SURETYSHIP AND PROCUREMENT

Transcription

1 SURETYSHIP AND PROCUREMENT NEW CHALLENGES AND NEW RULES FOR THE ITALIAN INSURANCE SECTOR June 2017 EXECUTIVE SUMMARY The future, today

2 This Study was prepared by The European House Ambrosetti for CBL Insurance and Olimpia Agency. The contents of this Study are of exclusive responsibility of The European House - Ambrosetti. CBL Insurance, Olimpia Agency and The European House Ambrosetti S.p.A. ALL RIGHTS RESERVED. This document is property of CBL Insurance, Olimpia Agency and The European House - Ambrosetti S.p.A.; it may not be reproduced without the express written consent of CBL Insurance, Olimpia Agency and The European House Ambrosetti S.p.A..

3 SURETYSHIP AND PROCUREMENT NEW CHALLENGES AND NEW RULES FOR THE ITALIAN INSURANCE SECTOR June 2017 EXECUTIVE SUMMARY

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5 10 KEY POINTS OF THE REPORT 1. On a global level, as well as in the Italian market, a number of megatrends are emerging and they will increasingly impact on the current business model of insurance companies: Upgrading of the risk management system provided for in the Solvency II regulatory system which since it also calls for absorption of capital on the basis of the underwritten risks will require that companies have adequate capital strength and, behind this, a high reinsurance capacity. Intensified competition from non-traditional players (such as insurtech, companies that work exclusively online, etc.), the effect of which will be to disintermediate the supply chain. The phenomenon of shadow insurance (shadow insurance activity of nonmonitored players and provided using marketplace and peer-to-peer platforms) that could redesign the operational and competitive logic of the market. Reduced customer loyalty, also as a result of the growing use of online channels that push companies to plan the launching of multi- and omni-channel strategies. This scenario exerts increased pressure on the margins of companies. Today, insurance sector ROE is recovering (on average in 2015, 11% in life insurance and 8% in non-life insurance) and, in any case, at higher levels than the banking sector (0.9% in 2015). 11.5% 14.5% 15.2% 17.3% 9.8% 10.2% 10.9% 10.7% 10.6% 0.3% 1.1% 3.1% 9.7% 10.1% 7.9% 5.9% 4.7% -0.9% -4.6% -4.7% -7.8% -8.8% I semester 2016 Life sector Non-life sector Figure I. Return on Equity (ROE) trend of the Italian insurance system: comparison between the life and nonlife insurance sectors (in %), first half of Source: The European House - Ambrosetti elaboration of ANIA data,

6 2. The effects of the current economic situation have contributed to underscoring a number of characteristics typical of life and non-life insurance in the Italian insurance sector. Over the last decade, the non-life insurance sector has registered a negative trend (CAGR -1.5%), compared with an average growth rate of 4% for life insurance which continues to represent 3/4 of the value of the Italian insurance market Premiums Life insurance ( Bn) Premiums Non-life insurance ( Bn) Figure II. Trend in direct premiums collected for the life and non-life insurance sectors in Italy (billions ), Source: The European House - Ambrosetti elaboration of ANIA data, 2017 Compared with the leading international benchmarks, Italy sits third-fromlast, with 2,434 Euros in collected premiums per inhabitant, a figure that is in line with Germany s, but far removed from that of the Anglo-Saxon markets (average premiums are 1.8 times higher in the US and 1.5 higher in the United Kingdom). Considering also that the national insurance market accounts for 9% of GDP, it could be assumed that there is ample potential for development. 4,420 3,686 3,199 3,134 2,434 2, UK US Japan France Italy Germany China Figure III. Premiums collected per inhabitant in Italy compared with other benchmark countries (in ), Source: The European House - Ambrosetti elaboration of ANIA data,

7 3. The suretyship sector represents a niche with a positive trend and complex competitive dynamics. On a global level, the trend in suretyship premiums continues to grow and has tripled from 2007 values to over 3 billion Euros in In Italy, suretyship is a niche sector (1.5% of gross premiums in the non-life insurance sector and 0.4% of the total in 2016), that tends to be risky (average loss ratio of 77.7% compared with an average of 62.2% in the non-life insurance sector in 2015), and characterized by fragmentation among a small number of operators, in a market that is already highly concentrated (the top 10 insurance companies account for 71% of all premiums collected). The market is divided between two main types of players: o o The major national insurance companies, which for corporate and governance reasons are often tied to large-scale companies, that require guarantees and securities for sums that are large and connected to translational operations involving politics and international relations. Small local companies or branches of foreign companies that work very effectively in this sector because they are specialized in one or more activities along the supply chain (risk assessment, contract consulting, assistance in risk mitigation and insurance coverage). These companies are able to typically guarantee even smaller amounts, since they are able to perform assessment rapidly and can take into consideration both hard and traditional assessment factors (e.g., balance sheet, ownership and contractual structure, etc.) as well as soft factors (e.g., compliance track record, credit worthiness and fulfillment capacity, etc.) Figure IV. Suretyship premium collections in Italy (million ), Source: The European House - Ambrosetti elaboration of ANIA data,

