Routes to the marketplace

Change; for some it’s a worry, for others an opportunity. New conditions that make one modus operandi obsolete open the door to a whole new way of doing things. In the case of insurance distribution, companies which have historically felt they controlled their distribution have seen the balance of power shift away from them and towards the distribution channels, especially the very large brokers.

This has posed two challenges for insurers: no company is comfortable with a major part of its process in the hands of another company which may not share its priorities; also, when customer value and relationship management are everything, insurers worry about losing access to customers.

Adding to these concerns about who is in the best position to build a valuable customer relationship is a further concern that the market is softening while the costs of doing business are increasing, meaning lower profits. Then, with the increasingly competitive nature of the business, the threat posed by aggregators, and the demands and costs of tighter regulation, is it any wonder that insurers are looking at alternative distribution models?

There are two elephants in the distribution room. The first is around the relationship with and ownership of customers, and the second is how people view insurance. An increasing phenomenon of recent years has been the commoditisation of insurance products. Commoditisation with its emphasis on price rather than service suits the direct-to-customer distribution model that has become a significant success in the personal lines market. It has also received perhaps too much support from the so-called consumer gurus. There is a case for educating the public to better understand the value of advice, because some direct sellers are now applying their formula to the lower end of the commercial lines market – traditional broker territory.

So, given that change is already happening in distribution, what options are available for insurers and brokers to protect their respective interests, and continue working in a harmonious manner? The answers, as you may expect these days, work on several levels, offering a range of distribution models, any or all of which may persist into the medium and long term.

Brokers have been merging for some time now and the emergence of super-brokers is well documented. However, a combination of the Data Protection Act, a regulator shared with financial services and the simple logic of economies of scale has driven the re-emergence of the composite broker / IFA merger. It is easier to share the data of another part of the same business than it is to use the data of another business and bringing insurance and financial services databases together makes sense. While the details may differ, FSA regulation of insurance and financial services adheres to the same principles of treating customers fairly and being able to demonstrate quality of service, so the systems needed to achieve this can be shared. And given that a number of IFAs are now merging with other professional practices such as solicitors and accountants, we can perhaps soon expect to see some full service professional service practices leveraging their client relationships across the whole range of client needs, including insurance.

“Commoditisation, with its emphasis on price rather than service, suits the direct-to-customer distribution model that has become a significant success in the personal lines market

Of course, this type of horizontal consolidation will, if anything, add more to the anxieties of insurers who worry about losing control of clients. But insurers are also getting in on the consolidation act. There are a number of models for insurers to claim a stake in the distribution of their products. This is nothing new, but in the past insurers have tried to get around the broker market by buying distribution in parallel areas such as estate agency – an experiment which went terribly wrong.

At the extreme end, some insurers are buying brokers outright. Stuart Shepley, partner in the Financial Services Group at Grant Thornton sees the logic in this as, “While insurers buying brokers may only be getting 30% to 50% of the business produced by their [acquired broker] they will be happy to have bought what they perceive as a more stable and accessible client base.” There is also the contribution to profits from the broker's activities with other insurers - but the regulator will need keep an eye on this trend to ensure the continued independence (in deed as well as in word) of brokers owned by insurers.

Other insurers are buying stakes in brokers ranging from controlling investments to minority stakes. They can spread their investment and, they would hope, the client relationship benefits more widely. Some are continuing to support brokers while others are establishing their own direct services in opposition to brokers. And brokers are successfully exploiting the commercial possibilities of the Web.

Refreshingly, among this plethora of new or revised distribution models, some firms are standing back and reaching the conclusion that the traditional insurer and broker relationship fits into the ‘if it isn't broken, why fix it?’ category. One company taking this view is Brit Insurance where Simon Cooter, Distribution Director of Brit UK assures brokers that, "we're not interested in buying you but we are interested in trading with you and we won't try to compete with you."

Unencumbered by any legacy business models or branch networks, Brit UK has been able to establish a local underwriting service network.

So what does the future hold? Perhaps it will be best summed up in the old phrase ‘horses for courses’. Personal lines will continue to be colonised by the direct distribution systems, using ever better designed commoditised products. In the commercial market, there may also be a level of commoditisation and direct selling at the lower end but for the majority of commercial customers the insurance products offered by their broker are only the tip of the iceberg. They value the consultancy, the discussion, the expertise on regulations and what is possible, that only a broker can offer; insurance is what will make that advice work.