On July 1, 1994, the third EC insurance directive will further deregulate the European insurance industry, providing another brutal increase in competition that will put in jeopardy the fortunes of the majority of Europe's traditional insurance providers. Indeed, dramatically changing patterns of competition have already begun to anticipate the painful effects of deregulation: the industry is on the verge of a structural shake-up, and the losses will be heavy. The strong likelihood is that many traditional multi-line insurers will break down under the pressures—financial and managerial—of a genuinely free market. But there are basic changes these companies can—and must—make now to steer their way through the coming period of deep structural change.

With its assets of more than US$2.2 trillion growing faster than GDP, the European insurance industry has long been a well protected and very profitable financial machine. It has also been extremely fragmented: more than 2,000 companies; a wide variety of sales methods, financial reporting methods, and tax regimes; and huge cross-border variations in market penetration and in the premiums charged for comparable coverage. (The average per capita premium in Greece, for example, is US$115; in the United Kingdom, US$1,907.) As a result, when the protection offered by national laws disappears, the degree of upheaval in insurance will be considerably greater than in most other regulated industries.

Based on government-approved premiums and conditions, European insurers' decades-old formula for success—"go for volume"—is not merely obsolete. It is a recipe for disaster. As in the United States' airline, transportation, and financial services industries in the late 1970s and 1980s, far-reaching deregulation will lead to extreme difficulties for—and even the demise of—many traditional carriers. When economic ground rules change, poorly-managed companies will no longer be able to survive, let alone prosper. Only the fittest will stand a chance.

An industry in transition

The balance sheets of many of Europe's major insurance and reinsurance groups are already beginning to show the signs of increasing pressure on prots: underwriting results in 1991 and 1992 were sharply down. This is not, as it was in the past, merely the reection of a temporary dip in the underwriting cycle. It marks the onset of an unstoppable transition.

In the more deregulated environments of the United Kingdom, the Netherlands, and France, industry protability has plummeted, in some cases to levels only one-third those of such markets as Germany and Switzerland (Exhibit 1)—markets that are still heavily regulated and obviously on the brink of a drastic decline in protability.

The economic logic for the impending collapse in profits across the region rests on:

• Overcapacity of 30 percent or more in sales and administration. The capital resources built up during the long era of high growth rates and stable profits are now making possible much more aggressive competition. Products are rapidly degenerating into commodities, as prices and margins decline in the general search for volume to fill capacity.
• A rush of specialized insurers into the market with simplified and, in some cases, 40 to 50 percent leaner cost structures is grabbing share away from established multi-line insurers—and fundamentally changing the whole industry's cost curve.
• More discerning customers are beginning to see insurance as a major financial burden and are actively seeking more favorable terms and conditions. As households and industrial corporations alike opt for self-insurance much more frequently, the total volume of premiums in the market will fall by 20 to 25 percent from today's levels.
• Financing the enormous investments now required in systems and marketing will force insurers to ratchet up profitability levels or liquidate hidden reserves.
• As more efficient capital markets, oriented to the real return on equity capital, take into account reserves hidden in the depreciated book values of investments, today's returns on equity capital will drop by about half (Exhibit 2).

Patterns of adjustment

With these forces at work, it is likely that the profitability of the European insurance industry will continue to decline until a thorough shake-up has occurred, and both survivors and newcomers have redefined their roles in the market. The nature of that redefinition, however, will depend to a large extent on the particular industry segment in which a given company chooses to compete.

Commercial lines

Liberalized in July 1991, industrial insurance across Europe has witnessed a "commoditization" of the product—that is, increasingly undifferentiated competition on the basis of price in the struggle for market share. In the past ve years, rates have fallen 30 percent, and business has grown extremely unprotable (Exhibit 3). The troubles at Lloyd's of London have received extensive press coverage, but they are far from unique. In Germany—Europe's largest insurance market—for instance, commercial re and business interruption losses in 1991 totaled more than DM1 billion.

