Best of Brokers: Siren call of e-sales

Traditionally, commercial insurance is dominated by brokers, from SME through to high-end niche markets. The face-to-face relationship based on the long-term association between a client and a broker remains the preferred way to buy insurance cover when it comes to the often bespoke requirements of business clients.

But the much-touted loyalty of business clients to their brokers and insurers is diminishing as the impact of the credit crunch continues to be felt and cost pressures mount. Technology, which has already revolutionised personal lines, is helping to drive change.

The insurance industry remains doggedly tied to the consensus that the aggregator model – the price-driven beast that has transformed how we buy our car and home insurance – is not suitable for the vast majority of commercial insurance. This consensus appears to be borne out by the fact that the online revolution in commercial insurance has so far been restricted to very small businesses with straightforward cover requirements.

Buying online

But a recent report showed around one-third of SMEs would buy their cover online if the option was available to them. And despite the internet’s obvious shortcomings in dealing with more complex commercial cover, the pervasive nature of the web is increasingly extending to commercial lines. More than two-thirds of the top 20 financial price comparison websites now provide access to business insurance, either as introducers to online providers or by providing quotations through a limited panel of insurers.

These systems are not as sophisticated as those used in personal lines, but products for the SME market and tradesman, office, shop products and other smaller premium products are all available online. In fact, an increasing number of insurers are only offering this kind of cover through the internet, because it is the only way to make a profit from it.

It is against this backdrop that many small brokers see the online revolution in insurance as a threat. Recent research shows that companies that use the internet don’t tend to have the same loyalty to an insurer or broker because of the price-driven nature of the service.

All this adds up to the worrying conclusion that the role of brokers in this sector, traditionally valued by business clients for the additional services they provide, could easily become surplus to requirements as the combined effect of the economic crisis and ease of technology take precedence over long-standing relationships.

“Yes, there has been an increase of e-trading in SME,” says QBE’s portfolio manager for small business insurance, Nick Dinsdale. “But there is a threshold in complexity below which e-trading works quite well, but above which you need advice from an insurer or broker to make sure your business is properly insured.”

It is worth pointing out that none of the large aggregators appear overly keen to shake up commercial lines in the way they have personal cover. In addition to the complexity of much commercial and SME business, their reluctance could also stem from the fact that unlike, say, private motor insurance, where there’s something in the region of 30 million cars to insure, there are only around five million SMEs in need of cover.

Speaking recently, chief executive and founder of Gocompare, Hayley Parsons, said: “I don’t think commercial insurance is something that aggregators can do a lot on. It will get there, but it’s a long way off. The difficult thing with commercial is attracting the customer and driving the traffic.”

Brokers still valued

Bearing in mind the collapse of the ill-fated commercial aggregator Coverzones, it is worth asking whether there is any real demand for an online insurance service for SMEs?

“Many more people are looking at the aggregator model for SME,” says insurance broking leader with PricewaterhouseCoopers, Roy Clark. “But a lot of entrepreneurs still like and want advice from a broker to ensure they have appropriate coverage. There’s more hurdles to online in the SME sector than in personal lines. I’ve no doubt it will take more share, but I’m not sure that SME will be transformed in the short term in the same way as personal lines.”

There is also an important distinction between the type of online offering in personal lines and that which has so far been made available for SMEs.

“The aggregator model that works in personal lines hasn’t really appeared in the commercial arena,” Groupama commercial lines director Malcolm Smith says. “Aggregators are driving some commercial volume, but they are working with brokers by switching customers to brokers’ sites. They’re not operating a comparison site for commercial insurance. It’s a totally different model to the personal lines aggregator. Will it go down the same route as personal lines? I don’t think so. Business customers tend to want advice and that doesn’t lend itself to the aggregator model.”

Moreover, it is worth pointing out that insurers have long complained about instances of fraud, or, more accurately perhaps, customers being economical with the truth when keying in their details for online policies. The situation is likely to be worse when it comes to commercial transactions, causing a further deterioration in the quality of insurers’ books just as it has in many personal lines.

