Nov 12, 2013
The 2012 Datamonitor UK Commercial Distribution report stated brokers still held 83% of the distribution of commercial insurance in the marketplace. In modern, competitive insurance new intermediaries are fighting for capital and commission as sales distribution channels become more varied. The result is brokers have to consider ways to stay stable amidst a flexible, soft market. The wider adoptions of digital and online technologies, too, pose a challenge for brokers that don’t adapt.
“58% of brokers said the level of commercial insurance they trade electronically had increased”
Insurance Times, 16/10/2013 edition
Is there really a threat to the very people who currently own relationships with the end customer? And are the changes personal lines a sign post for changes to be expected within commercial lines? With Insurance Times recently highlighting the ‘broker squeeze’ on commissions, innovative ways of increasing profit margins are fast becoming brokers’ priorities. With this in mind I’ve laid out some of the potential broker threats and opportunities to arise from them:
MGAs are one of the (no longer ‘new’) intermediaries in the insurance chain. There are no hard rules on who this affects and how as it is on a case by case basis – some carriers profit share with MGAs as they take on the work, other brokers may feel a pinch on their commissions.
X Can be a threat to brokers who handle high volume, low value commercial business as a possible commission reducer
√ Could be an opportunity to start an MGA or bring coverholders in house, especially niche area brokers:
Brokers are increasingly bringing coverholder or MGA business in house; Lockton/ Mapledown and Arthur J Gallagher/ OIM Underwriting etc. MGAs are able to quickly make rate changes, be entrepreneurial and take on new lines and books and retain control further along the customer chain – it is easy to see why the trend is not subsiding. Coverholders/MGAs grew by 275 in total from 2007 – 2012, now we are seeing ‘steady growth’ with 31 new MGAs from 2010 – 2012 according to Lloyd’s. However some of these new MGAs do fail and Saxon East of Insurance Times warns “Broker MGAs need a unique selling point”.
Binding is proving to be a revenue differentiator for medium to larger brokers. I.T is key for brokers and insurers to work together to process large volumes of policies in this way. Passing one document around 8 people before approval and labouring on spread sheets doesn’t add to anyone’s bottom line. Efficient processes free up manpower, meaning your staff could process double the amount instead of you having to cut costs, jobs and endure the subsequent negative PR.
X Is binding a threat if you don’t have a dedicated team? Ask your carrier partners.
Lack of binding or ‘account handling’ capabilities may or may not be an immediate threat to you take the lead from the insurers you work with. Do other broking companies they work with have dedicated binder/account handler teams to serve some of their schemes, or binding authority/coverholders to process books of business? How much business are they planning on processing this way in the future?
√ Binding is an opportunity for medium to large brokers to become or remain the preferred broker.
White labelling in personal lines is established; eliminating some personal lines brokers and enabling carriers to increase margins and undercut brokers. A recent example of the trust in white labelling is Brightside – turning to big brands ASDA and Debenhams in times of need.
X Threat to SME commercial insurance
Is the diversity of white label adoption into bigger brands and niche markets a sign it will slowly become more widely used for other types of commercial insurance? Big or niche brands come the benefits of up and cross selling to a mass or targeted audience, so it is easy to see how this may grow in an ever brand dominated world.
√ Opportunity to get in there first for SME insurance and others?
You could offer white labelling as part of your broking service to retain some business and increase sales whilst taking away the leg work from not only carriers, but yourselves.
Retail/ B2C has officially sold direct since 1985, thanks to the infamous, Direct Line. Direct selling was, of course, then catapulted by the birth of the internet and now we see the influx of the likes of ‘cover4mobilephones.co.uk’ and ‘cover4travel.com’ from UK and Ireland Insurance Services for example.
Direct online and intermediary aggregator sites have been used for high volume, low value business for some time. The squeeze comes now as wholesale B2B start to look at online as a sales tool, will e-trading cut out brokers and how can you gain more inclusivity to these channels?
X The Broker Market in UK has been transformed by consolidation and the advent of disruptive ‘Online’ Models” – Lloyd’s Market Review Presentation, 2012
√ Opportunity to all brokers
Create an online channel for your customers to engage with you, or join a B2B aggregator. Commercial lines aggregators already exist (iprism) and there are many ways to utilise online. ‘Marketplaces’ for products are another ‘channel’ increasing competition however – therefore pushing brokerage down in an already soft market; judging which ones will increase your product’s profit is vital.
We would recommend building products with the channels they are going to be sold via in mind. When opting for an online traded solution for example, minimising referrals should be a priority. This allows you to keep the cost of sale as low as possible and in turn, make pricing attractive.
Brokers are starting to view carriers more as customers –are you making the most of your carriers multi channel offering (if they have one)? Do your brokers make full use of their web-based portals or preferred channels to remain favourable, and in some instances get preferential rates?
Online is ever growing and can’t be ignored. Next it will be mobile and iPads, so web-based systems will facilitate what will be an even more an even more tech-savvy workforce– here is some research evidence of demand courtesy of IBM: The successful insurer will be digital – IBM Infographic.
Commercial insurance is now an ‘offline’ and ‘online’ market place.
There are many options to automate; messaging, policy admin and bordereaux systems. Or a multi channel system so you can open new distribution channels from one core system – opening and closing channels for different schemes offers flexibility and is strategically (and financially) safer for medium-large, growing organisations.
If you lack a niche offering or strong enough relationships you could move more into carrier territory as Vantage have done – for whom broking now only accounts for 10% of their business. But realistically threats are not happening at the speed of light. Commercial brokers still hold power and relationships with end customers.
The threat, for now, is more about being competitive, strategically diversifying, automation and knowing BOTH your audiences, carriers and customers.
“Automation is still a choice in the current market but soon it will be a necessity, as technology is becoming part of the decision making process when people select a broker, MGA or underwriter as a partner.” Peter Montenaro, Head of Delegated Authority, Lloyd’s – 2012
After speaking with senior executives at both broking and carrier companies I’ve heard of a mutual respect – both seeing one another as a customer – this can only pave the way for collaboration on the best ways to stay competitive for one another.