Because of these pressures, industrial customers may soon have to accept double-digit—in some cases, even triple-digit—percentage price hikes, even in the midst of recession in Europe. Until recently, good margins in personal lines enabled even small companies to write prestigious but loss-making industrial risks (Exhibit 4). In effect, the average European household has been subsidizing industry—in 1992, by several billion dollars.

Liberalization, deregulation, and consumer activism will put an end to that for good:

• Across Europe, premiums and products will rapidly converge as markets cease to be dened by national borders. The operations of international brokers will only accelerate the process.
• Industrial customers will attempt to evade the massive increase in premiums by means of self-insurance, pools, and captives, thus reducing the total volume of premiums. In the United States, analysts estimate that the share of such "alternative coverages" will reach 50 percent of premiums by the year 2000. Insurers will be called upon to support those coverages with specialized "unbundled" services like loss analysis, loss prevention, and claims handling.
• Only a very few large insurers will be able to marshal the resources to offer the specialized technical and legal expertise, financial capacity, and international presence that their customers seek. Today, hardly a single insurer is able to offer corporate clients a satisfactory level of international service.
• The majority of today's players will therefore have to exit the business—a shake-out like the one that occurred in the United States in the 1980s. Providing financial capacity will not, by itself, be enough of a value proposition to attract and hold corporate customers.

After the fundamental consolidation of the industrial risk market that will take place over the next few years, there is a chance that profitability will return to adequate levels for the competitors that remain. Failing that, industrial insurers will continue to suffer their cyclical profit and loss waves until profits from private customers no longer suffice to cover industrial losses.

Personal lines

For the foreseeable future, personal insurance will continue to be a local business, influenced by local variations in legal systems, crime rates, buying preferences, drinking and driving habits, lifestyles, and the like. Only in the very long term is it conceivable that an individual insurer will be able to offer a uniform product, price, and business system throughout Europe. But this does not mean that personal lines markets are safe.

Here, too, insurers face fundamental challenges: consumers are beginning to question why particular risks need to be covered (for example, why a home should be insured from the rst dollar onward) and to insist on receiving acceptable service (the current average settlement period for claims often exceeds six weeks).

Once largely indifferent to insurance products, private individuals have now recognized their significance: in the course of a lifetime, a household often pays more than US$150,000 in insurance premiums—enough to buy a condominium, and more than an average employee's savings at retirement. Little wonder that people get upset when they discover that roughly a third of these premiums are used for administration and sales charges. And little wonder that, as in other retail industries, customers have started shopping for the best buy or resorting to "do-it-yourself" (self-insurance) solutions.

Market research clearly indicates that European consumers are dissatisfied with the service and the price/performance ratio of traditional personal-line insurers. Their loyalty to insurance companies is dwindling, and they have shown themselves willing to vote with their feet when dissatisfaction hits breaking point. Such votes quickly add up: discount insurers have made substantial gains in market share, having already reached the 50 percent mark in product groups like car insurance in France, for instance.

As exclusive agency organizations lose ground (Exhibit 5), direct marketers (motor insurance) and banks (life insurance) have more than doubled their share of the market in the last few years. For example, direct motor insurers like Direct Line in the United Kingdom, which started up only in 1987, are advertising heavily, selling and underwriting individual risks over the phone for as much as 20 to 30 percent less than their competitors, delivering policies within 24 to 48 hours, and dispensing with agents and their commissions. Specialized direct life insurers are entering the market, too. This matters: automobile and life insurance, taken together, represent approximately 75 percent of the personal lines business.

Every major bank in Germany, the Netherlands, and France has made some foray into life insurance

Banks are also a source of threat: every major bank in Germany, the Netherlands, and France has made some foray into life insurance. As customer information becomes vital for sales and service, banks acquire an invaluable marketing edge over insurance companies, thanks to their customer-specific data and the frequency of their customer contacts. Furthermore, banks can sell insurance at marginal cost as an add-on product to fill their branch capacities.

