Aviva plc - paper PDF

Preview

Summary

paper...

Description

Market Share Analysis of AVIVA: An Insurance Company

MARKET SHARE ANALYSIS OF AVIVA: AN INSURANCE COMPANY

By Student’s Name

Code + Course Name Professor’s Name University Name City, State Date

1

Market Share Analysis of AVIVA: An Insurance Company

2

Table of Contents Introduction..............................................................................................................................................3 Aviva and its Major Competitors.....................................................................................................3 Effect of Competition among Insurance Company........................................................................4 Four Demand Factors that affects Life Insurance..........................................................................5 Price of the Life insurance...............................................................................................................5 Income of the consumers.................................................................................................................5 Advertisement and marketing effects............................................................................................6 Customers’ Expectations..................................................................................................................7 Analysis of the Impact of the Four Demand Factors.....................................................................7 Performance Comparison of Aviva and AIG................................................................................9 Recommendations and Conclusions...............................................................................................11

Market Share Analysis of AVIVA: An Insurance Company

3

Introduction People take insurance to cover themselves from the risks or uncertain future events. Simply, insurance is nothing but a risk management method. In this method, the insurer guarantees a huge amount of payment to the insured and the insured must pay in small premium in the exchange of risk cover. Any unwanted future event may ruin an individual or an organization financially and insurance can protect in that case. Some policies are short-term, and some are long-term; it depends on which policies people want for them. Although it was a slow-growing sector in comparison to other sectors, it has flourished in the past few years. The insurance companies offer many types of insurance to attract people such as life insurance, home insurance, business insurance, car insurance, and many more. To analyze and research the impact of demand factors for a life insurance service, Aviva plc has been taken as an insurance company and life insurance as its key service. AIG and Direct Line are other insurance company, which have been taken for the comparison purpose. The four demand factors for life insurance service will help understand how Aviva can increase its market share in life insurance. Aviva and its Major Competitors Aviva plc is one of the leading insurance companies in the UK. It is headquartered in London, UK (WsJ 2020). It offers several types of insurance services, but one of its key services is life insurance. AVIVA provides a cash lump sum to the insured's family when the insured passes away or he/she is expected to live no longer than 12 months due to any critical illness, within the policy term. An individual has many responsibilities for his/her family and life insurance helps the individual to fulfill his/her responsibilities throughout life and afterlife. According to AVIVA plc., it paid out 98.9% of life insurance claims in 2018 (Aviva 2020). The length of the life cover provided by Aviva is flexible. Here at Aviva, an individual decides for how long he want the life cover. It has two different types of life cover for its customers. One is level

Market Share Analysis of AVIVA: An Insurance Company

4

cover and the other is decreasing cover. The level cover is a good option for them who want to give their loved ones a standard life. In level cover insurance, the amount of cover remains the same within the policy term. The decreasing cover helps the loved ones paying a mortgage or long-term long after the individual life. But in this cover, the amount of cover decreases to zero over the policy term. Aviva has a set of eligibility criteria for life insurance in the UK. For example, the individual must be a UK resident. The Age should be between 18 and 89 years. He or she must tell about pre-existing medical conditions truthfully. However, a medical exam is not required in most of the insurance plans. It has many competitors, but two major competitors are AIG and Direct Line. They too provide life insurance as their key service. Effect of Competition among Insurance Company The insurance sector has to face tough competition as many competitors are there which offer similar products and services. But the tough competition among insurers is beneficial for people as they get a quality of services at a low cost. The insurance company always try to bring a unique or economical insurance plan so that they can attract people to buy their services. That’s why many types of insurance plans can be seen. The main problem with this sector is that the idea can be copied very easily. For instance, suppose a hypothetical condition and i.e., the world has no idea about travel insurance and Aviva brings it in the market as a new insurance plan. When AVIVA’s competitors would come to know about this service, they would introduce this new idea in their services, and this wouldn’t be a big deal for them. Therefore, it is difficult to compete with others in this sector. However, the credibility and goodwill of the company play an important role in increasing the customer base. This is because, before taking any insurance plan, customers are very much concerned about the credibility of the insurance company. Here, marketing and advertisement can play an important role in increasing the credibility of the insurance company. People trust on ratings of the companies for buying the insurance plan for them. A company with high ratings is considered as

