Direct insurers - Slipping through the net

Having succeeded in the personal lines sector Direct Line is now due to tackle the commercial market. Jakki May asks if brokers should be concerned

Direct Line and its little red telephone are often quoted as an example of a marketing trendsetter, leading the way in changing the nature of insurance sales. But so far the effect has largely been on personal lines sales rather than across the board. Since the advent of Direct Line, personal lines business has become increasingly commoditised and brokers have seen large chunks of their business disappear to direct sellers.

And for the past few years, there has been a feeling that while personal lines business was vulnerable to this kind of a shake-up, commercial lines would not be the same because of the complex nature of the insurance. A few have tried selling commercial insurance directly, or using banks as a distribution channel, but so far the success has not truly impacted.

However, in September Direct Line announced that it had decided to give the market a go. The question is whether a strong brand name and reputation will be enough for Direct Line to repeat its personal lines impact on the commercial market?

Bullish brokers

Brokers have remained bullish. Amanda Blanc, chief executive officer of UK broking at Towergate Partnership, believes: "More than 90% of small to medium-sized enterprises buy insurance through brokers and the trend is not changing.

"A good broker acts as a trusted adviser by providing a personal service and advice on complex matters, which could mean the difference between an SME continuing in business or not posting a loss.

"Local brokers are able to deal with all classes of insurance and pull a programme of covers together that mean the SME is not exposed to any unnecessary risk. It is difficult to see how Direct Line will be able to provide an offering to match or improve on those provided by local brokers."

Paul Maidment, London and south regional director for Allianz Insurance, echoes those feelings but also believes this latest move is nothing new. "Thirty years ago, we had a plethora of inspectors who worked for both brokers and direct, many of whom ended up as brokers themselves. But there was a flurry of activity. The difference was that these people probably gave advice, albeit under a different regulatory regime."

Another major difference between then and now is the electronic platform, which has made it much easier for those selling direct because customers can easily access a website, fill in the form and ask for a quote. But Mr Maidment says there is a huge difference between those buying a commoditised product, such as motor cover, and insuring a business. "A business will take quite a risk buying insurance without taking some sort of advice: advice is key."

He also notes that Direct Line had been expected to enter the commercial market for the past seven or eight years, adding that the intervening period will have enabled the firm to collect data and learn from its experience before launching into the sector.

Ultimately, Mr Maidment believes that there is room for both direct sellers and brokers in the commercial arena, but he talks of the direct sellers making inroads at the very bottom end of the spectrum. He believes that direct sales accounts for around 10% of the existing market - a figure that has changed little for many years - and there is some talk of that reaching 30% to 40% over a long period of time.

Unlike Ms Blanc, Mr Maidment sees the SME as a target, but he too stresses that brokers "have nothing to fear, certainly not if they are promoting advice over price".

"It will be at the very small end where businesses feel they need something straightforward and low cost," he adds.

Brokers that are carving themselves a niche are also unlikely to have much to fear from the direct sellers, according to Mr Maidment.

"It would be a brave entrepreneur who trusts his business to his own understanding of the whole risk and foregoes independent advice," he says.

Mike Williams, managing director of UKGI, a network of some 250 brokers, says when asked the question most brokers are not particularly concerned about this threat. Much of that confidence comes, he believes, from knowing their customers and understanding that the moment they are facing premiums of more than a few hundred pounds a year, the client will want advice.

But he also acknowledges that if Direct Line has "a slick, efficient, competitive range of products, it will achieve a certain market share".

Significant variants

Mr Williams also believes that no matter how much insurers try to simplify the range, commercial products are complex. "The problem is that there are so many variants. In a significant number of cases, someone goes online and finds someone prepared to give them insurance and answer all the questions. What is likely to happen next is that the computer system cannot deal with one of the variants and then the customer has to contact a call centre.

"It will happen if they want a higher sum insured, for example, or if they have a security system that the computer does not recognise."

He says that any direct operation will need a good telephone call centre to back up any web-based sales, preferably in the UK. "They will have to be slick and responsive, but even then I still think that if I am spending £400 to £600 on insurance then a broker offering a competitive quote and also taking the responsibility for giving me advice will get my business."

Mr Williams says it is also unlikely that a policyholder would simply switch to a direct seller without giving the broker a second chance to match or beat a quote - another opportunity for the broker to win back any potentially lost business.

He concludes: "I think at the bottom end, Direct Line has an opportunity to create some market share, but the selling level on that is pretty low. The banks have tried for some time to get small businesses to buy their insurance through them but without much success.

"If you look at the Datamonitor predictions from 10 years ago, it forecast that at least half the business would be online, but it has not happened."

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