The precariousness of personal lines can be gauged with the help of a few ballpark figures: a sudden price decline of only 10 percent in motor vehicle insurance in Germany would halve the non-life profits of the entire insurance community. The price difference between the cheaper insurers and the market average is already around 10 percent.

The options in personal lines boil down to two: either sell the lowest-priced coverage in the market, or deliver quality to precisely-defined customer segments at cost levels still much lower than today's. Both are difficult paths for multi-line insurers, which for decades have been selling much the same products to every customer via a sales channel that is relatively expensive and often fails to provide a level of service that would justify its costs. In the next few years, the profitability in personal lines will be devastated until the surviving competitors develop new business systems and new cost structures.

Not all the news is bad. Demand for life insurance continues to be strong among Europe's aging population, which is dissatisfied with national social security systems. At present, only about 5 percent of the billions in life insurance benefits due to be paid out in the future are reinvested via insurance companies. A larger part of these funds could be retained by insurers if they were to offer short-term investment instruments. Even so, the prospects are too limited to offset the risks and constraints that most traditional players face.

Multi-line insurers

A recent analysis of more than 200 of the largest P&C insurers in France, Germany, and the United Kingdom reveals the true dimensions of the danger facing traditional multi-line insurers. These companies accounted for more than 80 percent of the total market in the three countries. As Exhibit 6 indicates, the results showed enormous performance differences among them:

• Virtually all of the top-performing companies were "focused"—that is, they had more than three-quarters of their business in one segment of the market: one product, one customer group, one channel (other than the agency channel), or one region (Exhibit 7).
• Almost none of the traditional multi-line insurance groups were in the top category. Quite the contrary: most had lost market share and showed below-average profitability.
• The focused companies increased their total market share by one-fifth over the last decade, up to about 35 percent.

By all reasonable measures, focused insurers far outperformed multi-line companies: their cost structures in comparable businesses (motor insurance, for example) are sometimes 40 to 50 percent lower as a result of targeted marketing, sophisticated use of systems, and much lower overheads.

The primary reasons for this systematic difference in performance, confirmed by a similar analysis of the US insurance industry, are that focused players simplify their business approach and work processes, develop in-depth underwriting expertise in one segment of the market, and take advantage of their smaller size to foster entrepreneurial behavior.

By contrast, the more sluggish multi-line insurance groups are often handicapped by the size and complexity of their multi-layered hierarchies and growing headquarters staffs, by the inherent limitations on economies of scale imposed by the variable costs characteristic of the insurance business, by their inadequate development of relevant skills (underwriting and claims handling), by their incomplete analytical understanding of the business, and by their lack of information about ultimate customers—which leads them to ignore ample cross-selling opportunities.

For many multi-line insurers, it is clear that their business concepts, as well as the management systems that underpin them, have been shaped by the regulatory environment, and remain so. Companies are organized by products and functions rather than market segments; useful management information is scarce; the main emphasis is on volume instead of profit; and organizations are defined by hierarchy and command-and-control, not by delegated accountability and empowerment.

A "success trap" has made multi-line insurers unduly conservative at a time when radical new thinking is imperative

Most European insurance executives are, of course, well aware of the challenges and dangers they face and have begun much-needed restructuring programs and strategic reviews. Many others, however, have not been able to free themselves of the shackles of their past success. This "success trap" has made them unduly conservative and cautious about change at a time when radical new thinking is imperative. Data from the leading business schools show that talented young managers avoid careers in insurance. As the buffer of regulation disappears, all this will have to change.