Market Share Analysis of AVIVA: An Insurance Company

5

more credible. For example, Aviva's market share got reduced due to a series of downgrade ratings at the end of 2002 (Schertzinger 2009). Four Demand Factors that affects Market Share Demand of a product or service is willingness and ability to buy it. It tells a person’s desire to purchase a good or service at a particular price and having ability to buy it. It depends upon some significant factors. Some of the important factors affects demand are: Price of the product or service, Price of the alternative product or service, income of the customers, taste and preferences of the customers, customers’ expectations about the product, Types of product or service, government policies, advertisements, etc. The major four factors of the demand are: Price of the Life insurance, Income of individuals and society, Expectations of the customers, and Advertisement and marketing effect. Price of the Life insurance There is an inverse relationship between the price of the good or service. Other things remaining constant, the increase in prices of the life insurance results in decrease in demand of the service and If the prices decrease, the demand of the service goes up. The rise or fall in the price decreases or increase the purchasing power of the consumers and affect the demand of the product. For example, Suppose Aviva plc increase the premium price of the Term life insurance, the demand for Term life insurance will decrease due to the higher prices. Income of the consumers The relationship between income and demand of the service or product depend upon type of products. If it is a normal good or service, keeping other factor constant, increase in the income rises the people’s purchasing power increases. It increases the demand of the service. The rise in the income decreases the demand of the inferior goods. The higher income allows customers to purchase costlier goods and it decreases the demand of the inferior products. Luxury good or service has positive relationship with the income. A rise in income increases

Market Share Analysis of AVIVA: An Insurance Company

6

demand of the luxurious good or service. Being a normal product or service, the life insurance has a positive relationship between the Life insurance and Income of the individuals because rise in disposable income increases the market demand of the life insurance. It means there is a positive income elasticity of the demand with respect to life insurance. The rise in income results in the decreasing marginal utility. The marginal utility is the satisfaction derived by using one more unit of the product. If we demand one additional unit of the product after a level, the satisfaction level getting from the product started falling and marginal utility also falls and become zero or negative. It makes consumer to buy new products or save the more income. They start to consume such goods and services which makes their lives comfortable, secured, and healthy. The person who is earning an inadequate income uses it to fulfill basic necessities. A person with a higher income can think about secured and comfortable life and could demand such goods and services. Advertisement and marketing effects Effective Advertisement helps to catch the attention of the customers and people of the society. It provides the information of the goods or services such as availability in the market, prices of the product, and available features and benefits of the product. Celebrity Endorsement helps in increase the popularity and reach of the advertisement via television, newspapers, social media, Online websites, radio, magazines, etc. People trust known faces and it attracts customers to know about the product and service. Bruce Willis, Elle Macpherson, Ringo Starr, Alice Cooper, and Dame Edna Everage are Celebrities brand ambassadors of the Aviva plc (Aviva 2020). It built the product popular and trustworthy and increases the demand in the market. Companies have various market strategies to increase the demand of the product such as tying up with the companies whose products promote our products. For example: AIG sponsored Manchester United’s shirts, a famous football club for four years till May 2010 (BBC 2020). It helps the company increase the popularity with all over the world where fans support and watch the games.

Market Share Analysis of AVIVA: An Insurance Company

7

Customers’ Expectations In the short run, the demand depends upon the expectations of the consumers about the future price changes. If they expect that price of the product or service will decrease in future, they decrease the current demand. And If they expect that the price will rise in future, it increases the current demand. For Example, if a company announce new policies for the premium rates of insurance, if customers expect that the prices will rise, then they increase the demand before the new polices implementations. The Consumer observe the current situation of the market and predict the future expectations. For example, In the market AVIVA plc keeps its prices of life insurance unchanged or constant, but customers expect that AIG or Direct Line will increase the premium of life insurance, the demand of the life insurance of AVIVA plc will increase due to comparative advantage in the product or service.

Analysis of the Impact of the Four Demand Factors Price of the service is related to the price at which insurance is taken by the consumers. Every consumer must pay a premium amount to take the insurance policy as it gives surety for the payment of some amount of money to the beneficiaries upon the death of the insured person. Generally, the amount of the premium is determined based on age of the consumer taking life insurance policy, risk associated with the life of the person, and current health position of the consumer. In the given scenario, the chosen organization of life insurance policy is Aviva. AIG and Direct line are the competitors of the Aviva company. In this case, demand for the insurance policy plans depends on how Aviva, AIG, and Direct line charge premium for providing the services of life insurance plans to the customers. The amount of high premium charged by the companies discourages the consumers to take the insurance policy plans, whereas low amount of premium charged for providing the services of the life insurance plans encourages the consumers to take the policy of life insurance. Thus, low premium charged for the insurance services increases the market share of the insurance company.