Tony Gibbs, sales director with Macbeth Insurance Brokers, a small firm in the South East, tells the story of a roofing contractor he quoted for a liability policy who said he found cover for a quarter of the price on the internet by describing himself as a building contractor rather than a roofer.

To that end, brokers on aggregators need to take extra measures to ensure the quality of the business going on to the insurers’ books, and check clients’ backgrounds to ensure they are getting cover that is appropriate to their needs.

Yet, despite the complexities involved, many believe that the aggregator model, far from being a threat, actually offers ambitious brokers unlimited opportunities to secure new business.

Stephen Young, commercial director with Transactor, one of the top five insurance software houses, disagrees that commercial insurance is too complex for aggregators. “Three years ago, everyone said we’d never see non-standard vehicle insurance online; the same for

non-standard household insurance. But both are now available online. The question sets are getting more sophisticated and so is the software, so the idea that commercial insurance is too complex to be sold online is completely wrong.”

Young believes the aggregator model offers small brokers in particular a chance to “punch above their weight” when competing for business with larger rivals.

“Some small brokers fear the aggregator model but for many it offers great opportunities,” he says. “Money currently being spent on marketing by smaller brokers would be better spent by getting on to aggregators because aggregators offer a relatively inexpensive way into the market. It might cost you £50 to sell a policy through an aggregator, but what does it cost if you don’t sell a policy? If you’re a small broker trying to build a brand, being online puts you on a more level basis with established companies.”

But not everyone is convinced. “Put simply, an aggregator quote is not an advice-based sale, it’s a price-based sale,” says Jason Cobine, who runs small London broker Cobine Carmelson. “Brokers provide advice, and we should not be competing on price with aggregators because we’re offering a service that aggregators cannot. Some claims settlements can be horrendous on aggregator services because advice has been taken out of the equation.”

But if the jury is still out on how pervasive a role aggregators can play in commercial insurance and whether they are a friend or foe to brokers, the launch in recent years of a myriad of online trading platforms such as Imarket, Acturis, BrokerDirect, Iprism and Towergate’s Powerplace offers proof that small brokers are keen to use e-trading to reduce their costs.

Handling complexity

Currently there are two ways brokers can trade electronically: insurers’ extranet sites and dedicated software houses' platforms. The vast majority of small brokers tend to transact commercial lines business on insurer extranet sites. The problem with extranet sites is they don't feed directly into broker back-office platforms, so brokers have to continually key in information to get quotes. But that, too, is starting to change as software houses develop more sophisticated models.

“Most of our work – nearly all classes – is now done electronically using Acturis, and that includes professional indemnity and D&O,” says Macbeth’s Gibbs. “Traditionally, it used to be a presentation followed by an email to the insurance company, but now we just input the information into our back-office system and it goes to a few insurers who look at it and give you a quote, sometimes straight away. The system is improving all the time in terms of the complexity of risk it can handle.”

Of course, trading platforms reduce the amount of rework between broker and insurer and the panel of products available to brokers is expanding, albeit at a slower rate than the expansion seen in personal lines. But despite the speed and cost saving, not every small broker is a convert.

Cobine says that only around 20% of his business is conducted through aggregators or online trading platforms. “There’s a limit to how many platforms you want to input details into. It’s not to say they’re not useful, but there is a limit to their use,” he says. “Big brokers can use extranet sites and other platforms because they need churn, but small brokers don’t have the same kind of churn.”

Online quotes as benchmarks

But as costs pressures continue to plague SMEs, many are logging on to the internet, getting quotes from insurers’ websites, and using them as a benchmark against what their broker is quoting.

So far, the broker is still doing the final transaction, largely because the software doesn’t exist to cater for the complexity of most SME products and most are still restricted to “quote only” rather than “quote and buy”. But as programs become more sophisticated, it seems likely that at some point in the future business clients will be pressing the buy button themselves. IT