A regulated market that allows every supplier to succeed is being replaced by free-market competition in which the winners will be distinguished from the laggards by company-specific differences in performance. Thus, as the nature of competition shifts from the blind pursuit of volume to an intelligent positioning in various submarkets, accompanied by specific operational skills, the industry will itself acquire a new and very different shape:

• Of the more than 2,000 insurance groups operating in Europe today, less than half will survive. Most of the remainder will be acquired by financial institutions that will maintain their distribution networks, but close their administrative functions.
• The market share of surviving multi-line insurers will continue to fall. But the market position of specialized insurers, particularly direct marketers, will expand, as will the banks' share of distribution activities, mainly in life insurance.
• The number of leading underwriters of industrial risks will decline from more than 150 to fewer than 10. These will have to learn to operate on a Europe-wide—indeed, a worldwide—basis, either through their own networks or through international alliances.
• There will be workforce reductions of about 30 percent—or some 300,000 employees—in back-office services.

Within ten years, the structure of the European insurance industry will have been fundamentally transformed

Within ten years, the structure of the European insurance industry will have been fundamentally transformed. That means today's multi-line insurers will have to move fast simply to maintain their current positions.

Inadequate responses

In reaction to such an outlook, some insurers have been trying to expand internationally. Merger and acquisition activities in the insurance sector have more than quintupled to over 200 per year, with cross-border acquisitions accounting for almost two-thirds of the total. The majority of these activities have been geared to Southern European countries like Spain and Italy, but acquisitions have been strong in other parts of Europe as well. Indeed, some of the largest European players like Allianz, UAP, and Zürich are beginning to establish a European network of subsidiaries.

But foreign start-ups, cross-border alliances, and international M&A offer no short-term solution to the performance gap—and possibly no long-term answer either. Even in favorable circumstances, start-ups usually take years to break even; and in personal lines, cross-border activities and synergies will be extremely difcult to achieve. In the meantime, the urry of mergers and acquisitions is beginning to abate. Insurers now recognize that, in the merger frenzy, prices were paid that make an adequate return impossible for years to come, in view of the poor performance and declining market protability of acquired companies. There will be a number of international divestments before long.

A few companies have fundamentally limited their business portfolios to concentrate on well-defined market segments. Still others have chosen to bet their future success on "skill-based" competition. They focus all their energy on their core businesses in home markets in order to optimize their performance in the key functions of the insurance business system. The goal is to return to their original mission: dealing carefully with individual risks through in-depth analysis, customer selection, service, claims handling, and process optimization. These efforts are beginning to pay off—provided that they have been pursued with determination, in detail, and over a long period of time.

Often, though, such efforts have been inadequate in both concept and execution. Countless cost reduction programs have yielded less than a one percentage point improvement in the cost ratio. Administrative staffs continue to grow, despite enormous investments in EDP. Reorganizations lead to more layers of hierarchy, more complicated matrices, and more cumbersome work ows. Efforts to clean out risk portfolios are negated when new—and worse—risks are put on the books. Pricing and selection guidelines are undermined by discount practices and simple misclassification. Claims handlers, measured by their productivity rather than the quality of their decisions, behave in counterproductive ways, typically paying 5 to 10 percent in excess of what is owed to claimants.

The gap between successful specialists and less successful multi-line insurers is widening

There is no easy escape. The gap between successful specialists and less successful multi-line insurers is widening. And it cannot be closed through investment earnings alone. The volatility of the nancial markets makes this an unpredictable source of income. More important, investment earnings in property and casualty insurance account for only a fraction (say, 15 to 20 percent) of insurance claims, which can uctuate wildly and wipe out investment earnings in bad years. In order to survive and grow, P&C insurers have to realize underwriting prots from their insurance operations.

The message is clear enough: multi-line insurers must shake themselves free from the volume-oriented "success trap" that has tied them up for so long in behavior patterns that are no longer relevant. They need to develop a new way to think about their business and to link it to a systematic fitness program for achieving top performance.

