(Bloomberg) -- The rush is on to replace people with software in Europe’s insurance industry as cost cutting and automation become increasingly crucial to bolstering earnings.
Zurich Insurance Group is accelerating its cost reduction program, targeting savings of at least $1 billion by the end of 2018 with changes that will affect about 8,000 jobs. Talanx AG is spending 300 million euros ($341 million) to upgrade technology at its German unit over the next four years after outmoded systems left frustrated customers with expired car registrations. Allianz SE’s modernization includes plans to allow customers to file small auto claims using pictures from their smartphones.
Profit at Europe’s insurers has become more vulnerable to the unpredictable level of claims as premiums stagnate and investment income dries up due to low or negative interest rates and struggling capital markets. Cuts and modernization may lead to the elimination of a quarter of the almost one million jobs in the region over the next decade, including positions in policy issuing and claims management, according to McKinsey & Co.
“Currently, expenses are the only profit lever management has to boost earnings and dividends,” said Moritz Rehmann, who helps manage about 10 billion euros at DJE Kapital AG in Munich. “Most other profit drivers, such as investment income or claims, are more or less out of their hands.”
The challenge is particularly urgent at Hanover, Germany-based Talanx after a series of takeovers left the company with mismatched systems that cost double the industry average to maintain, according to Jan Wicke, head of the company’s German business. Expenses represented 37 percent of non-life insurance premiums at Talanx’s German unit at the end of the fourth quarter. Allianz, by comparison had an expense ratio of 25.1 percent in the country.
Talanx estimates that more automation will help reduce annual costs by 240 million euros by 2020 from about 850 million euros in 2014. It also plans to cut about 12 percent of the workforce at its German retail unit and said last month that more reductions may follow.
“Insurers are increasingly working on the automation and digitalization of their processes,” said Fred Wagner, professor of insurance management at the Leipzig University. “Many of the jobs that are prone to that, such as contract and claims handling, will become obsolete.”
Modernization is driving job losses in other parts of the financial industry. Banco Santander SA plans to cut as many as 1,200 jobs and close about 450 branches in its home market of Spain this year, according to a person familiar with the plan. Mutual-fund companies including Vanguard Group Inc. and Charles Schwab Corp. have created so-called robo-advisers, software aimed at achieving better returns for clients than traditional financial advisers.
Axa SA, France’s largest insurer, and Allianz are a step ahead of some peers after starting cost-cutting and technology upgrades several years ago. Axa has invested 950 million euros in digital technology since 2013 and sees that step as critical to the next stage of its development, according to Charles Graham, senior industry analyst at Bloomberg Intelligence.
Allianz’s German unit is now focused on innovation after completing a three-year cost-cutting program in 2014 and there’s no need for further reductions, said Manfred Knof, head of the division.
Markus Riess, who oversaw Allianz Germany’s expense overhaul, is now head of Munich Re’s Ergo primary insurance unit in the country. Last month he said he plans to present a restructuring plan for the business in the second quarter. Ergo had to correct life insurance payments that were too high or too low in more than 350,000 cases last year because of faulty IT systems, bolstering the case for modernization.
While it’s unquestionable that some jobs such as mail handling will become obsolete, others may be created elsewhere in areas such as the development and testing of new services, Allianz CEO Oliver Baete said in an interview with WirtschaftsWoche magazine published on Thursday.
Zurich plans to achieve its savings through “the application of new technology, lean processes and the offshoring and near shoring of some activities,” the company said. The insurer’s expense ratio worsened to 31.7 percent of premiums last year.
Cutting costs isn’t the only motive for insurers to upgrade their technology. They have to compete with new companies that that offer coverage with just a few clicks on a smartphone. Last year, insurance technology startups raised $2.65 billion in funding, up from $740 million in 2014, according to data from venture-capital researcher CB Insights.
“Right now is a good time for insurers to revisit costs as they still have a comfortable capital position,’’ said DJE Kapital’s Rehmann. “As always, the real challenge will be cutting at the right places.”