared the other industries, a fact which is related to the de-centralization of each activities and the flexibility regarding the structure/ management of its operations. The performance and the challenges of insurance industry in Britain are set under examination in this paper. Emphasis is given on the market segmentation, the British demographics but also the buying trends of consumers in regard to the services of this type. Moreover, the competition and the opportunities of the British market – as it can affect the insurance industry are analytically explained using appropriate strategic models, such as the Porter’s Five Forces model and the PESTEL analysis. It is concluded that the insurance industry in UK is a sector with significant prospects but it is necessary that measures are introduced for the sector’s more effective monitoring – referring to the quality of services and the balance between services/ pricing which influences the level of competition developed in the specific industry. 2. Insurance Industry Overview – Market segmentation The British insurance market is the second most powerful globally; the sector’s employees are estimated to 313,000 (Efinancial careers 2011); in 2010, a decline was observed regarding the number of people working in the particular sector, reaching the 275,000 (Stern 2011), probably as a result of the pressures against the British economy; the continuous increase of premiums in the specific sector is rather a negative factor for the sector’s growth (British Insurance Premium Index 2011). In any case, the specific sector has a key role in the development of the British government’s policies – referring especially to the environmental plans and initiatives of the British government. The above fact is reflected in the cooperation in 2010 between the British government and CEOs from the country’s major firms in order to suggest an effective plan of action regarding the limitation of global climate risk - in ‘the United Nations Framework Convention on Climate Change (UNFCCC)’ (University of Cambridge 2010); the cooperation between the British government and the insurance sector is expanded further, including the joint activities undertaken for the limitation of the financial risks across the British market (Stobbart 2009). On the other hand, the risks in the particular industry can be high – especially because of the turbulences in the British financial market, under the influence of the global financial crisis (Guardian 2011). However, the industry’s position in the British market is significant – in fact, it has been proved that the particular sector ‘controls the 17% of the country’s stock market’ (Economy Watch 2011). The market segmentation could help the firms of the industry to increase their position in the local market; geographically, Britain can be divided into two major zones – in terms of business concentration: the greater London area, including City, is the centre of the country’s business activities; the rest of the country presents similar market (and economic) characteristics. In terms of behaviour, the British market could be also divided into two major parts, as above; in the greater London area, business activities influence the life of people, while outside London, emphasis is given on quality of life; however, the modes of living do not represent particular differentiation – in both London and the other areas of the country: parents over 50 are not expected to live with their children, health is considered among the priorities for people of all social classes – even if for older people health seems to be the most important issue – compared to other issues, such as assets of various types (Gjonca et al. 2004). The above issues should be taken into consideration when evaluating the operations and the challenges of insurance firms across Britain. 3. Strengths and challenges of the industry The potentials of the particular industry to face the pressures of the global market and to achieve a further growth can be identified using a SWOT analysis framework; in the context of the above framework, emphasis will be given on the following characteristics of the British insurance industry: a) Strengths: the high performance of the industry; reference is made to the high number of the industry’s customers, a fact which has urged entrepreneurs to enter the particular sector; the high prospects of the industry; the British Insurance Industry is the most powerful in Europe; in the future, the power of this industry is expected to be further developed as the insurance needs of firms worldwide are increased – because of the environment, the increase of volume of operations, the growth of the market worldwide – for instance, the BRIC countries, b) Weaknesses: the number of firms in the British insurance industry is high; new firms – of various sizes – are likely to enter the industry periodically – because of the industry’s high performance; in this way, the competition is continuously increased, leading to the decrease of prices of services; the monitoring of the industry is not effective – due to the expansion of its operations; the FSA (Financial Services Authority) makes significant efforts so that to gain a full control of the industry, but such target is difficult to be achieved – the use of advanced technology (Internet, social networking) by the firms of the sector makes their control even more difficult, c) Opportunities: Britain is a country with a significant presence in the global market; in fact, Britain is considered as one of the most important business centers worldwide; this means that the firms operating in the British market have an advantage towards their rivals in foreign markets; moreover, new markets have appeared internationally; the growing Chinese market and the markets of the BRIC countries creates significant opportunities for growth for firms established in Britain – a country which participates actively in the management and monitoring of global financial transactions – reference can be made for instance to Lloyds, the organization which is involved in the funding of most marine projects worldwide; in accordance with a recent report, in 2014, the value of the insurance sector in Britain will be 590.6 billion (Data Monitor, 2010) and d) Threats: the global financial crisis is still active; at least, its consequences have not be eliminated; this fact can be identified in the turbulences that characterized the British economy; firms operating in the British market need to develop a safety network, ensuring that they are not too exposed to debts – at least, not at high level, ensuring that they could manage, as possible, a strong market crisis. 