But recommendations to change the scope of the business and specialize in just one market segment are not credible: no multi-line insurer can limit its range in this way without losing control over premium volume, marketing channels, and costs. The only way out is to concentrate on two things: segmenting the market to fulfill the different success factors in each segment; and restructuring the business system in order to establish a new economic base in terms of marketing and costs (Exhibit 8). This process is the most practical—and perhaps the only—way for large insurers to change from a "composite" perspective to that of a "multi-specialist." Implementing it, however, will entail a radical break with the management practices of the past.

The lessons of focus

In trying to get there from here, today's multi-line insurers can learn from the focused insurers that have succeeded in transforming their single market concentration into four tangible business advantages. They have:

• created a small company environment;
• established a simplified, low cost infrastructure;
• optimized their operational skills in risk selection, underwriting, and pricing; and
• become extremely close to their customers.

The lessons, then, are these:

1. Environment

Despite the scope and complexity of their businesses, multi-line insurers can develop a small company environment

Despite the scope and complexity of their businesses, multi-line insurers can develop a small company environment: that is, minimal hierarchy and "red tape," close links with the market, clear bottom-line responsibility, and strong employee motivation. Their situation today is virtually the opposite: a gigantic, all-powerful head office, a functional orientation, an organization structure with six to eight layers that removes managers from the front line of the market and delays business decisions, and a strong cultural bias for volume instead of profit.

This environment is the predictable evolutionary outcome of the industry's historical focus on product lines and regulatory requirements, not markets. Unlike focused insurers, multi-line companies approach the market in an undifferentiated way, selling all products to all customer groups at all income levels. But each of these markets is distinct from the others, and has its own special requirements. Because companies have different strengths and market positions in a variety of markets, profit-poor businesses regularly get subsidized by those that are profit-rich—often without management having a clear idea of why or by how much.

The first lesson of focus, therefore, is to restructure the business portfolio, eliminate marginal activities, and concentrate resources on those businesses where a company is, or could soon be, one of the market leaders. This could mean, for example, that it is better to concentrate on a few local regions—and even to acquire further regional distribution networks from other insurers—than to spread activities thinly across a whole country. In many cases, this will involve dropping the entire industrial business.

The remaining activities can then be organized as a series of separate business units with total responsibility for their own resources, market success, and bottom-line results. The more independent these units are, the more dynamic and profitable the overall company's performance becomes. AIG, one of the most successful insurance groups in the world, operates through almost a hundred profit centers targeting specific market segments.

2. Infrastructure

The second lesson is to redesign the infrastructure to cut costs. Large multi-line insurers suffer from the high complexity costs imposed by heavy overheads; the proliferation of products, many of which do not even cover their variable costs; complicated, multi-layer work processes; and the need to market through agents. All these typically result in a cost burden double that of focused insurers—a burden that simply cannot be sustained in the price-competitive market of tomorrow.

Why would a customer want to pay a composite insurer more than a specialist charges for the same coverage?

Why, after all, would a customer want to pay a composite insurer more than a specialist charges for the same coverage? Quality of service can justify only a very narrow price differential in a commodity-type business. And specialists often provide better service quality, not just a lower price.

Therefore, costs have to be reduced to the bare bones through a rigorous redesign of internal organization. The goal must be to eliminate any activity that does not have a direct bearing on customer satisfaction or that does not prove indispensable to running the business. The number of administrative locations in the field network can usually be reduced; process ow can be trimmed from three steps (agent to field office to head office) to two (agent to head office); and the number of people in the head office can be slashed. This is not an effort to save three to five percent. Labor capacity cuts of 30 to 40 percent or more are necessary to bring costs in line with those of focused competitors.

3. Operations

The third lesson from focused insurers is their excellence in operational skills. Insurance is an "execution" business. Since the products are basically the same, the difference in market and cost performance is determined by how well daily business activities are executed and coordinated. Companies that concentrate on operational basics—like underwriting, claims settlement, fullling customers' service needs, and marketing—outperform their competitors by a wide margin.

