Commercial brokers; adapt or die?

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

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 AUTHORITY

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

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.

 

E-TRADING/ ONLINE

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.


CONCLUSION

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.

 

Bon voyage! Salmon and Sabrefish swim to separate seas

Sabrefish, eInsurance specialists, announced today that it has acquired Salmon’s insurance business, including RiskWrite software and staff. The eInsurance team originated as part of Salmon in 1989. Salmon has developed commerce oriented projects for leading names in retail, insurance and retail finance over the last 23 years.

As of January 2013 the eInsurance side of the business, RiskWrite software,  it’s staff and some new additions separated from Salmon and is now a fully independant global insurance technology provider named Sabrefish.

Commenting on the news, Chris Harvey, CEO of Sabrefish said, “The acquisition of Salmon’s insurance business marks an exciting new chapter in the development of RiskWrite. This follows on from last year’s announcements of major new features in RiskWrite Enterprise Version 3 and the launch of RiskWrite Managed Service aimed at intermediaries and smaller carriers.”

When the insurance team operated under the Salmon brand they worked separately but alongside the retail team – sharing the same on budget, on time, customer oriented values which will continue to be upheld by both Sabrefish and Salmon. Salmon will retain it’s retail and manufacturing clients and Sabrefish its insurance clients and expertise.

With fond memories and excitement for the future, Sabrefish wish Salmon every success!

What are the key differentiators for a successful MGA and what are the opportunities and threats going into 2013?

On 26th September 2012 senior executives from the likes of Aon, Allied World Insurance, Axis, Chartis, Dual International, Hiscox, Marsh, the MGAA, Novae, Torus, Sagicor and WR Berkley Syndicate attended an Executive Briefing entitled ”What are the key differentiators for a successful MGA and what are the opportunities and threats going into 2013?’.

The event coincided with the launch of RiskWrite Managed Service, the addition to RiskWrite Enterprise, Sabrefish’s multi channel eInsurance software.

Feedback from attendees was very positive so I thought I’d summarise the presentations. If you would like to put forward any areas of interest for future briefings and content, make a recommendation,  or read more about RiskWrite see Sabrefish’s multi channel insurance software here.

Dan Martin, Head of UK Regional Development at Catlin Underwriting Agencies Ltd

Neil Hodges, Salmon’s Insurance Client Executive introduced the first speaker, Dan Martin, Head of UK Regional Development at Catlin Underwriting Agencies Ltd, as a ‘mere boy’ having only spent twenty years in the industry! Dan commenced his presentation on ‘Distribution is a key factor but an MGA needs to add value in order to break into new and existing markets – the underwriter’s viewpoint’. Dan addressed the current options for MGA’s to access the market looking at traditional channels such as retail, wholesale, strategic partnerships and modern channels such as online, mobile, price comparison websites. He questioned whether customers are tiring of social networking as a distribution channel and whether share prices are indicative of the value of Facebook. Dan cited the hefty financial investments required for price comparison websites and online as a medium – but their growing necessity alongside mobile apps – and recognised the most unproven traditional channel of sub-delegated, calling it a ‘leap of faith’.

Most notable of these insights was the separation between traditional and modern channels. For example the move to online, social and mobile and the news that Google is now partaking in the price comparison motor market.  The high cost and resource investment required in technology, time and the new generation of specialised talent were recognised as key profit generating factors. Dan said to not deviate from basing your multi channel distribution strategy on your customer’s behaviour.

“Are we planning an IT business, a marketing business or an insurance business?”

Dan said the opposite of a highly structured multi channel distribution strategy and the natural partner of many distribution channels is acquisition costs. Whenever removing acquisition costs from the chain, be careful you are not exposing greater structural costs such as IT, marketing and compliance. An underwriter’s role is to write profitable business – overall profitability relies upon a high level of stability.

