Brokers are facing a period of unprecedented uncertainty, with threats seemingly coming from all directions. With consolidation gaining pace and insurers and IT providers moving in on brokers' traditional territory, it is more important than ever for them to adapt and face the challenging climate head on, as Phillip Walter writes
The general insurance industry is approaching a crossroads. This is especially true for the broking sector, as intermediaries occupy a particularly vulnerable place in the food chain, and are exposed to changes in climate from insurers and consolidators.
This vulnerability has never been more keenly felt than it is now. Continuing market consolidation is causing fear and expectation in equal measure. Insurers are moving into the market, and even technology providers are offering themselves for auction.
Given this pace of change, many industry leaders believe that the remaining time to establish oneself in the new general insurance market is swiftly approaching a close, with perhaps another 18 months until the end of the runway. This remaining distance of opportunity may in fact be less, depending on the liquidity of institutional finance. Stated plainly, brokers are not just in yet another cycle - the entire industry is experiencing a phase of genuine evolution.
In respect of strategic planning, many brokers and insurers have found the past two years a challenge. For insurers especially, the competitive requirement to streamline manual processes and automate commoditised product lines via 'no-touch' electronic gateways only goes so far without overdue comprehensive reform. Pressure exists to continue to further reduce administration costs, and to solidify avenues of distribution.
The availability of funding has been an obvious contributing factor to the current insurers' move towards acquiring brokers, as well as a factor in all the inter-broker consolidation. The perceived threat of sheer muscle from a couple of the new super-intermediary class of broking juggernaut has certainly served as a catalyst of sorts for insurers' highly publicised response. Notwithstanding many of these big-picture facts, the major contributing element is the realisation of the fast-approaching expiration date by which one may position a company to take advantage of the changing avenues to market.
Small to medium-sized enterprises are one such target market, and the UK is known as a 'nation of shopkeepers', with the vast majority of businesses having less than nine employees, with most, in fact, having less than four. This market segment accounts for a massive amount of premium, and although long-standing generational loyalty tying firms to individual brokers has a degree of impact, brokers need to adapt to compete with new pressures. Insurers want to use the majority of these transactions to lower administration costs. Intermediaries, therefore, run the risk of losing the bulk of this market forever without some forthright action.
The lure of easy money for insurers by going web-direct for personal lines has given birth to another free market form of broker - the aggregator. Although some aggregator sites are insurer owned, the competition has certainly made an impact on margins. Only Direct Line - and this is through sheer force of branding and television spend - has made a decision thus far to remain comparison unplugged.
The technology behind Imarket, simply an agreed process for transferring standardised risk capture information, allows insurers to build SME commercial products into an electronic tradable commodity. This presents brokers with pressure to construct marketing and business development initiatives that allow them to solidify their hold on their existing SME client base ahead of the new external pressures that will unfold during the next calendar year and beyond. Most of the product lines offered by Imarket will be trading on direct websites and even specialist SME direct website aggregators within the next 18 months.
Volatility within such a market presents some realisable and substantial opportunities, and raises some important questions for brokers. The high rate of complacency that is inherent within the industry is going to force an exit for many intermediaries, and not in the long term.
Inefficient working practices and workflow processes, cumbersome reporting features, an inability to commercialise new business opportunities into niche markets, the burden of manually complying with Financial Services Authority regulation; all are aspects of complacency to adapt to the changing market, and an unwillingness to realise that as intermediaries, brokers must provide an attractive proposition to both client and supplier.
A tangible acceleration of the ongoing changes the industry is witnessing is less than six months away, and this presents an immediate decision crossroads for all brokers. The direction offered by both avenues of choice are reasonable and achievable, although both require prudent and swift action.
The first option is that of an exit strategy. The most profitable time to retire or simply cash in by selling the business or book of business in the industry's history is now, so it's certainly a noble and fair choice. The alternate option is to take advantage of the state of flux in the market, and structure the brokerage for long-term growth.
Given the pace of industry change, the prospect of engineering the business is all too much for many brokers and is arguably the most significant reason for consolidation. Insurers want to buy into distribution control to speed up the pace of change, but it takes both a buyer and a seller to close a sale. Not to make a decision, and to continue on regardless with little meaningful modernisation and examination of business process will, in most instances, result in an erosion of market share within the next few years, and a sharp reduction in the value of the business. Even an exit strategy requires action in order to maximise the value of the business.