Every day, hundreds—sometimes thousands—of clerical staff in the eld make decisions based on their personal experience and subjective judgment when they take on risks, set prices, give discounts, and adjust claims. Because the decisions made in the eld are effectively the sole determinant of a company's prot or loss, the quality of execution at local level is vital to its nancial health. The difference between "excellent" and "average" execution is enormous: ten percentage points in the combined ratio—or a doubling (or even tripling) of annual prots.

The problem is that in many cases, these decisions are made slowly and badly by clerical staff with mediocre education, low motivation, and poor coaching from middle management. Correcting this situation will be hard, since it involves changing employee behavior—and not by imposition from above, but by cultivating skills over many years and by improving them slowly, day by day. Only a "learning organization" can do that, with a work environment that involves every employee and places a premium on continuously developing new ideas, higher aspirations, and better ways of doing things, based on bottom-up experience, not top-down objectives.

However difficult this approach may be, it is the only successful way to achieve the desired changes in behavior. Computer systems can help in functions such as underwriting and claims, but the heart of the task remains: each employee on the spot must fully master the technical insurance skills of underwriting, pricing, and adjusting claims.

4. Customers

The final lesson is that focused insurers stay very close to their customers. Multi-line insurers tend to concentrate on products and intermediaries (agents and brokers). Companies out of touch with their retail customers are forced to leave contacts entirely up to their intermediaries, thus losing the ability to build knowledge as well as instincts about end consumers. Indeed, there is no other industry in which so little information exists about customer needs.

By contrast, focused insurers have access to detailed information on their target customer groups, and they aim to satisfy their needs as completely as possible. A striking example is USAA, an American insurer that specializes in serving US army officers, offering them the best products, service, and prices possible. During the 1991 Gulf War, USAA went so far as to extend its life coverage to include war risks, even though such coverage had previously been expressly excluded from its business plan.

Inherent strengths

Multi-line insurers should learn these lessons from more focused providers, but they must go further. They must build on strengths of their own, such as size, especially with respect to risk information; a customer base and product range that allow complete coverage of the insurance needs of individual customers; and the self-interest of agents, who as independent entrepreneurs face all the market challenges in person. These advantages are rarely exploited.

Whether meaningful advantages of size really exist in insurance has been the topic of endless debate. Certainly, there are few of the usual economies of scale owing to the overwhelming proportion of variable costs (losses and agents' commissions) and the complexity costs of large, diversified operations. But there are other size advantages—economies of scale in EDP systems, market weight in reinsurance and investments, distribution power—that are quite well exploited.

There exists yet another advantage of size that can provide three or four times the economic benefit of classic scale economies—and that is scarcely exploited. This is the large database maintained by big companies of the risks they carry on their books. With today's advanced systems, such data can be analyzed in extremely sophisticated ways. The larger the database, the deeper the analysis of risk profiles, which in turn allows targeted marketing, underwriting, and pricing. Smaller companies with too thin a database will lack the information they need to avoid unattractive risks at excessively low prices. As a result, they will inevitably fall into a downward spiral of "negative selection": higher losses—higher prices—worse risks.

Few companies reward customers for covering all of their insurance needs with them

Although multi-line insurers can offer a full product line, current penetration rates of fewer than two products per customer show how little their selling and pricing approaches have been oriented toward the market. We know of very few companies that reward customers (or intermediaries) for covering all of their insurance needs with them.

Customized products and service remain the only escape route from an otherwise inevitable commoditization of the business. And a competition purely on price among undifferentiated products is something multi-line insurers cannot win because of their cost structures. A clear identification of customer needs is the essential starting point for building customer loyalty to a product range well matched to those needs in terms of its breadth, comprehensibility, and exibility of coverage. Improved customer data will facilitate cross-selling, and price concessions will be necessary to give customers an incentive to place all their coverage with one insurer.