As an underwriter Dan reminded the audience that MGAs are an underwriting proposition, the MGAs are acting as an agent to insurer and it is not just about filling a book of business as quickly as possible with exceptionally high conversion rates.

Dan concluded ‘’It is imperative you get multi channel distribution correct, understand the relative importance of each channel and be intuitive to the future purchasing decisions of your customers –  as well as investing time and energy in a unique proposition that adds genuine value and therefore provides longevity through beyond the market cycle…’’

Top 6 macro-economic considerations for gratifying and enacting MGA purchasing decisions – Less trust: in banks, FS and insurance – Increasing regulatory change: advice importance/ transparency – Innovations in IT – cloud and mobile technology – How do your channels inter-relate and which take priority – Rare to be price setter, often following the market – Slim margins outside of risk exposed premiums

Top questions to ask yourself when setting up an MGAs – Are you sticking with the business plan? – Do you have due diligence, do you know who you are getting involved with and in what way? – Is communication clear? Shout if there is a failure of disclosure from the underwriter or in the instance of unheard disclosure – Do you have the appropriate referral channels? – Access to decision makers? – Is bordereaux received and paid on time? – Is the market moving around you and are you responding?

 

John Holm, Commercial Director at Capita Insurance Services

Neil Hodges then introduced John Holm Commercial Director at Capita Insurance Services as having 30 years experience – but within banking, in particular analysing risk. John then took the floor to present on ‘Market opportunity is a starting point however finding the team, raising capital and seeking outsourcing partners all need to be addressed’.

John’s presentation promoted Capita’s investment in MGAs, he started by emphasising evidence of the quality and sustainability of the underwriting, involving a risk analysis of any MGA business plan and underwriting results from previous years. The most favoured types of MGAs for investment are niche businesses with a profitable track record. John referred to the value of ‘skin in the game’ i.e. financial investment from the MGA management/owners, in particular cash, those that are asset rich and cash poor would need some kind of guarantee. Capita, John highlighted, are investors that would only request a negotiable minority share.

Financing growth is usually via a loan or acquisition and Capita are an alternative. Also if a bank pays half, for example, and Capita is an option for assist with the other half.

John concluded that as with all good businesses the key differentiator from his experience is the people. The quality of the people who run the business as there will always be threats and opportunities and good people know how to deal with threats and take advantage of those opportunities.

 

Mike Walton, Case Study – setting up an MGA

Neil Hodges then introduced the final speaker Mike Walton referring to his senior roles at Nexus, Novae and PRI Group. Mike then commenced his presentation, ‘A Case study – a current MGA project – the key drivers and challenges’. Mike started stating he is currently evaluating a new start up opportunity. Mike shared his view that MGAs were easy to set up and became profitable as they are attractive to disenfranchised corporate underwriters. He mused about MGA’s increased popularity and the regulators attempts to create more resistant regulatory structures to better manage the market.

Simple components –  what is needed in order to set up an MGA; – Regulatory environment – insurance capacity – An underwriter – A distribution platform – Brokers to promote the product – Initial capital – TPA (Trading Partner Agreements)

Mike shared his key challenges and the many questions he asked himself. Questions such as; ‘I want to do it now and cheaply – do I outsource or keep in house?’, ‘How to put in little money for the greatest return?’, ‘Whether to use a carrier or sell direct?’, ‘Whether to set up one’s own carrier or sell into insurers and brokers that want it?. Mike acknowledged that the whole process will be based on value creation, but ultimately the bottom line – underwriting profit; a talented underwriter who gets the right price and creates profit.

Mike Walton’s regulatory requirement cost as a percentage of income

Regulatory CapitalMike shared his experience that regulatory capital is ‘not going to break the bank’ and gave this quick breakdown of regulatory requirement cost as a percentage of income.

