Financial Services

Revenue drivers

• Offering various accounts (savings, commercial), loans (personal, home, education, business), wealth management, insurance, and investment banking services.
• Generating income from locker fees, card fees (credit & debit), trading commission, M&A fees, asset management fees, transaction fees, and interest on loans.
• Utilizing offline & digital ads, email promotions, tele-calling, and e-Commerce for promotion, plus offline sales offers.
• Physical locations and apps for accessibility.

Cost drivers

• Fixed costs include lease/rent of land for office, insurance, maintenance, management software, taxes, R&D, and expenses for bonds/securities.
• Variable costs include salaries, marketing, utilities, employee training, brand collaboration commissions, and losses on investments/loans.

Trend considerations

• Increased adoption of digital and fintech advancements.
• Growing importance of cybersecurity resilience.
• Integration of AI, blockchain, and cloud computing technologies.
• Increased focus on Environmental, Social, and Governance (ESG) considerations.

Key terminologies

• Net Asset Value (NAV): The total value of a mutual fund’s assets minus its liabilities, divided by the number of outstanding shares.
• Non-Performing Loans (NPLs): Loans that are in default or close to default, indicating potential credit risk.
• Liquidity Ratio: Ratios such as the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) that measure a bank’s ability to meet short-term and long-term liquidity needs.
• Return on Assets (ROA): A measure of a bank’s profitability, calculated by dividing its net income by average total assets.

Key Ideas

• Strict solvency and capital requirements are in place.
• Long-term liabilities must be matched with predictable assets.
• Premium pricing is determined by actuarial models and risk selection.
• Customer inertia is high, but competition is increasing, especially from digital insurers.
• Claims management and fraud prevention are critical functions.
• Distribution occurs through agents, brokers, and direct digital channels.

Revenue

• Premiums from life, health, auto, home, and commercial policies.
• Investment income generated from reserves and float.
• Policy fees and administrative charges.
• Reinsurance arrangements.
• Ancillary products, such as warranties and specialty coverage.
• Commission income from partnerships and brokers.

Costs

• Fixed Costs: Corporate SG&A, claims infrastructure, agent/broker networks and sales staff, technology platforms, and marketing and brand development.
• Variable Costs: Claims payouts and settlements, reinsurance premiums, loss adjustment expenses, customer acquisition, and fraud investigation and legal claims.

Trends

• Insurtechs are modernizing underwriting, claims, and distribution through AI and automation.
• Data analytics and telematics are improving risk assessment and personalized pricing.
• Growth of embedded insurance models within e-commerce and fintech platforms.
• Climate change is increasing catastrophe risk, challenging property insurance models.
• Consumers are shifting to digital channels for policy purchase and claim submission.

Risks

• Catastrophic events (e.g., wildfires, hurricanes) can lead to large unexpected losses.
• Regulatory changes can affect pricing, reserve requirements, and product availability.
• Fraudulent claims lead to higher loss ratios and increased investigative costs.
• Poor underwriting practices can result in unprofitable risk pools.
• Prolonged low interest rates reduce investment income and squeeze margins.

Overview

• Insurance companies provide risk coverage in exchange for premiums.
• Offers intangible services.
• A complex and heavily regulated industry.

Revenue Streams

• Premium income from policyholders for coverage.
• Investment returns from deploying collected premiums into interest-generating assets.

Cost Drivers

• Payments for claims and associated adjustment expenses.
• Acquisition costs, including broker commissions, sales staff salaries, and marketing.
• Administrative expenses, such as legal, compliance, and underwriting costs.

Customer Segment

• B2C: Individuals with low to high incomes, often with clear credit histories.
• B2B: Small and medium enterprises (SMEs) and large corporations.

Channels

• Offline: Brokers (through branches and call centers) and retail bank partners (ATMs, cashiers, managers).
• Online: Insurance company websites, online banking portals, and dedicated online insurance shopping platforms.

External Drivers/Risks

• Regulatory changes can impact product offerings and compliance costs.
• Cybersecurity threats pose risks to client data and trust.
• Climate change leads to increased claims from natural disasters.

Trends

• Leveraging big data to understand customer behavior and tailor specific insurance products, exemplified by companies like Metromile.
• Evolution of insurtech companies, focusing on customer-centric solutions, such as Lemonade.