Cross-selling products to loyal customers is the key marketing philosophy

If cross-selling products to loyal customers is the key marketing philosophy, then the agents are an important part of it. Companies operating through independent, exclusive agents own a major asset: self-employed business people who are working on their own account and at their own risk. But this asset is commonly underutilized. Insurers often neglect to manage their agency forces sufficiently, leading to rapid and costly agent turnover, high lapse ratios, low customer penetration, and inadequate customer service.

There is one way to turn this around: to manage the agency sales channel tightly, as if it were an employee salesforce. That means concentrating on training and support for existing high-quality agents (not new ones), while weeding out poor performers early; having agents coached professionally by high-caliber sales managers whom they respect; compensating agents on underwriting results, growth, and customer penetration, not volume alone; cutting out unproductive administrative activities, which today occupy more than 50 percent of their time, by fully exploiting electronic support systems; and providing easy access to customer data.

The new insurance company

Most large multi-line insurers are far from achieving their full potential

Most large multi-line insurers are far from achieving their full potential. Those companies that survive in an increasingly competitive marketplace will have to change their business approach rigorously. They will concentrate on three management tasks in order to develop into a multi-specialist:

1. Approach different markets in distinct ways. They will, for instance:

• Understand their full role in the mass market as effective distributors of insurance and other financial products and services, including investment products such as mutual funds. Their sales and service approach will be electronically based and need no manual support other than by the intermediary. Successful companies will strive for 100 percent penetration of their target customer bases by means of incentive pricing, all-risk products, and active sales and service efforts.
• Service industrial risks, if at all, through an independent international business unit, with highly specialized staff located in a separate head office and separate field offices, handling marketing, sales, underwriting, and claims.
• Serve, again through separate profit centers, a number of specialized customer/product/channel segments, such as the motor-direct business or professional liability for specific professional groups.

2. Radically restructure the business system They will, for instance:

• Use electronic information and transaction systems at the point of service, without any intervening administrative middle layer (field or regional office). New policies, or changes to existing ones, will be issued on the spot at the intermediary/customer interface. This will lower their cost base significantly—and drive even greater improvements (error rates, turnaround times) in service quality.
• Outsource major tasks such as EDP, claims, and overhead functions, again in an effort to lower costs.
• Adjust claims within two to five days through a centralized claims division with professional local claims offices, supported by computerized expert systems. In order to generate the volume necessary to support such a dense network, several insurers will have to pool claim adjustment networks, which will in turn cooperate closely with car repair shops. The aim here is to save 5 to 10 percentage points of the claims ratio while improving service levels at the same time.
• Carry out computerized risk analysis continuously in order to generate new insights on risk structures for coverage, pricing, and risk selection. These insights will then be automatically—and instantaneously—transformed into underwriting guidelines, providing agents, brokers, and clerical staff with the latest and most up-to-date price guidelines via their PCs.

3. Empower their people at all levels. That is, they will:

• Develop agents to be well compensated and highly qualified account managers, providing them with on-line access to a comprehensive customer database and with service levels superior to those offered by bank branches. Such agents are, of course, inuencing the underwriting results by selecting and advising customers and must, therefore, have the claims ratio reected in their commissions.
• Energize their front-line employees by delegating full authority for underwriting and claims settlement, by training and coaching them relentlessly, and by rewarding them according to their performance and results.
• Treat senior managers as entrepreneurs whose compensation varies in line with the performance of their profit centers and the company's overall financial results.

The present situation in European insurance is not the result of the current economic slump or of a downturn in the underwriting cycle. It is the beginning of a fundamental change in the market. European insurers are on the brink of an unavoidable structural change. As has happened in other industries facing deregulation, traditional, multi-line market leaders are in danger because of their high cost structures and obsolete market approaches. They must, therefore, undertake—now and with real urgency—fundamental changes to their overall business policies, organizations, and people management. Otherwise, their slipping performance will in the long term not permit them to make the investments necessary to stay in the market. There is little time. And there is much to do.