Industry Attractiveness

Insurance is one of the most important economic activities in Switzerland, providing employment to around 59,000 people in 2012. The country spends more per person on covering domestic risk than any other country. Factors that make Switzerland an attractive market for insurers are a stable economic and political climate, solid insurance regulations, a growing population and the generally highly risk-averse nature of Swiss consumers. The availability of a skilled workforce is another key reason for its development as a major insurance hub.
An important characteristic of the Swiss insurance industry is that it is mandatory for Swiss citizens to pay for several categories of insurance. The Swiss constitution mandates contributions by employees and employers towards the state pension and occupational pension schemes. Group life occupational pensions, through which employees finance their own retirements, have been a key driver of the Swiss life segment. The Swiss constitution also prescribes voluntary personal pensions.
The personal accident and health segment is primarily driven by growth in the personal accident and health insurance categories. It is mandatory for everyone in the country to purchase basic health insurance. It is also compulsory for every employer to provide personal accident insurance to employees.
The industry has been characterized by moderate but consistent increases in premiums since 2010. The industry’s written premium increased from CHF53.4 billion (US$49.3 billion) in 2008 to CHF57 billion (US$60.8 billion) in 2012, at a CAGR of 1.7%. This is further expected to increase to CHF63.5 billion (US$63.6 billion) in 2017, at a CAGR of 2.2%.
The profitability of the Swiss insurance industry can be gauged from the fact that in 2012, the life, non-life and personal accident and health segments registered combined ratios of 90%, 83.5% and 83.9%, respectively. These ratios demonstrate that the Swiss insurers have been running their core businesses profitably and that investment returns were not required to compensate for underwriting losses.
Rising life expectancy, and rising incomes resulting from economic growth will offer scope for insurers offering private pensions to grow. The non-life insurance segment will benefit considerably from the continuing immigration of highly skilled manpower, particularly from European Union (EU) countries. Growing immigration also raises the overall level of consumption in the country. Switzerland has a notable export industry which will gain substantially once EU countries recover, driving demand for cargo insurance.

Segment Outlook

According to the World Economic Forum, Switzerland was the most competitive economy in the world between 2009 and 2013. Evaluation factors include the quality of institutions, infrastructure, health services, education, market size and economic variables. The life segment was the largest in the industry in 2012, accounting for 54.6% of industry premiums. Swiss citizens give considerable priority to life insurance arrangements, which can be gauged from the fact that the life insurance premium per capita in the country was CHF3,889.8 (US$4,148.3) in 2012, one of the highest in Europe.
The strong demand for life insurance products predominantly emanates from the provision for personal and occupational retirement and disability benefits through the first and second pillars of the Swiss constitution’s pension system. The objective of the first pillar is to assure a minimum standard of living for all citizens. Every employer and employee has to individually pay 5.15% of the overall employment income. The amount is used for the pension payments of existing pensioners.
The second pillar’s objective is to ensure that all employees and their families maintain their current standard of living after retirement or on the occurrence of death or disability. Under this pillar, each employee contributes funds for his/her own retirement. Contributions vary according to the age of the employee, with employees and employers individually contributing either 7%, 10%, 15% or 18% of the pensionable salary. The life segment has derived a considerable proportion of its annual premiums from group life occupational pension schemes. With around 150,000 SMEs in the country and the retirement age of 65 years and 64 years for men and women respectively, the segment will continue to benefit from the conditions of the first and second pillars.
Despite the low interest rate environment and paucity of appropriate investment opportunities, the return on equity of Swiss life insurers in 2011 measured 20.7%. The average real net investment return in the same year was 4.1%. The combined ratio of the segment declined from 112.3% in 2008 to 90% in 2012. The value of the ratio is expected to be 94.1% in 2017.
According to FINMA, the top-six insurers accounted for 86.6% of the total market share in 2012, indicating a high level of concentration. AXA Liben was the leading company with a market share of 28.9%, followed by Swiss Life with 25.2%.
The life segment’s robustness can be gauged from the fact that it remained relatively unscathed from the financial and eurozone crises. Gross written premium registered by the segment increased from CHF29.6 billion (US$27.3 billion) in 2008 to CHF31.1 billion (US$33.2 billion) in 2012, at a CAGR of 1.3%. Gross written premium is expected to increase further to reach CHF34.8 billion (US$34.8 billion) by 2017.