4. Porter’s Five Forces analysis The Porter’s Five Forces Model is used in order to identify a firm’s or an industry’s external environment. The above model refers to a series of forces – five –, which are likely to impact on the operations of a particular organization or industrial sector. Using the specific model (see Graph 1, Appendix), the external environment of Britain’s insurance industry could be described as follows: a) New Entrants: the British insurance industry is continuously expanding; due to the high profitability of the specific sector, opportunities exist for new entrepreneurs who wish to avoid extreme risk – i.e. industrial sectors the performance of which is not secured; the insurance industry of the UK – which is the largest in Europe, as explained above – is offered for significant benefits; the risks of the sector related to the global financial crisis should be taken into consideration. Moreover, in UK the establishment of firms is quite simplified process – bureaucracy is significantly reduced in business startups; also the business which will enter the specific sector is not expected to face any barriers, but it should be ready to face a strong competition, b) threat of Substitute Services: at this point, insurance industry can be characterized as problematic; in fact, due to the high number of the firms operating in the particular industry it is quite difficult for the authorities to check the quality/ pricing of services offered. In this context, the threat of substitute products is extremely high, being a factor that negatively influences the sector’s image towards the public – even if, in terms of pricing, the above practice is often welcomed by consumers in the specific sector, c) threat of Bargaining Power of customers: as already explained, the British insurance industry is a well developed one; due to the high number of firms operating in this sector, consumers have a series of options regarding the industry’s services. This does not necessarily means that the level of the services offered by all firms is the same – in fact a differentiation in quality of these services exist giving the chance for limitation in their pricing and the increase of competition; however, the average level of services provided in the British insurance industry can be characterized as quite satisfactory – mostly because of the continuous monitoring of the industry’s activities by the Financial Services Authority; therefore, consumers in this industry have the power to press the firms for better pricing without the service involved to be particularly influenced – in terms of its quality, d) Bargaining Power of suppliers; the services provided in the insurance industry do not require complex or unique products or facilities/ infrastructure; for this reason, the power of the industry’s suppliers to press for higher prices – referring to the suppliers’ compensation for the services/ products provided to the insurance firms – is limited; in fact, insurance firms in the British market can easily identify new suppliers without the relevant cost to be increased, e) Industry Competition: British insurance industry is well developed; competition within the particular industry is extremely strong, a fact that has led to the decrease of prices; the firms that already operate in the industry but also those that plan to enter the specific sector need to be appropriately prepared for the strong competition expanded across the above industry. 5. PESTEL analysis In order to estimate the opportunities available in the British insurance industry for firms that wish to operate in the specific sector, it would be necessary to examine a series of aspects of the industry’s environment using the PESTEL analysis – a strategic analysis which can be used along with the Porter’s Five Forces model in order to show the trends (political, economic, social, technological, environmental and legal) which characterize the industry’s external environment (Graph 2, Appendix). In the context of the PESTEL analysis, the industry’s environment could be characterized as follows: a) Political: Britain has been traditionally characterized by stability in its governance; the last decades the country’s government is elected with no major conflicts; there is no threat for the country’s businesses in terms of the potential appearance of sudden and strong political conflicts; the above fact guarantees also the stability of the economy, b) Economic: the performance of British economy is not standardized; the country has been strongly affected by the global financial crisis; the high level of debt can be characterized as a threat regarding a future growth; the increased competition between Britain and other markets worldwide – for instance the Chinese market or the markets of the BRIC countries would not be a cause of worry, Britain keeps its strategic position in the management of funds required in the development of projects – as in the case of Lloyds that offers the major part of funds required in marine plans, c) Social: British society is characterized by equality and lack of discrimination; emphasis is given on the protection of social peace, culture and ethics, d) Technological: in Britain, technology is quite important for the development of business activities; moreover, the firms operating in the British market can have access to advanced features of technology, securing the continuous improvement of their performance – as it is related with the effective communication with customers, e) Environmental: The operations of the industry’s firms can affect the environment but not directly; rather through the terms included in insurance contracts regarding the potentials for compensation because of environmental damages; the continuous expansion of natural disasters would be a problem for the firms in the particular sector – which would have to increase the level of compensation provided to their customers; therefore, the environmental conditions globally and their effects on the industry should be taken into consideration by the entrepreneurs who are interested in entering the particular industry, f) Legal: the industry’s regulation is extensive, through a series of laws; most important, no barriers have been set, in terms of the law, for the entrance of new businesses in the particular sector; domestic and foreign entrepreneurs are given the chance to invest their funds on a sector which has a significant performance and many prospects for further growth. 