Mid-tier sized and large consolidating brokers that wish to solidify their customer base and achieve business growth must realise that they need to improve business communications with insurers to improve productivity and product innovation. They need to improve cross-selling of products and services across the business, develop efficient online business channels for customers, and achieve a significant reduction in costs through efficiency and back-office process improvements.
As intermediaries, brokers are under pressure to market products and services to a complex set of audiences, while fast and effective communication is a constant challenge for brokers, and one that can only be achieved with modern, efficient, and flexible systems. The sheer value of being able to transact efficiently and electronically with insurers and customers cannot in any circumstances be underestimated in today's competitive environment.
In recent months, the market has seen a growing trend among insurers to use the risk capture standards given by Imarket to transact directly with brokers that are looking for an increasing range of SME products, or desiring just a slight variation to the Imarket offering. Mid-sized brokers have an enormous short-term opportunity to achieve a significant margin increase by structuring long-term deals with specific insurers on key products that are based on automated electronic trading and they will contractually secure higher commission rates. The access to modern automation and back-office systems that allow simple customer website access and massive business efficiency gains has never been easier. In fact, implementing a modern system and re-engineering the business is simple enough, so although it is now the end of November, any mid-sized brokerage could be running a truly new system well before mid-January.
The majority of smaller brokers are members of networks, and although this gives some benefits, it should never replace taking the initiative to increase the pace of change.
However, broker networks need to offer far more than just 'buying club' benefits and simple access to certain insurer products. Although a few broker networks are beginning to realise that they could build muscle to flex with insurers, the majority of networks remain completely fractionalised.
Many broker networks claim large combined gross written premium figures, but as this is spread across numerous network members running numerous software systems and differing manual poor online business transaction processes, the network merely offers a slightly improved marketing medium to an insurer and a few extra basic products to its members. Certainly not the real punch that a prudent network manager could use to conduct some hard negotiation with insurers that would offer significantly higher commission rates to the brokers.
Networks have an obligation to mandate that all members should use the same technology, and to offer a substantially larger range of services and systems to their members, including comprehensive business-to-consumer website services for each member to brand as its own, (especially SME business and niche commercial), and also offer network services such as outsourced accounting and FSA compliance, and certainly each network should provide its own premium finance product. Smaller brokers, in particular, should use the remainder of the year to take a long, hard look at the offerings of their broker network, and in the short-term vote with their feet to move to one that offers real strength.
Larger brokers, especially those with multiple offices, should look closely at their business processes, and the time and costs associated with opening up new revenue streams and maximising the profitability of existing streams. Interestingly, in a recently published industry research paper, close to 90% of large brokers - all of which were using legacy industry software - expressed disappointment with the abilities of their system to cope with modern demands.
It has been noted that, when technology infrastructure means that it takes over one month, or over £10,000, to progress a scheme product from an idea in the boardroom to a transacting product, both within the sales office and on a consumer or wholesaling website - or if the system cannot publish real-time business intelligence reporting and real-time accounting - then that infrastructure will cause a large intermediary to be left behind over the next twelve months, negatively impacting sales and the intrinsic capital value of the business.
The general insurance industry is approaching a crossroads, and intermediaries are vulnerable to change, but are more than capable of swiftly adapting to seize opportunities. Brokers of all sizes have decisions to make. It would indeed be fair to say that senior management from each and every intermediary across the UK need to find a quiet place to sit over the coming weekend, make a cup of tea, and get stuck into some serious introspection.
- Phillip Walter is chief executive of Insurecom.
Insurecom is empowering large consolidating insurance brokers to break free from the constraints of ageing technology and meet their strategic business goals more efficiently than ever before.
Insurecom's application, Agency Plus, is built from the ground up for the specific requirements of large corporate brokers and intermediaries.
The end-to-end broker system is designed to dramatically reduce costs and deliver substantial productivity benefits throughout the entire business by automating broker workflows, Financial Services Authority compliance and audit trails; providing comprehensive customer, policy and accounts management in one place; seamlessly integrating with existing Microsoft Office/Outlook technology; and producing real-time management information on demand to support brokers in treating customers fairly.
The high performance solution quickly adapts to changing business strategies with Insurecom's Toolkit - an expanding set of liberating tools enabling brokers to move from idea to launch at lightning speed. Insurecom clients can enjoy the flexibility of being able to add online quote and buy facilities; add rating engines and allow customers, agents and introducers to access their records securely online within 28 days. Insurecom's ultimate mission is for technology to enable change., which is why Insurecom's approach is radically different from other broker system providers - a meticulous process methodology and revolutionary training solution means that changing systems is now very easy.
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