Mike said regulators are not interested in regulatory capital but cash flow forecasts, as proof you can satisfy the business liabilities as and when they are due. Another challenge is that the overrider can’t really exceed costs, it needs to equate to costs. Also that owners shouldn’t make a profit on business written irrespective of profit commissions, otherwise the loss is felt by the underwriter and insurers are becoming ‘wise to this’. According to Mike, MGA owners should expect the business to break even for approximately two years.

 

 

Working capital costs six months prior to trading as an MGA

Working capital

 

Mike’s top 3 cash flow forecast insights

• Premium income never arrives as quickly as the plan indicates

• Deficit will exceed £500,000 before business revenue flows steady

• Reasonable to assume that working capital requirements will equate to 6 months of annualised cost base

Financing your MGA

BROKERS – Brokers within your specialism will  contribute funds – loans to fund the start up of the business – to secure you as capacity for their products.

SPECIALIST OUTSOURCERS – Outsourcers provide intelligent money, they see and know deals. They are good long term partners, if the deal is right they will also be focused on exit. Some will fund the working capital up front, so it can be a cheap opportunity to start making money but you don’t really want to give them more than 20% and they must deliver.

INSURERS – Insurers will give you an advanced overrider, however he emphasised the seriousness of this transaction saying that he knows of insurers that have lent money to MGAs and they have never underwritten a pound of business, it is not free money and can impact your career!

BANKS – Banks not looking to lend money now; whereas three or five years ago they would. Last year, for example, they would not invest in a binder business which had large books of guaranteed business and guaranteed commissions, they will no longer ‘touch’ future streams. If they do it is requires personal guarantees = unnecessary pressure?

INTER-MANAGEMENT LOANS – People lending one another money within the management team can result in uneven traction when it comes to business decision making. Means tested is one option. Those who don’t want to invest means tested are likely to have the most money!

Mike covered his experience of Lloyd’s vs. the FSA regulatory frameworks (see Regulatory Framework slide).  Mike shared his insights saying Lloyd’s comprehensive questioning around why you will win the business is reassuring, they are reputable and to be Lloyd’s approved you must detail a niche product, service proposition or strength of personal relationship that will move a portfolio from one insurer to another without reducing profit. Benefits such as security and licences prove attractive and they are dogmatic in expecting an IT strategy and platform and disaster recovery.

The FSA is an easier environment as they don’t have Lloyd’s additional responsibility to protect the franchise – they will just look at the business plan.

For the full event presentation, click here to download from Sabrefish’s resources

 

In a troubled global economy, how are brokers and underwriters responding to the threats and opportunities in 2012?

On 22nd May 2012 senior executives from the likes of Novae, Axis, Chartis, Hiscox, Markel, Mitsui, Torus, Liberty, Marsh, Cooper Gay, and Allied World Insurance attended an Executive Briefing on the theme of ‘In a troubled global economy, how are brokers and underwriters responding to the threats and opportunities in 2012?’.

Feedback from attendees was very positive so I thought I’d summarise a few of the key points here.  If you want to read more about RiskWrite, Salmon’s multi channel insurance software here.

Peter Montanaro, Head of Delegated Authorities at Lloyd’s addressed the question of  ”The number of MGAs has grown rapidly in the last two years – is this the quickest route to leveraging global opportunities?”

Peter started by saying ‘No they haven’t and yes, so thank you very much’, proceeding to mock leave the podium. Luckily for us he was joking, and returned to go on ‘I don’t know maybe the number of MGAs have grown, but in Lloyd’s our numbers have stayed stable.’  Peter was challenging the common perception of rapid growth of MGAs and coverholders and shared the losses they’ve experienced as well as the growth; “Since 2007 the total number of coverholders has gone up by 275, but only by 31 in the last 2 years”. He acknowledged the growth and market presence of the ‘coverholder model’ but emphasised Lloyd’s growth rate is steady, with losses.

Peter then gave examples of what Lloyd’s reps thought when asked  whether coverholders are ‘the quickest route to leveraging global opportunities’ in their territories. The Italian rep said MGAs represent the best gateway to the market through technology, good market access and efficiency. By contrast, the German rep, thought it may be the quickest route but questioned the sustainability, profit long term and quality.