8 4. In Italy, the (current and potential) demand for credit and suretyship may not be adequately satisfied, with significant development opportunities for insurance in this area. The increasingly stringent patrimonialization restraints the Basel reform is imposing on banks requires from them not only correct and remunerative allocation of capital, but also effective recovery of their own resources. The credit and suretyship sector for a single bank is not that interesting because operations lead to the absorption of its own capital similar to that of cash transactions and they are not always harbingers of new business opportunities and further sources of income that could derive from customer relations. In addition, they also represent risks that often cannot be sold or reinsured by the banks themselves (such as cash loans). In Italy, banks specialized in the issuing of guarantees do not exist (as they do in Germany, for example), nor do institutes capable of making this sector a main area of business. Given the need during tenders to draw up other types of insurance as the complexity of the tender increases, the economic ratio should create a preference for a dialogue with an insurer which is able to provide both guarantee coverage as well as any others that might be required. Compared with a traditional financial intermediary, the insurer would play an active role in solving problems of the tender in which its client is involved because it would assume responsibility for the claim. Therefore, this situation aligns the interests of the company with those of the contracting party. 144, , , , , , , , , , , , , , , , Endorsement loans (total) Towards non-financial companies Figure V. Evolution in the size of endorsement loans in the Italian banking system (million as of December 31st of each year), total and focus on the clientele of non-financial companies, Source: The European House Ambrosetti elaboration of Bank of Italy data,

9 5. Among the markets of potential interest for expansion of the insurance sector, in addition to that involving public tenders and procurement, three types of instruments should be taken into consideration: Service contracts among private parties, as a guarantee for uninterrupted production or its quality as requested by a customer from a supplier. Contracts involving generic fulfillment obligations, such as in business, for example guarantees the franchisee is required to provide in fulfilling obligations set by the grantor. Contracts with reciprocal obligations between the parties as guarantees regarding the administration of goods and services involving temporary joint ventures (TJV). Guarantee for the compliance with the obligations imposed by the execution of works, supplies and services for the Public Administration Public tenders and procurement Contracts with reciprocal obligations between the parties Guarantee regarding the administration of goods and services involving temporary joint ventures (TVJ) Guarantee for continuity or quality of production as requested by a customer to a supplier Service contracts among private parties Contracts involving generic fulfillment obligations Guarantees the franchisee is required to provide in fulfilling obligations set by the grantor Figure VI. Potential markets for suretyship expansion in the insurance sector: overview. Source: The European House - Ambrosetti data elaboration, There are a number of critical competitive aspects which, if not taken on quickly, could limit the development of the suretyship sector in Italy: Risk assessment is very complex and involves both financial and economic aspects, as well as aspects related to the assured party s operations and business. Operating in this sector requires significant investment in organizationand technology-related resources which must be sufficient to providing support to the risk assessment process. The high claims/premiums ratio is unlikely to be recouped or mitigated in the short-term, a situation which increases the minimum collection volume required to operate in this sector and requires solid strategic relations with reinsurance underwriters. 7

10 A specialized distribution network must be developed and, preferably, it should be a sole agent (given the special nature of the product and close client relationship required). Adoption and compliance with Solvency II generates high costs for operators that exposes smaller ones to a high-risk level in terms of the sustainability of their business. Complex risk assessment (financial and business sides) High costs related to the adoption and compliance with Solvency II Need for significant organization- and technology-related resources for risk assessment Need for a specialized and, preferably, a soleagent distribution network High Loss Ratio unlikely to be recouped or mitigated in the short-term Figure VII. Main critical areas in the development of the credit and suretyship sector in Italy: overview. Source: The European House - Ambrosetti data elaboration, Compared with similar banking products, insurance sureties are characterized by a number of strengths that are important to market penetration. Suretyship avoids the immobilization of significant financial resources that could be channeled towards more remunerative assets within the company or towards new investment. Distributing the product through agents and brokers allows for: o o o o a closer relationship between the intermediary and client that enhances the ability to collect information and reduce preliminary investigation costs; faster processing; lower assessment costs; greater possibility for customized contracts. Insurance products have a high service component, for both the assured party as well as the beneficiary, an aspect which should be highlighted as much as possible through a proper positioning strategy backed up by both the companies and the distribution network. 8