Market Share Analysis of AVIVA: An Insurance Company

8

This demand factor plays vital role in the determination of market share of the life insurance in the market. When income of the consumer is high, then consumer’s expenditure for reducing risk associated with life increases to a greater extent by ensuring repayment of amount invested over the death of the insured to their dear one. On the other hand, when income of the consumer is low then consumer spends less on taking life insurance policy. There lies positive relationship between market share of the life insurance and demand of the insurance policy by the consumers. High income leads to higher demand for insurance policy due to which market share of the life insurance increases too. Higher income is also the main cause of the opening of new life insurance companies as higher income earner increases the demand for life insurance plans that boosts the profit margin arising out of insurance sector. In the given scenario, there are Aviva, AIG, and Direct line. Suppose, if income of the consumer increases resulting into higher demand for life insurance plans then the possibility of new firms entering into the market can rise. Advertisement and marketing effects impact positively in increasing the market share of the life insurance in the market. Advertisement helps in increasing the popularity of the life insurance plans by providing the scenario of the benefits associated with the plans. It also increases the knowledge of the plans in remote areas as well because advertisement through websites, pamphlets, and google ads covers wide area of the consumers. Advertisement and marketing effects also help in increasing the competition among the business rivalries that boosts the welfare of the economy overall as competition to some extent increases the efficiency and productivity for providing services at efficient costs by the firm to the customers. For example, If Aviva, AIG, and Direct line compete can lead the low amount of premium charged by these organizations as these organizations can lower the amount of premium to attract the major portion of the market share to avail more benefits by the pooling of insurance amount at one place.

Market Share Analysis of AVIVA: An Insurance Company

9

Consumer expectation has great role in increasing the demand for life insurance policy by the consumers. If the insurance policy framed by the insurance sector meets the expectation of the consumers, then demand for life insurance policy may increase resulting into greater market share of the insurance service. Similarly, if the insurance sector does not meet the expectation of the consumers, then demand for insurance policy may decrease resulting into lower market share of the life insurance policy. Consumer expectation can be categorised as implicit or explicit. Implicit expectation takes into consideration the norms of performance, whereas explicit expectation takes into consideration various factors such as quality of the product, performance and services rendered. These factors are also assessed by the consumers to get optimal benefits from the available resources. For example, if a consumer expects handsome amount of return on the maturity of the insurance plan and insurance company say Aviva guarantees to provide handsome amount of money then the possibility of more demand for the life insurance policy plans by the consumers will increase. Similarly, when Aviva legs behind and puts some terms and condition on the repayment of the invested money on the maturity of the insurance plan; demand for life insurance policy may decrease (Boyes & Melvin 2016). Performance Comparison of Aviva and AIG

(Source: ww.advfn.com)

Market Share Analysis of AVIVA: An Insurance Company

10

From the information given in the above table, it can be inferred that Aviva’s turnover from industry of life insurance is 28,659.0m and profits from this industry is 1652.0m (Advfn 2020). EPS can be defined as the earning per share. EPS shows the profitability of the company so 38.2 of EPS shows the profitability of the Aviva company .PE ratio is related to the price to earnings ratio which takes into consideration the share price relative to the net annual income which is earned by the firm per share. Here PE ratio is 10.8 which represents Aviva’s share price relative to net annual income. Market cap is 16,122m and in billion terms, it is 16.122B (Advfn 2020). The graph below shows the stock chart from January 2019 to January 2020 which have been divided based on three months combined (Advfn 2020).

(Source: ww.advfn.com) The chart below shows the performance of AIG Group, Inc. From the chart, it can be concluded that AIG’s PE ratio is 25.38 that shows the price to earnings ratio representing company’s share price to earnings per share. The graph shows the stock chart on various days

Market Share Analysis of AVIVA: An Insurance Company

11

from December 26 to January 13. Market cap which represents company’s total value of shares of stock that is 44.42B. Thus, by comparing the market cap of both the companies Aviva and AIG, it can be inferred that market share of AIG is more than the Aviva from Jan 2019 to Jan 2020 (yahoo finance 2020).

(Source: finance.yahoo.com) Recommendations and Conclusions Based on the analysis of Aviva in terms of market share, it can be concluded that Aviva legs much behind in the market share from AIG. AIG (44.42B) has a big market share in the insurance sector than Aviva (16.122B). To increase market share in the insurance sector, Aviva should increase its reach to the customers through internet and social media as these are the most efficient ways now a days. It should bring some interesting policies that can attract people. Keeping close eyes on the competitors’ plans and policies can also help Aviva comparing the performances. To increase the demand for life insurance plans, insurance companies must provide some incentives such as rider facility and tax deferred growth to increase the market share in the insurance sector. It accelerates the demand made by consumers for life insurance policy. The major factors such as price of the services, average income of the consumers, consumers expectations from the services, and expenditures made on advertisement and marketing must be taken into consideration while determining the marketing strategies for the

Market Share Analysis of AVIVA: An Insurance Company

12

expansion of the services rendered. Aviva should find the ways that can help it increasing the lump sum amount since everyone wants more returns. In addition to these recommendation, Merger or acquisitions with smaller companies can help Aviva in increasing its market share as it reduces competitions and increase the customer base.

Market Share Analysis of AVIVA: An Insurance Company

13

References Aviva 2020, "Aviva launches new advertising campaign", Aviva.com, retrieved 24 January 2020, . Aviva 2020, "Life insurance", Aviva.co.uk, retrieved 24 January 2020, . Advfn 2020, "Aviva PLC Annual Financial Report", ADVFN, retrieved 24 January 2020, . BB...