Personal lines can be a nice little earner

For personal lines motor business the given wisdom has been that direct insurers have won the distribution battle. Keynote’s published statistics on the split of personal motor distribution indicate that the direct writers’ share grew from 39% to 44% between 2002 and 2006, and is predicted to grow further to 48% by 2011. Conversely, the share of independent intermediaries fell from 42% to 35% between 2002 and 2006 and is forecast to fall further to 29% by 2011, painting a bleak picture for the broker channel.

But is this correct? As an observer of the industry, I for one do not think so.

A quick review of the most recent published financial statements of the major personal lines brokers shows a very different picture. In fact, it leaves the impression that times have never been so good with increasing turnover and ever increasing profits and profit margins. So what is the discrepancy and how can this be, if the broker channel is reportedly being so severely squeezed?

The answer lies not in what you can find from a set of broker accounts, but surprisingly in the recent half-year results announcement from Admiral. Approximately two thirds of Admiral’s new business is now written via the internet and it is rapidly growing both its motor policy count and its overall profitability. What is also apparent is that most of this profitability is coming not from underwriting motor business but from the sale of ancillary products. This is only possible if there is direct contact with the end customer.

Ancillary sales include income streams from the sale of legal expense cover, vehicle breakdown, premium financing and the cross-sale of other personal lines products such as household and travel. In addition, if claims are also controlled then further ancillary income can be generated from referral fees from credit hire companies and from personal injury lawyers.

It is by mimicking the larger branded direct insurers like Admiral that the large personal lines brokers are able to thrive. This is because the art of today’s motor insurance distribution game is the application of cross-subsidies.

“By pricing motor business aggressively the broker is able to pull in more volume which then allows it to cross-sell a full range of ancillary products.

Ian Clark

The key to winning large volumes of internet based business is the price competitiveness of the core motor product. With price comparison sites becoming ever more important to internet distribution, the two factors needed to be successful are a competitively priced product and a strong brand.

Historically, the large personal lines brokers have had the latter but not the former. This has however recently changed as a result of what is largely now a “net rated” product market with the result that the big branded brokers can now offer both a competitively priced product and a strong brand.

So how does this work? The broker takes the technical price offered by its insurance partners and places it on a price comparison site with little or no uplift, or in some cases even a discount, to the technical net rate offered. By pricing motor business aggressively the broker is able to pull in more volume which then allows it to cross-sell a full range of ancillary products through its client touch point, and to take referral income through its control of the claims cycle.

Margins on ancillary products are greater than those historically earned from broker commissions, and this coupled with the additional volume generates increased profits for the major personal lines brokers.

The AAs, Swintons, BGLs and Kwik-Fits of this world are all sitting pretty in the new world of price comparison sites.

Ian Clark is an insurance partner at Deloitte.