Fairfax Financial (FFH) is a financial holding company based in Canada. It was originally founded as Markel Service of Canada in 1951, and it was renamed in 1985. Primarily company operates from Canada and is headquartered in Toronto. It operates in property, casualty, insurance and reinsurance, investment management, and insurance claims management. The company has been under present management since 1985, and its common shares are listed on the Toronto Stock Exchange (Fairfax, 2021).
FFH operates in other regions through its subsidiaries. FFH has pursued the growth strategy by acquisition, and the company’s vision has led to enormous growth; it has achieved the compound annual growth rate of 15% since 1985 in price per share. Porter’s five forces model is a valuable tool to identify threats and opportunities faced by FFH in the insurance sector.
Competitive Rivalry in The Market
The financial services industry is generally highly competitive. Massive corporations are operating in the sphere, and they dominate the industry. FFH has reported $19.3 billion in revenues and $202.4 billion in profit, and it has a market cap of $12.3 billion in 2020 (Forbes, 2021). The main competitors of FFH are Prudential, Travelers and Lincoln National. Prudential has reported revenue of $57 billion in the same financial year and a net loss of 374 million that is attributed to the global pandemic; it is placed at 55th rank in the Fortune Global 500 companies (Fortune, 2021).
However, Travelers reported a profit of $2.6 billion and revenue of $31.9 billion and is ranked 98th in the Fortune index in 2020 (Fortune, 2021). Philadelphia based Lincoln National is ranked 172nd in the Fortune index and reported revenue of $17.4 billion and profit of $0.4 billion in the financial year of 2020 (Fortune, 2021). Therefore, the market is highly competitive.
Threat of Substitutes
The financial industry has evolved with time; as with other components, the insurance industry also forms a vital part of the business community. The technological progress is enabling the hybrid companies, financial and technology to provide services in the sphere. The newly formed companies are known as insurtech, and they are taking benefit of the development by providing better services and customer-centric products. In 2016, 32 insurtech startups were founded in Canada, and the market is thriving in the region (Mazhar, 2021).
However, incumbents feel the competitive pressure from these companies; they have established businesses with a fair market share. They have responded well to the threat posed by these companies and adapted to change by research-based new products and acquisitions. The threat of substitutes is moderate in the short term.
The Threat of New Entrants
The threat of new entrants is low to moderate in the industry. There are industry-related caveats associated with each sector. The financial services industry has its limitations, and the significant obstacles are the following, high capital requirement, well-established incumbents and regulatory framework. The industry has severe regulatory oversight, and the companies have to comply with the strict requirements and incur additional costs. The other major problem is the finance requirement as the business highly finance dependent and requires massive cash flow at inception. The availability of financing options partially mitigates it.
Insurtech startups have drawn around $17 Billion in investment in the last decade (Deloitte, 2019). Lastly, the industry is already saturated, and many public and private sector entities are operating with experience and resources; this mere fact discourages the newcomer. Therefore, the threat of new entrants is moderate.
Bargaining Power of Buyers
Buyers usually pose moderate bargaining power. Buyers’ power depends upon the following factors such as buyers’ concentration, availability of alternatives, switching cost and brand loyalty. The buyers usually deal individually for insurance unless it is a corporate client and has lower bargaining power. The market is competitive, and there are many insurance providers in the market; this gives buyers options to choose from, and they can exercise higher bargaining power. If the industry competes for the market share, customers have higher bargaining power (Masocha et al., 2011).
However, despite there is no switching cost among insurance providers, consumers have to consider the soft cost of the switch as their new consumer might not provide all the financial perks they are used to, and good services cannot be substituted for financial gain. The overall bargaining power of buyers is moderate.
Bargaining Power of Suppliers
Suppliers’ generically can exercise moderate bargaining power. Their power is directly related to the suppliers’ concentration, the importance of supplies for the business, forward integration risk and nature of supplies. There are three main sources of inflows for the insurance firm retail clients, corporate clients and expert human resources. Retail clients are important for the business but hold moderate bargaining power because they alone cannot push the business. However, corporate clients are a vital source of inflows. They bring the cash by giving them massive clientele. In return, they ask for better terms, including lower premiums, thus affecting the company’s bottom line.
Lastly, human experts, actuaries are skilled people and are in scarcity; they are extremely important for the business and thus commend higher bargaining power. If being mindful of their importance for the business, suppliers pose a serious supply chain risk (Dess et al., 2007). Therefore, suppliers hold moderate bargaining power.
References
Forbes. (2021). Fairfax Financial. Available at: https://www.forbes.com/companies/fairfax-financial/?sh=7384cdf8750e
Fortune. (2021). Prudential Financial. Available at: https://fortune.com/company/prudential-financial/fortune500/
Fortune. (2021). Travelers. Available at: https://fortune.com/company/travelers-cos/fortune500/
Fortune. (2021). Lincoln National. Available at: https://fortune.com/company/lincoln-national/fortune500/
Fairfax. (2021). Company Profile. Available at: https://www.fairfax.ca/Corporate/company-profile/default.aspx
Mazhar, L. (2021). Status of the Canadian InsurTech Landscape (Part 4) — Startup Stats, Investments and Future Opportunities. Available at: https://medium.com/luge-capital/status-of-the-canadian-insurtech-landscape-part-4-startup-stats-investments-and-future-a07b4c826833
Deloitte. (2019). Accelerating insurance innovation in the age of InsurTech. Available at: https://www2.deloitte.com/content/dam/Deloitte/us/Documents/financial-services/us-accelerating-insurance-innovation.pdf
Masocha. R., Chiliya. N., and Zindiye. S. 2011. The impact of technology on competitive marketing by banks. A case study approach. African journal of marketing management. 3(3):68-77.
Dess, G. G., Lumpkin, G. T. and Eisher, A. B (2007). Strategic Management. Text and cases. International edition. London: McGraw-Hill.