“I think at the moment automation is still a choice for each stakeholder but it will become a necessity’’

Peter recounted a scenario when an Hawaiian coverholder had been approved by Lloyd’s and told him they were going to have a party, a bemused Peter remarked on their excitability only to discover they had been ‘waiting’ a year and a half to be approved. The Lloyd’s Performance Management Directorate (PMD) is committed to the market as Lloyd’s turn approvals round in five weeks as long as they’ve received the necessary documents – it turned out the application had been sat with the broker all that time. Peter emphasised their punctuality and flexibility on a case by case basis; welcoming feedback on the compliance questions Lloyd’s ask on MGA/coverholder applications.

The role of technology as a competitive tool emerged as Peter emphasised the need for automation; how it is still a choice in the current market but soon 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.

 

Simon Wilson, Director of International Development at Markel tackled ‘Distribution strategy for specialty insurers”

Simon marvelled at the unique nature of London market geography compared to its international counterparts. When working for Lloyd’s Asia he recalled his surprise when during a business trip he not only had to walk what he thought would be a ‘a couple of blocks’ to visit the Canadian coverholder; but travel 45 minutes. BY CAR.

Simon mapped the levels of risk complexity and premium size associated with different parts of the Insurance market (left hand slide). Simon noted that mass market retailers (low size and low complexity risks), motor, home owner and personal lines for example, are attempting to move into ever more complex lines.

He positions ‘classic London market play’ as high complexity and high size risks that are coming under pressure from two new groups – regional wholesale markets and specialist SME suppliers. Not only is the ‘classic London play’ coming under pressure from different types of insurance companies but international ‘regional hubs’ too are posing a threat, as they are underwriting more and more of the  large, complex risks in Singapore, Miami and Zurich.

Simon perceives segregating parts of your business into these four categories may, operationally, be more fruitful.  If you try to sell wholesale products through an international network of offices, for example, you may meet unnecessary internal discrepancies.

Simon emphasised this competitive landscape as ‘never still’ and questioned the avoidance of silos, where they are beneficial; however it seemed the stand out trend was a desire to increase the complexity of risks underwritten therefore increasing the mark up per policy.

 

 

Simon shared his experience of financing small MGAs and coverholders with niche propositions, particular products to particular markets, and that their fixed cost base is usually a minimum of two million dollars.  When operating these global entity MGAs and coverholders in a different territory he suggested that they need to write to a 35% loss ratio just to break even.

Simon drew similarities between supermarket retailers and underwriters in making a profit; considering overheads and getting the most out of suppliers.

For me, these were the key points from the event:

  • MGAs are the quickest route to market if effective systems and processes are in place
  • Speed should not be the only focus for coverholders; quality and sustainability should also be considered
  • The BRICS countries present huge growth and penetration opportunities in life, car and home insurance
  • Companies that have invested in developing in house systems can be opposed to new technologies and change
  • The traditional method of spreadsheets doesn’t do it anymore; systems are needed to cope with the demands of modern regulation

A Changed World – 6 Key Issues for insurers to consider

Manifesto

The world has changed.  The second half of 2008 saw events that previously would not have entered our wildest dreams. Who would have thought that one of the UK’s largest banks would pass into state ownership? Who would have thought that one of the longest periods of uninterrupted economic growth would stop dead in its tracks?

With this in mind, employees at Salmon recently put their heads together to author a manifesto (in 6 parts)  for Directors and Managers of Insurance companies, who have a responsibility for eCommerce and eBusiness.   Part 1 is available now as a downloadable .pdf, and considers “Will your Customers Change?”

It is our belief that at least six key issues need to be considered by insurers right now.  We will explore each in full in due course so register here to get each part of the manifesto emailed to you.

Here are the issues as we see them.  What do you think?

