Tony Cornell looks at the issue raised by Simon Bolam at the BIBA Conference....
In his address at the recent BIBA conference in Edinburgh, Simon Bolam queried whether the major insurers were brokerphobic. The question was raised as a result of their actions on dual pricing, abysmal service levels and imposing the burden of the extra costs of mergers on to the broking side of the industry without any compensation. It did seem a little inappropriate to raise this issue at a conference, where nearly all the brokers were sponsored by insurers who had spent nearly £500,000 in direct and indirect support of the conference. Without the support from so called brokerphobic insurers, Biba would not have a conference.
It would seem therefore that tangible support is still in abundance. So, is there any substance to Simon's remarks or is it one of those bouts of paranoia in which the broking sector indulges from time to time.
Mutual need
There can be little doubt, that insurers need brokers. Of the total general insurance premium in the UK market of £24bn, brokers control some 70%, worth £17bn. In the commercial market, brokers control some 90% of the premium income and at the moment there is no other alternative method of distribution. For insurers to take over the servicing role of brokers would require a massive switch of resources and a totally new approach to business insurance.
They just do not currently have the skills or total range of products to do this. The reasons why there was a move to brokers in the 1960s and 1970s are still there. Clients value local relationship, continuity of service, understanding of their business and requirements and innovative solutions. In the current state of the market, any major switch of distribution is not realistic except in the commodity end of small business.
In personal lines, the situation is less clear cut, with direct, retail brands and financial institutions controlling nearly half the market. Their share is growing and this will continue with the continual blurring of boundaries in financial services and the growth in the use of new technologies. In this sector insurers can provide a similar service without a broker. Remote servicing of what are commodity products is easy for large, well-organised companies with a customer focus.
In spite of all the publicity given to dual pricing for direct business, however, insurers have still made a massive investment in trying to keep the broker channel alive in the personal lines market. The total industry investment in EDI including Polaris, is probably well over £30m and the pricing strategy for motor insurance to maintain a viable broker channel over the last few years has cost the insurers billions of pounds.
Important market
In one sector there is no alternative method of distribution and in the other the insurers have been prepared to commit a great deal of money to ensure the brokers' continual survival.
There is little evidence that they are brokerphobic in these areas and indeed it would be a brave chief executive who alienates such an important market.
Insurers pay over £2bn to brokers in commission per year and this as a percentage of premium income, has grown regularly over the years as brokers leveraged their power in a fragmented insurer market. This power balance has changed following the recent consolidation and mergers, but as an industry.
The commission paid to brokers is more than insurers pay their own staff and represents nearly half of their total expenses. In 1998, the last period when insurers results were consolidated there was a total underwriting loss for UK business of over £2bn. There is little doubt that brokers are making more money from general insurance than the insurers themselves.
The shake out of employees has also been much more severe in the insurer sector with tens of thousands losing their jobs.
Insurers are trying hard to reduce costs to improve the overall value proposition to customers to prevent new entrants who undoubtedly would decide to go direct. It is unlikely that this saving will ultimately be to shareholders' benefit, the competitive nature of the UK market means that any savings will have to be passed on to the customers. As insurers' own costs are reduced, the proportion paid to brokers as commission grows as a percentage of their overall expenses. This will need to be tackled and will cause inevitable pain to brokers.
Another issue is the hardening of the market. This is inevitable. The market's premium income in 1999 was the same as in 1993 in spite of:
This underrating needed to be corrected and rates are rising and insurers are exiting markets if they see little chance of long term profitability. This benefits brokers as it increases the need for their services and their customers require access to a wider range of markets. Hardening markets are difficult for everyone but necessary. It may make brokers feel uncomfortable and create the need to acquire new skills but any hardening or withdrawals are not deliberately aimed at them. It is just a necessary correction in this stage of the underwriting cycle. Hardening of rates cannot be considered to be brokerphobic, but in fact helps brokers as they increase profitability.
The service in the industry is abysmal and a great deal of the extra costs are borne by brokers. Poor service affects brokers margins and growth. It is vital that the industry improves. I hope it is a transitory problem and will correct itself as inefficiency is not in the insurers' interests. It increases costs and causes lack of control in both the underwriting and claims areas, which destroys profitability. Brokers may feel threatened but are bound to feel the affect most as they control some 70% of the market.
Real conflict
Motor insurance and dual pricing is another major cause of broker unrest. The rationale for this has been well covered in a previous column. Here there is real conflict and brokers can rightfully feel threatened by insurers who should be their allies. However, public buying habits are changing, profitability has been disastrous and outside competition is growing. Insurers have no choice but to respond to these pressures.
Overall, apart from private motor, insurers are totally committed to the broker market. They have no other viable options. The current view of phobia is a temporary phenomenon arising out of the consolidations, the need to reduce costs and to restore profitability. This creates an anti-broker feeling as brokers are carrying the brunt of the burden of change as they deal with the customers.
Insurance is a mature industry where brokers and insurers should work together to solve its problems. It needs an adult dialogue and more communication and understanding of each other's problems.
Insurers need to respond by unequivocally stating their support for the broker market and be prepared to debate all the facts in an open and honest way. I don't believe there are hidden agendas just a huge challenge, and virtually impossible pressures by shareholders and boards, which the executive management in the insurers side have difficulty in meeting in a consolidating and unprofitable market.
