Guest article in "Börsen-Zeitung" by Torsten Leue, Chief Executive Officer of Talanx AG
The environment in which insurance companies are operating today is undergoing more dynamic change than at any time in the past. Opportunities are being opened up by the digital transformation – through artificial intelligence and the Internet of Things – and by digital ecosystems. At the same time, external factors such as exchange rate effects, low interest rates, the political climate and sustained pricing pressures put our business model to the test on a daily basis. It is important to make strategic adjustments in anticipation of these disruptive conditions if market opportunities are to be exploited.
Corporate culture as a foundation
The corporate strategy of the Talanx Group builds on our strengths: a highly developed entrepreneurial culture with clear decentralised responsibilities, a B2B focus and a high degree of regional diversification in terms of both the business and product mix.
With our four divisions of Retail Germany, Retail International, Industrial Lines and Reinsurance we have a simple and customer-centred structure and are also the cost leader in most segments. A clear emphasis is placed on B2B insurance – our roots are in business transacted with industrial enterprises and it has shaped our DNA for more than 110 years. These activities are complemented by reinsurance and bancassurance operations.
Talanx is organised on a decentralised basis: with 74% of our business conducted abroad we are highly diversified and hence one of the most international companies in Germany. Not only that, we have generated vigorous growth – 20 years ago we booked annual premium of EUR 6 billion, today the figure is EUR 35 billion. In the last five years alone we have posted profitable growth of 5% per year, a significantly better pace than the market as a whole. We are now present in more than 150 countries, we are the number 3 in Germany and rank seventh in Europe, and we provide insurance coverage more than 40 million times over with a workforce of around 22,000.
More ambitious goals defined
These strengths form the basis of the focused strategy pursued by the Talanx Group. Starting with the current year we have set ourselves significantly more ambitious goals. We are, for example, aspiring to a return on equity of at least 800 basis points above the risk-free interest rate – the previous target was 750 basis points. It is envisaged that the earnings per share will rise by at least 5% per year on average in the period until 2022. Focused strategies on the part of the divisions, a range of growth initiatives, concentration of the Group's internal reinsurance in the hands of the holding company as well as more systematic capital management all play a part here. It will also be crucially important to continue driving the digital transformation.
Rigorous capital management
As a vital integral component of our current strategy, we are refining our rigorous capital management. To this end, excess capital of the Group's subsidiaries is transferred to the holding company in order to maximise financial flexibility within the Group. This paves the way for increased investment in profitable and high-growth segments so as to ensure first-class capital resources at all times and safeguard a stable dividend over the long term. Another initiative concentrates the reinsurance requirements of the primary insurance entities and hence supports diversification on the Group level.
Strengthening industrial business
We have a clear focus within our various divisions. In industrial business a growth initiative launched by our industrial insurer HDI Global SE and our reinsurer Hannover Re in the segment of high-margin specialty lines, i.e. business involving special risks, is gathering pace. Our joint venture named HDI Global Specialty insures, among other things, aircraft, oil platforms and paintings. Over the medium term we are aiming to profitably grow our premium volume here from EUR 1.2 billion to EUR 2.1 billion.
Furthermore, the ongoing rehabilitation of fire business – which has proven highly successful so far – continues in industrial lines. Under the "20/20/20" programme we are seeking to reduce the combined ratio in fire insurance, which accounts for roughly 20% of HDI Global SE's total portfolio, by at least 20 percentage points by the year 2020. As things currently stand, almost 90% of the minimum price increases targeted by 2020 have been firmly agreed with the relevant customers.
Potential in foreign markets
In the Retail International division we have posted double-digit growth rates in recent years with combined ratios in the order of 95%. We intend to continue to pursue this growth trajectory in emerging international economies. Considerable potential is still available here in view of the comparatively low level of insurance penetration. The goal is to rank among the top 5 insurers in each of our five core markets – Brazil, Chile, Mexico, Poland and Turkey. Along with organic growth, acquisitions in our focus regions of Latin America as well as Central and Eastern Europe continue to form part of our strategy.
Growth in commercial business in Germany
In the Retail Germany division we are driving growth in commercial business, in which we traditionally have a strong presence. The focus is on small and mid-sized enterprises with revenues of up to EUR 5 million, which account for 75% of the market. By the year 2022 we aspire to rank among the top 5 in this segment with a premium volume of around EUR 500 million and we are seeking to increase our market share to 10%. We are also systematically pursuing the strategic programme KuRS, which is already bearing fruit. In this way, the division's cost level is to be cut by around EUR 240 million by the year 2021. We have already achieved significant successes here and are thus currently ahead of schedule – more than EUR 190 million in annual cost savings have been generated to date.
Our divisional strategies also continue to include a clear focus on the area of reinsurance. We want to build on our existing strengths – especially in terms of competitiveness and profitability – and we are seeking to consolidate and selectively expand our position as a global player in this area.
Key challenge: Digital transformation
One of our key challenges is to accelerate the digital transformation. In so doing, the journey becomes the destination. The emphasis here is on enhancing the system landscape. Particularly in Germany, this constitutes a never-ending task: in the coming years alone we plan to decommission 220 systems so as to ensure that we are still able to meet the rapidly emerging requirements from customers and the market.
What is more, it is vital to maintain a clear focus in a disruptive environment. We are committed to advanced data analysis that embraces artificial intelligence and behavioural economics. A pivotal question is: How can I evaluate the available data more meaningfully in order to, among other things, prevent fraud? Some 250 employees at Talanx are now involved in exploring the field of data analysis. In addition, we are making increased use of digital ecosystems, including with banks, car manufacturers and platforms. We can build here on our strong B2B focus.
The order of the day is to bring the necessary skills for the digital transformation into the company and retain them. In this respect we are not only competing with other insurers, but also across industries with other businesses and start-ups. A persuasive entrepreneurial culture and a positive climate are indispensable if we are to recruit and retain high potentials for the company over the long term.
Digital innovations and applications are systematically refined in our international Best Practice Lab and implemented locally in conformity with market-specific requirements. Within the space of three months, for example, 12 chatbots developed in sprint sessions went into production at Talanx and HDI. Not only that, participations in innovative start-ups, including most recently in Next Big Thing, a company builder specialising in the Internet of Things, as well as in Elinvar, a digital platform for asset and wealth managers, play an increasingly important role in the strategy.
Agility is key
In order to translate our ambitious plans into reality and act in a way that is flexible, quick and customer-centred, agility is a decisive factor for the Talanx Group: for us, agility means that we are a learning organisation that focuses on the customer with a view to increasing our profitability. If we are to succeed in this, we need a motivating culture of trust – in other words: "empowerment" – and a digital mindset. This requires management that embraces not only "predict-and-control" but also increasingly "sense-and-respond". In a decentralised environment this goes hand-in-hand with transparency and consistency as well as clear responsibility. Innovations can then emerge out of the enterprise, driven by staff and managers alike, instead of being imposed from above. What matters to us in the context of our more sharply defined strategy is that we do not create a rigid corset for ourselves, but rather that we quickly build on our strengths and cultivate additional capabilities so as to be able to respond to current developments and challenges. Agility can thus serve as a key to staying successful in the present disruptive environment.