  • Issue #1:  Will your Customers Change? Even counter-cyclical industries, like general insurance, need to carefully consider this question.  After all, any business is only as stable as its customer base.  As we shall see, answering this question is not straightforward.  There are indications that we will have to think about meeting at least three shifts in customer demand and buying behaviour.
  • Issue #2:  Flexing our Cost Base Reducing operational costs has been a major component of most organisations’ plans over the last decade but there are new challenges.  Firstly, living through an economic downturn means that we have to rethink the minimum critical size of our operations.  Secondly, economic, political and social pressures may mean that we have to revisit past strategies based on outsourcing and offshoring.  These now established recipes might not serve us too well in the coming years.
  • Issue #3:  New Channel Relationships Emerging evidence points us to the fact that customers’ buying criteria – how they make purchasing decisions – may be changing both in commercial and consumer markets.  This means that current web based distribution will have to change if it is to deliver real value for both customers and suppliers.
  • Issue #4:  How to Unlock Markets Extending the reach of offerings into new markets is a commonly cited piece of advice for organisations facing an economic downturn.  A better and more astute move is to unlock markets that traditionally minded competitors think are either unprofitable or can only be served in one time established way.  To keep ahead of the game we have to consider how technology can act as a key to redefining markets that others pass by.
  • Issue #5:  Regulation – The Tool of Change:   There is no doubt that the current downturn will produce a globally co-ordinated push for new regulatory approaches to prevent another financial crisis.  November 2008’s first meeting of the G20 – the countries that will reshape the business world – put regulation right at the top of its global action plan.  All we know now is that the regulatory demands on organisations – especially in the financial services sector – will change.  The impact could range from more disclosure regarding investments, through to increased customer education and new roles for directors.  The demand for information will increase and new co-ordination and control systems will be needed.
  • Issue #6:  Information for Tough Times:  Research tells us that organisations that survived the last real downturn – in the early 1990s – managed their businesses in a totally different way to those that failed and disappeared.  Those that succeeded were closer to their customers and used a far broader range of management information than did the failures.  These winners were better at getting and using customer and market information.  So, systems for decision making have to go way beyond traditional financially based approaches if our businesses are to survive and grow in the current environment.

There is no doubt, rather than entrenchment, this is a time for innovation in how business processes and systems really deliver value. I hope you like the manifestos.  Please feel free to share and re-use.

Novae Underwriting get revamp by Salmon

A great new announcement was made this week:

Online Underwriting for Motor Fleet line-of-business

The announcement reflects our delight helping Novae launch its Motor Fleet line-of-business on RiskWrite, extending the web-based platform implemented originally back in 2004, to cater for a range of new productsto be marketed quickly and efficiently.  (You can read the announcement we made when we first started working with Novae here and get a complete case study here).

Steve Fookes, IT Director Novae said; “The introduction of Novae’s Motor Fleet Underwriting Service is an opportunity to strengthen our market position. We needed a completely integrated IT infrastructure that could be aligned across the business which was cost effective and would support ongoing growth.”

Designed as a series of fully reusable and customisable components that allow insurance companies to quickly leverage a truly open IT architecture; RiskWrite provides Novae greater visibility of the insured, policies and claims throughout the life cycle; encompassing such activities as quotations, placement of orders, policy production, financial management, document generation, management information and regulatory requirements.

For those not in the know (I am assuming everyone isn’t an expert in online insurance underwriting, thankfully Salmon are) this is a big deal.  The web-based system we have developed ensures that paper-based inefficiencies are a thing of the past and help Novae provide a high level of customer service to its brokers (such as providing online quotes and offering “acceptance” immediately, together with instant documentation).  Motor Fleet Underwriting is a complex business, and as part of the project Salmon has interfaced with third party systems likes the Motor Insurance Database, however, Salmon was still able to ensure Novae hit the go-live deadline and enabled Novae to commence trading on schedule.

———————–

What a great end to the working week….