Introduction: Necessity of Strategic Planning for Insurance Companies
Although today remarkable changes in the markets for insurance and financial services point to a "Financial Service (R)Evolution"(1), many German insurance companies (IC's) disregard the essential importance of strategic planning.(2)
There is a progressing number of sceptical opinion, predicting adverse times for the insurance industry. However, the majority of insurance practitioners is coinciding with the so-called "theory of continuity": In terms of growth, the insurance industry is more successful than the economy as a whole, and will prosper in the future as well.(3)
The "climatic change" of the environment significant for strategic decision making, is leaving its marks on the insurance business. An overview of the actual trend estimations indicates that the latest developments mentioned briefly by the headings "European Common Market", "German (Re)Unification", "East European Markets", "Increasing Consumer Sovereignty" etc. demand for strategic planning.
The result of a well representative investigation concerning the insurance market in Germany, we realized in autumn of 1990, confirms the significance of the developments listed above. More than 90 insurance companies who filled out a questionaire, expect that these factors concerning their strategic environment will be of paramount importance. Nevertheless, this result stimulated us to develop concepts and instruments for the specific needs of insurance companies, which can be helpful in managing the future.
Firstly, this article presents a discussion of the possible applications of specific strategic instruments for insurance companies. Also an exemplary case is shown, demonstrating how to use these strategic techniques in an IC.
Business Segmentation as a Prerequisite for Applying Strategic Techniques
Due to a shortage of information, senior managers often have no knowledge of market-attractiveness and specific competitive positions of the various strategic business areas ("SBA's").
Thus the importance of setting up easily comprehensive business sections is obvious but in view of the "line-of-business-thinking" (e.g. for IC: life, fire, marine) the formation of totally autonomous SBAs may bear some problems for the insurer.
The reason why this may be problematical is that insureds often take out several insurance policies from different lines of business. This brand name loyalty explains the characteristic difference between industrial production and the insurance business.
One always has to consider what impact specific strategic options chosen for only one SBA has on the other business segments.(4) Therefore, general aspects of overlapping SBA should be taken into account for SBA-forming.(5) For this reason the insurance industry predominantly applies the criterion "types of customers" for the segmentation of business.
In the meantime, the insurance practitioners have realized the great importance of customer orientated planning of business segments, but the widespread differentiation between private and business customers is not suitable for these circumstances.
Apart from separating the operating area, based on the predominant criterion "customer" (market) and the still commonly used criterion "product", geographical aspects may occur as relevant. This point of view is important especially for ICs because a loss or the individual experience in the insurance industry can vary from one region to another.
With these criteria for separating the operating area one can identify useful characteristics and relate them to one another because the business segmentation is serving as a basis for applying many strategic methods such as the portfolio technique, detailed below.
Possible Applications of the Portfolio Analysis
Especially the two-dimensional matrix, which combines market attractiveness and competitive advantage, has proven itself for the use within the service business. …