Distribution Channels

The distribution network for life products in Switzerland primarily comprises brokers, bancassurance, direct marketing and agencies.
Brokers are the main distribution channel, accounting for 82.7% of the total commission paid to all distribution channels in 2012. In the Swiss insurance industry, brokers are normally autonomous businesses and sell the products of multiple insurers without entering into formal contracts. The value of new business gross written premium generated through the channel decreased from CHF10.5 billion (US$9.7 billion) in 2008 to CHF9.1 billion (US$9.7 billion) in 2012, at a CAGR of -3.6%. This value is projected to increase to reach CHF11.2 billion (US$11.2 billion) by 2017. The number of new policies sold by brokers increased from 4.9 million in 2008 to 5.4 million in 2012. This number is expected to reach 6.8 million by 2017.
Bancassurance was the second-largest channel in 2012, accounting for 10.8% of the new business gross written premium generated. The value of new business generated through the channel decreased from CHF1.5 billion (US$1.4 billion) in 2008 to CHF1.2 billion (US$1.3 billion) in 2012, at a CAGR of -5.1%. The channel’s share is expected to decrease to 10.3% in 2017, while its new business gross written premium will reach CHF1.4 billion (US$1.4 billion) in the same year. The number of new policies sold through bancassurance increased from 677,631 in 2008 to 702,447 in 2012. This number is expected to increase further to 820,621 by 2017.
Direct marketing in case of Swiss life insurance segment comprises the company employees and distance selling methods such as internet and phone. The value of new business gross written premium generated through direct marketing decreased from CHF385.3 million (US$355.8 million) in 2008 to CHF312.8 million (US$333.6 million) in 2012, at a CAGR of -5.1%. The channel accounted for 2.8% of the new business gross written premium in 2012. This share is expected to remain the same in 2017, with gross written premium valuing CHF372.2 million (US$373 million) in the same year. The number of new policies sold through direct marketing increased from 178,483 in 2008 to 184,944 in 2012. This number is expected to increase further to 222,272 by 2017.
Swiss agencies comprise tied agents who work exclusively for a single insurer. The value of new business gross written premium generated by agencies fell from CHF315.2 million (US$291.1 million) in 2008 to CHF263.5 million (US$281 million) in 2012, at a CAGR of -4.4%. In 2012, agencies accounted for 2.4% of the new business gross written premium. This share is expected to increase to 2.5% in 2017, accounting for CHF340.2 million (US$341 million) in new business in the same year. The number of new policies sold by agencies increased from 146,018 in 2008 to 155,767 in 2012. This number is expected to increase further to 201,210 by 2017.
Other distribution channels accounted for a market share of 1.1% in 2012. Written premium generated through the other channels is expected to post a CAGR of -9.3%, reducing its market share to 0.6% by 2017. The number of new policies sold by other distribution channels declined from 116,241 in 2008 to 74,475 in 2012. This number is expected to decline further to 46,288 in 2017.

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Porter’s Five Forces Analysis

Bargaining power of suppliers: Low to Medium

Capital providers such as banks and other financial institutions are the main suppliers to life insurers. Because of the implementation of SST, the life insurers are currently able to cover all their liabilities, reducing their dependence on capital providers. The low interest rate environment may lead to a struggle to generate money to service interest rate guarantee products. This may force them to borrow from banks, thus raising the bargaining power of banks.

Bargaining power of Buyers: low to Medium

The mandatory nature of group life occupational pension schemes lowers buyer bargaining power. The large shares held by the six leading life insurers mean policy buyers have limited choice. However, the bargaining power of buyers of private pension products and other investment products is medium, as channeling savings into these is not mandatory.

Barriers to entry: Low

There are no barriers to entry into the Swiss life segment. However, insurers contemplating entry should bear in mind that gaining market share will be difficult due to the dominant position of the six leading life insurers.

Intensity of rivalry: High

The intensity of rivalry among the top six life insurers accounting for 86.6% of the market share in 2012 is high. This can be gauged from the fact that these six insurers also accounted for 86.7% of the market share in 2011. There was an increase in market share of three of the six life insurers by half a percentage point each in 2012. Another two insurers saw their market shares erode by one percentage point each. The market share of the remaining one insurer remained the same. Thus, the loss of market shares of two of the insurers turned out to be the gains of the other three, indicating the intensity of rivalry. Even the intensity of rivalry among the rest of the insurers, in an effort to retain their small market shares, is high.

Threat of substitution: Medium

All citizens who have reached retirement age or are disabled are entitled to the compulsory state pension, contributed to by employees, employers and the self-employed. This, to a certain extent, compensates for the lack of life insurance products.

Recent Developments

27 February, 2014
Swiss Life has reported a net profit of CHF784m ($882m) in fiscal 2013, compared to CHF99m ($111.4m) last year.

The company’s profit from operations during the year was CHF1.149bn ($1.29bn), an increase from CHF361m ($406m) in fiscal 2012.
Net premiums earned were CHF12.944bn ($14.56bn) up from CHF11.87bn ($13.35bn) in the previous fiscal.
Swiss Life CEO Bruno Pfister said, "2013 was a very good year for Swiss Life," says Bruno Pfister, Group CEO. "Higher premium income, higher margins and higher profit accompanied by lower costs: These strong results prove that we are making good progress with our Group-wide programme ‘Swiss Life 2015’ and have been able to expand our position in the market."
Swiss Life reported growth in strategically important business areas such as home market, France, Germany, while Swiss Life International recorded a drop in premiums of 10%.


12 March, 2014
Zurich Insurance Group will cut nearly 800 jobs across its global operations, as part of its plan to slash operational cost and return to profitability.

The cuts are expected to save the company almost $250m every year by the end of 2015,
The Swiss underwriter said that the job cuts will allow it to rationalize its organizational structure while curtailing both complexity and costs as it continues to deliver on the group’s strategic priorities for 2014-2016.
Furthermore, the insurer will revamp its business by investing in priority markets, at the same time divesting underperforming units.
This initiative follows a comprehensive review, and will help the Swiss company to remove management layers between group and the business units.
According to the insurer, its strategy will position the company for profitable growth, placing customers and their needs at the center of our business.
Zurich Insurance CEO Martin Senn said, "We continue to make significant progress towards our strategic goal to make Zurich a focused and more profitable business."
"This latest initiative empowers our people to act decisively in delivering first-class services to our customers while also minimizing overheads.
"It will be implemented through a measured process, with employees supported at every stage of the transition," Senn added.
The proposed job cuts are subject to the appropriate consultation with employees and their representatives, according to the insurer.