Luxembourg is a renowned financial center in Europe and it has a well-developed insurance industry. The country’s financial sector, including insurance, accounts for one-fourth of the GDP and plays a crucial role in economic development and employment generation. The global financial crisis and the eurozone debt crisis impacted the country’s financial sector between 2008 and 2012, forcing the government to provide support to the banking industry. Economic growth moderated to 0.3% in 2012, after expanding by 2.9% in 2010 and 1.7% in 2011.
Despite these challenging economic conditions, the insurance industry continued to grow, with gross written premium increasing from EUR13.1 billion (US$19.2 billion) in 2008 to EUR23.3 billion (US$29.9 billion) in 2012, at a CAGR of 15.5%. The domestic insurance industry is relatively small – international markets accounted for the majority of the gross written premium generated.
The insurance industry is dominated by the life insurance segment, which accounted for 89.0% of insurance premiums in 2012. Individual insurance was the largest category, accounting for a 78.7% share of the life segment’s written premiums in 2012. Non-life insurance was the second-largest segment with a 10.3% share, followed by the personal accident and health segment with 0.7%. Property insurance accounted for the largest share of gross written premiums in the non-life segment in 2012 with 43.7%, followed by motor insurance with 27.0%.
The life segment registered a CAGR of 17.7%, the fastest in the industry, led by an increase in demand for individual products such as savings and investment-linked products. The individual category increased from EUR2.4 billion (US$3.5 billion) in 2008 to EUR6.5 billion (US$8.4 billion) in 2012, at a CAGR of 28.6%. Subdued business activities in non-life insurance in 2009 and 2010 resulted in a low CAGR of 2.3% for the segment. This had an impact on the demand for liability, marine, and transit insurance categories.
There were 93 insurers (domestic and foreign) operating in the industry at the end of 2012. The 10 leading life insurers and 10 leading non-life insurers accounted for 79.1% and 92.3% of the respective segments’ gross written premiums in 2012. The availability of multilingual and multicultural experts, flexible and deferrable tax regimes, and an inclusive policy approach have made Luxembourg a leading center for reinsurance companies in Europe.
Given the tough economic and financial market conditions, insurance companies are focusing on asset quality management, product diversity and improving distribution channels to cater to consumer demand and expand their market reach. The bancassurance and brokers channels dominated the distribution of products in the Luxembourg insurance industry between 2008 and 2012. Bancassurance accounted for 62.5% of the gross written premiums generated in the life segment, while brokers represented 67.5% of the gross written premiums generated in the non-life segment.
The Luxembourg insurance industry is expected to grow at a CAGR of 10.5% up to 2017. Rising life expectancy, a rapidly aging population and increasing healthcare costs will drive growth in the life, and personal accident and health segments during this period. Growth in the non-life segment will be supported by stability in automobile and housing demand However, austerity measures, such as an increase in value added tax, and slow economic growth will be challenges.
Life insurance was the largest segment in the insurance industry in 2012, accounting for 89.0% of the industry’s total written premiums in 2012. Driven by high income levels, a supportive regulatory framework and favorable demographic conditions, the segment registered a CAGR of 17.7%, increasing from EUR10.8 billion (US$15.8 billion) in 2008 EUR20.7 billion (US$26.7 billion) in 2012. Luxembourg is an attractive destination for cross-border life insurance business, where it acts as a center for global insurers to launch new policies under the EU’s freedom of services provision. The segment is highly competitive and concentrated, with the 10-leading companies accounting for 79.1% of gross written premiums in 2012. Overall, 48 life insurers, of which 43 are domestic, one is foreign, and four are pension companies, operated in the country in 2012.
Individual life insurance dominated the segment in 2012, accounting for 78.7% of the segment’s gross written premiums. Luxembourg has the highest GDP per capita in the world – EUR83,190.7 (US$106,950) in 2012 – which supported the continued demand for life insurance products. Rising life expectancy is also adding to the demand for saving and investment products.
Reforms in the pension system, which came into force from January 2013, increased the contribution rate from 24.0% of wages to 30.0%, and improved the benefits by linking it with the number of years of professional service achieved. This is expected to have a positive impact on the growth of the pension category. Furthermore, the introduction of the professionals of insurance (PSA) sector in July 2013 is expected to improve outsourcing capabilities. An insurance company can outsource its activities, such as management of portfolios, to the PSA and free-up resources to be used in other core areas of business.
Bancassurance was the preferred channel for distributing policies among life insurers in 2012, accounting for 62.5% of the total commission paid, followed by brokers. Bancassurance’s popularity is testament to the country’s developed private banking hub, facilitating the ability to distribute policies through banking networks. The channel is expected to continue to dominate the distribution network over coming years, despite a decline in its share of written premiums generated to 61.6% in 2017.