11 8. To seize all the value deriving from the broad development potential of the sector, a number of basic conditions must be respected: maintenance of the fulfillment speed, or extremely rapid initial response time; upgrading of information databases that can gather sets of qualitativequantitative information; consolidation of distribution networks so they are able to invest in both their own training (including in partnership with the company) as well as computer tools connected online to the company itself; provision of collateral guarantees, typically in terms of recourse, that are of easy and general acceptance by the guaranteed client. Specifically, it is essential that the guarantees of the good and service be split from those of the beneficiary; rapid pre-assessment of reliability which can provide certainty in the decision-making process to applicants, including when negative responses are involved. In fact, unlike the majority of other sectors, in this case providing a guarantee insurance policy is connected to a deal that is not always feasible without a guarantee. A rapid response can determine whether or not the business deal can continue. 9. The entry into force of the new Italian Public Procurement and Concession Contracts Code in April 2016 resulted in an overall reduction in tenders in successive months, both in terms of number and value. Approximately 3/4 of Italian construction companies are affected by the new Code. Research into sources (institutional and associations) in the public domain revealed a noticeable reduction in tenders in 2016 (for example, -2.1% in the number and -16.6% in the monetary value of public works tenders registered by ANCE, the Italian Association of private construction contractors; among contracting authorities, -4.2% in number and -30.8% in value among local bodies, especially Italian Regions and Municipalities). The ad hoc analysis conducted by The European House - Ambrosetti using the Olimpia Agency database on tenders related to the period shows, on an overall level, a clear reduction in the number of tenders in the second half of 2016 (with -7.9% overall at end-year), with varied trends depending on the sub-sector. 9

12 Billion 37.3% Entry into force of the new Code Total number of tenders 2016: -7.9% vs % 10.8% 11.7% 3.6% -6.7% -20.0% -38.6% -19.5% -31.0% -14.8% -23.6% Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Figure VIII. Trend in the number of public tenders for services, construction works and supplies on a monthly basis (% variation on previous year), Source: The European House - Ambrosetti elaboration of Olimpia Agency database, 2017 While increasing in value, services showed a decrease of 4% in terms of number, while, over a 12-months period, the so-called Code effect resulted in an overall reduction in construction works and supply tenders, both in terms of monetary value (-47% with approx. 3 billion Euros less) and number (-18.6% in construction works and -28.3% in supplies) Entry into force of the new Code 6.5 bn bn 0 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Figure IX. Trend in public tenders: focus on the construction works and supplies aggregate (billions, cumulative amount), Source: The European House - Ambrosetti elaboration of Olimpia Agency databank, 2017 The downward trend involved the market both in the category of amounts under 1 million Euros (86% of the number of tenders) as well as that over or equal to 1 million Euros (87% of the amount). In this latter segment, the number of tenders decreased by 47% in construction works and 38% in supplies. 10

13 -46.9% -38.5% -18.9% -13.4% -18.6% -24.4% -28.3% -25.6% -0.9% -4.0% -4.2% -7.9% -54.4% -48.7% -14.0% -25.2% -26.9% -34.8% -34.6% -17.0% -1.8% 1.1% 17.4% 12.5% Value Services Construction works Supplies Total tenders < 1 Mln 1 Mln Total Number Services Construction works Supplies Total tenders < 1 Mln 1 Mln Total Figure X. Amount and number of public tenders by type (% variation on previous year) Source: The European House - Ambrosetti elaboration of Olimpia Agency database, 2017 The negative impacts associated with the new Code are primarily connected to delays in formulating the tender calls by the Public Administration ( less structured contracting authorities had more trouble quickly implementing the new provisions), and difficulties in complying with the new regulations by companies which were often nervous about how to interpret the application of the new Code. It should be also taken into account both the impact of the obligation of procurement centralization and the physiological resistance of a part of the Italian P.A. to reorganize according to the new rules. 11

14 10. The 2016 Public Contracting Code reform and subsequent modifications contained in the recent Corrective Decree (May 2017) fostered greater simplification and transparency in the sector in order to render the functioning of the tender market increasingly efficient and competitive. The revision of the Code made it possible to streamline the massive, multilayered body of laws and regulations surrounding public tenders in Italy, towards simplification of the application of procedures by the various players involved (contracting authorities, competitors, companies and professionals) thanks to a clear, system-wide and unified framework, as well as a clearer division of roles and responsibilities. The reform was applied on a 360 basis. Therefore, overall, the assessment is positive, but some gray areas must be addressed as soon as possible, including the issuing of further administrative implementing decrees to render operational numerous regulations contained in the Corrective Decree and the overcoming of certain limits to full transparency in the market (especially in relation to below threshold public tenders). The National Anti-Corruption Authority (ANAC Autorità Nazionale Anticorruzione) has a special role to play in terms of monitoring, regulation and power to intervene in procedures to assigned public tenders. A significant contribution to the efficient and transparent functioning of public tender market activities could be provided by the: o o issuing of company ratings by the ANAC (on the request of economic operators and as recognition of previous positive behavior of companies in the public tender process), that could tend to be considered an evaluation factor in calculating the amount of the suretyship premium issued by insurance c0mpanies, credit institutions and financial intermediaries, thus contributing, more generally, to improving contract fulfillment; attribution of legality ratings by the Italian Competition Authority (AGCM Autorità Garante della Concorrenza e del Mercato) to allow requesting companies access to credit and to take part in tender calls. 12

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