6 Recommendations In accordance with the issues analyzed above, the British insurance industry has many prospects; however, it seems that the rate of its growth is rather low, a problem which could be resolved by adopting the following measures: a) increase of control on the activities of the industry’s firms ensuring that their operations are aligned with the rules regulating the specific sector, b) change of rules which introduce a differentiation in treatment of the consumers compared to the firms – reference is made especially to the alteration of the terms under which the principle of the utmost good faith is applied; in this way, the trust of consumers towards the industry will be increased; the potential failure of the consumer to provide information on one or more key issues related to insurance contract would be more fairly judged – such practice is already initiated through the Bill submitted recently in the Parliament for the reform of the Marine Insurance Act of 1906, b) increase of the support provided to the firm’s new entrants; in fact, incentives would be provided to entrepreneurs who are interested in investing in the particular sector – meaning also the foreign investors who wish to enter the British market; these incentives would be either monetary, for instance, tax benefits or reliefs or non-monetary, for instance the right to bid on projects related to the public sector, c) increase and improvement of the information provided to the public regarding the activities of the industry’s firms; people in Britain are not fully aware of the aspects of the insurance industry – meaning that they are not fully aware for their obligations and rights in the context of an insurance contract; by explaining them analytically the terms of such contract, their trust to the industry would be increased, a fact that could also increase the industry’s profits. 7. Conclusion The performance of the insurance industry in Britain can be characterized as rather satisfactory. The firms operating in the specific sector have to face a series of challenges, as analyzed above. It seems though that the sector’s opportunities are many and it is perhaps for this reason that the number of businesses involving in these activities is kept at high levels. The measures suggested in the previous section could help the firms of the sector to increase their competitiveness, but the level of the benefits achieved cannot be precisely estimated in advance. The key reason is the fact that the British economy still faces a series of pressures and turbulences because of the global financial crisis – an issue highlighted above. The insurance firms operating in the British market cannot rely on the governmental support in order to survive; they should rather try to promote innovation and develop strategic initiatives, which will help them to compete effectively their rivals. The prospects of the British insurance industry, as explained previously, lead to the assumption that such efforts are worthy to be initiated guaranteeing the payback of the funds invested, even in the long term. References Association of British Insurers. 2011. Available from Economy Watch. 2011. UK Insurance Industry Information. Available from Efinancial careers. 2011. Insurance. Available from Data Monitor (2010) Insurance in the United Kingdom. Gjonca, E., Calderwood, L. 2004. Socio-demographic characteristics. Available from Guardian. 2011. Insurance Industry. Available from HM Treasury. 2009. Vision for the insurance industry in 2020. Available from Lloyds. 2011. Available from Office for National Statistics. 2011. Investment by insurance companies, pension funds and trusts 4th quarter 2010. Available from Stern, K. 2011. The UK Insurance Sector: less people, more engagement! Lloyds. Available from Stobbart, G. 2009. Challenges and opportunities facing the UK Insurance Industry. News-Insurance. Available from University of Cambridge. 2010. Insurance industry and UK Government join forces on global climate solutions. Available from Appendix Graph 1 – Porter’s Five Forces Model Political Economic Social Technological Environmental Legal -Stability in the country’s governance -No political conflicts on issues related to the public interest -The performance of the British economy is not standardized -High debt of the country -Increase of competition from other countries (BRIC countries, China, Korea etc.) -British society is characterized by equality and lack of discrimination, -No social conflicts are likely to be developed across the country -Culture and ethics are important in all human activities -The level of technology used in business activities in Britain is high; technology is highly promoted in all business sectors -the access to advanced technology features is easy -The operations of the industry’s firms can affect the environment but not directly; rather through the terms included in insurance contracts regarding the potentials for compensation because of environmental damages -The industry’s regulation is extensive, through a series of laws -Legislators in Britain have not set barriers for the entrance in the sector of foreign entrepreneurs Graph 2 – PESTEL analysis of British insurance industry Read More