The life segment is expected to post a CAGR of 10.4%, increasing from EUR20.7 billion (US$26.7 billion) in 2012 to EUR34.0 billion (US$43.4 billion) in 2017. Demand for life products will be driven by increasing life expectancy, high income levels, and improving economic growth. However, with rising competition, a low interest rate environment, and changes in regulations to align with the international standards, such as Solvency II, the segment is also expected to consolidate.
The written premium of the life segment (excluding unit-linked products) increased from EUR2.5 billion (US$3.7 billion) in 2008 to EUR8.3 billion (US$10.7 billion) in 2012, at a CAGR of 35.0%. The individual life category accounted for 78.7% of the segment’s written premiums in 2012, with a value of EUR6.5 billion (US$8.4 billion). The others category recorded a written premium of EUR1.8 billion (US$2.3 billion) in 2012.
Life insurers employ a number of distribution channels to cater to different customer needs and demographics. The main channels for distributing life insurance products between 2008 and 2012 were bancassurance, brokers, and direct marketing. Bancassurance was the leading channel in 2012, accounting for 62.5% of the total business commission earned.
Bancassurance’s popularity is primarily due to the presence of large financial institutions in the country, and insurers entering into agreements with leading banks to market their products. It was the most popular channel for distributing pension products and other savings-type products with post-retirement benefits. The most common bancassurance arrangement is the integrated model, in which banks partner with wholly-owned captive insurance subsidiaries. The number of life insurance policies sold through the channel increased from 230,000 in 2008 to 280,000 in 2012, at a CAGR of 4.0%.
Brokers were the second-largest distribution channel with a 32.3% share of the total commission earned in 2012. The channel offers insurers a large client base, strong brand reputation and an existing sales force at a relatively low cost. The number of insurance brokers in the country increased from 252 in 2008 to 351 in 2012. However, the number of policies sold through the channel declined from 200,000 in 2008 to 140,000 in 2012.
The direct marketing channel accounted for a 3.6% share of commission earned in 2012. Key advantages of the channel are the cost reductions it provides through lower commission charges and minimal underwriting expenses. Large, established insurers are expected to focus more on developing web-based sales platforms.
Bancassurance and brokers will remain the key distribution channels for life insurance products; the combined share in total commission earned is expected to reach 94.8% by 2017.
In order to remain competitive, life insurers are being forced to reduce their administrative and customer-acquisition costs, leading to an expected preference for direct and online channels over the coming years.
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Porter’s Five Forces Analysis
Bargaining power of supplier: Medium
Life insurers depend on banks and financial institutions for capital, and reinsurers for sharing risk. The presence of a large number of banks and financial institutions in the country provides insurers with plenty of options. Some life insurers operate as subsidiaries of global insurance groups, with capital generally supplied by parent companies. These companies have a strong capital base, resulting in a low dependence on capital providers. However, the upcoming solvency regulations will require life insurers to maintain a minimum level of capital, forcing independents to rely on capital providers for financial assistance, subsequently increasing the supplier bargaining power.
Bargaining power of buyer: Low-to-medium
Buyer bargaining power is assessed as low-to-medium. The bargaining power of group or corporate buyers is considerably greater than individual buyers due to the higher value of transactions and the trend of purchasing policies in bulk. To retain these high-volume corporate buyers, insurers offer discounts, subsequently reducing their negotiating power. Furthermore, with 48 companies operating in the segment, the scope for consumers to switch between companies is high. Insurers are, therefore, compelled to provide products at competitive prices to acquire new customers and retain existing ones.
Barriers to entry: Medium
Liberal government policies facilitate entry into the country, and financial liberalization in the EU makes movement within the region hassle-free. However, the competitive environment and highly concentrated segment make it difficult for a new entrant to capture significant market share. The implementation of Solvency II regulations is expected to increase the barriers to entry further, through the introduction of higher capital requirements and stringent risk management standards.
Intensity of Rivalry: High
The intensity of rivalry among life insurers is assessed as high. A recovery in consumer confidence and economic improvements are expected to encourage growth in the segment. The highly-concentrated environment encourages insurers to develop new products to retain market shares, and focus more on retirement products.
Threat of substitution: Medium
The threat of substitution for life insurance products, such as private pension and term life, is assessed as medium. The country’s social security system is well developed, and changing consumer behavior towards products with lower capital requirements will threaten existing life products, encouraging insurers to launch new ones.