Revenue drivers

• Offering mobile payment solutions, peer-to-peer (P2P) lending, neobanks, robo-advisors, blockchain security, regtech, and insurtech solutions.
• Subscription models generating recurring revenue, freemium, premium, and pay-per-use pricing structures.
• Licensing fees for white-labeled solutions.
• Partnerships with government agencies or firms for cross-promotional activities and referral programs.
• Incentives for fintech adoption and financial literacy campaigns.
• Direct-to-consumer (D2C) sales through mobile applications.
• Partnerships with financial institutions for white-labeled solutions.
• Distribution via retailers or e-commerce platforms.
• Monetizing data through analytics and insights.
• Licensing proprietary algorithms or software.
• Providing consultancy services for financial institutions.

Cost drivers

• Fixed costs include R&D, software/app development and maintenance, regulatory and licensing fees, and infrastructure costs for servers and data centers.
• Variable costs involve data storage and processing, transaction fees, customer acquisition, customer support, and service expenses.

Trend considerations

• Increasing digitalization of financial services.
• Growing adoption of mobile payments and digital wallets.
• Expansion of cryptocurrencies and blockchain technology.
• Evolving regulatory changes impacting the fintech industry.

Key terminologies

• Robo-advisor: Automated investment platform that provides algorithm-driven financial planning services.
• Peer-to-peer (P2P) lending: An online platform that connects borrowers with individual lenders.
• Regtech: Regulatory technology, which uses technology to help businesses comply with regulations efficiently and effectively.
• Insurtech: Technology that enhances and streamlines the insurance industry, including processes such as underwriting, claims management, and customer engagement.
• Neobank: A digital-only bank that operates exclusively online without physical branches.
• White-labeled solutions: Products or services developed by one company but rebranded and sold by another company.

Key Industry Trends

• AI, Blockchain, and cryptocurrencies are enabling cheaper and more efficient digital distributed ledgers for transactions, with crypto emerging as a cheaper alternative to asset investments.
• The rise of digital transactions and online-only banks offering competitive savings rates is eroding the need for cash.
• Financial de-regulation, such as legislation easing Dodd-Frank restrictions, allows smaller banks to gain market share.
• Increased transparency is demanded from private equity funds due to pressure to outperform benchmarks, leading to greater scrutiny of funds and firms.

Important Terminology

• AUM (Assets Under Management): The market value of all financial assets managed by a firm for clients and itself.
• Private Equity: Investors and funds that directly invest in or acquire private companies, aiming to improve operations and financials for eventual sale or public offering.
• M&A (Mergers & Acquisition): Mergers combine two companies into a new entity, while acquisitions involve one company taking over another.

Important Calculations

• NPV (Net Present Value): (CF) x 1 / (1+i)^n, where n = number of periods.
• Pay Back Period: (Fixed Costs) / Contribution Margin (CM)

Important Considerations

• Current Portfolio
• Exit Strategy & Time Horizon
• Acquisition Price
• Employee & Customer Relationships
• Market Trends
• Tax & Regulatory Implications
• Client Risk Profile

Introduction

• Insurance involves the provision of policies that detail conditions under which an insurer will compensate a policyholder.
• A major distinction exists between life insurance and non-life (general) insurance.

Revenue Drivers

• Demand for risk mitigation.
• Pricing of risk (premiums).
• Investment returns (from invested premiums).
• Value-added services (e.g., consulting, risk advisory, wealth management).

Cost Drivers

• Frequency and severity of claim losses.
• Commissions and acquisition costs paid to sales channels.
• Expenses and overhead.

Key Industry Trends

• Insurers are increasingly relying on intermediaries like brokers, agents, and bank partners to facilitate digital and direct relationships.
• Risk coverage is becoming more innovative (e.g., pay-as-you-drive auto insurance, smart cyber insurance, HIV life covers).
• There is an increasing focus on automation and digitalization, including AI/ML, to improve customer experience, enhance efficiency, and reduce costs.

Suppliers

• Reinsurers
• Third-party service providers across the insurance value chain

Customers

• Individuals (for life, health, motor, home, travel insurance, etc.)
• Organizations and entities (for business loss, payroll, etc.)

Other Industry Metrics

• Solvency margin/capital requirement: The capital reserves an insurer must hold to cover potential losses.
• Claims reserving practice: The method used to estimate and set aside funds for future claim payments.
• Underwriting (risk selection) appetite: The types and levels of risk an insurer is willing to accept.
• Service level / claims turnaround time: The speed and efficiency with which claims are processed.
• Claims fraud detection levels: The effectiveness of systems in identifying fraudulent claims.

Major Regional Players in Asia

• AIA
• Ping An Insurance
• Tokio Marine Holdings
• FWD Insurance
• China Life