“ Predictions of broking ”
sector demise have failed to materialise
writers snatch more and more business from beneath their noses. That trend would continue, so the prevailing thinking of the day predicted, with the inevitable penetration of commercial lines followed by the fall of Rome and the sacking of Troy. Well, something along those lines. But the predictions have failed to materialise. This, in turn, has led to renewed confidence among brokers about their ability to withstand the direct writers’ assault. Grudging acceptance of a diminishing market share has been replaced by a fresh assertion of brokers’ independence and robustness. If we can survive the worst recession since the 1930s, so the argument goes, we can certainly survive direct writers.
A new appreciation Part of that fashion cycle turning is linked to a new appreciation of some of the advantages the broker-only insurers have over their direct counterparts. These seemed to get lost in the panic of the 1990s but are now being seen by brokers in a clearer light.
Dedicated broker-only insurers do not have to build their business models around compromise, which can only be a positive thing. Insurers distributing direct and via brokers must fudge their pricing to keep both sets of customers satisfied. This creates tensions within the business and makes product development and price changes all the more complex and protracted. It doesn’t bode well for efficiency. Broker-only insurers have a much simpler pricing structure to manage, thus can be faster and more responsive to market trends.
Good customer relationships are a vital part of any business’s strategy and broker-only insurers
have the upper hand here too. With brokers as their partners, they are able to forge strong relationships rooted in a shared imperative to serve policyholders well. Any insurer with a foot in both distribution camps has the barrier of an understandable degree of broker scepticism, while the direct writers have to build expensive brands in an attempt to overcome the gulf that exists between them and their customers.
Broker support Broker support is also a valuable asset for the broker-only insurer. By partnering with hundreds or thousands of brokers around the country, the broker-only insurer develops a network of like- minded professional allies able to provide market intelligence and other valuable feedback.
Broker partners also allow the
broker-only insurer to pilot products in a way the direct writers cannot. Discreet, closely monitored test runs with a limited number of brokers, or within a defined geographical area. The information gained from this type of pilot is of huge commercial value and allows the broker-only underwriter to refine and hone a product - or even reject one - before committing to the full market.
Enhanced retention Another factor overlooked in the nervous 1990s and early Noughties was the hard truth about retention. A good broker retains well over 90% of their business; a direct or mixed insurer will generally achieve much lower levels - possibly as far south as somewhere in the high 60%s. That’s a 20-point-plus difference opening up right there with the broker-only insurer on the right side. Business sticks to brokers, and brokers are more loyal to
insurers who are loyal to them. Do the math, as the Americans say. We touched on the recession earlier and the renewed sense of confidence among brokers having come through what is hopefully the worst of it. There is a reason for that - brokers are less exposed to the more extreme fluctuations in customer buying behaviour due to their stronger relationships and better retention rates. Put simply, a broker should fare better during economic adversity than a direct writer which means, once again, the broker-only insurer gains from its relationship with brokers while direct writers are exposed to the full force of economic storms.
Let’s be clear; broker-only insurers have not reinvented themselves over the last 20 years á la David Bowie - they haven’t needed to. What’s happened is that the panic and doom- mongering has abated, allowing brokers to make a much more balanced assessment of the strengths of their broker-only insurer partners.
The result of that assessment may come as a surprise to many. The reason brokers and broker- only insurers have survived is that the partnership model generates a range of benefits that are hard for direct writers and those who straddle the divide to replicate. The key is to understand those benefits and use them to the best possible advantage. Fashion is a fickle master, and as sure as broker-only insurers are having their moment in the sun now, the clouds will gather again at some point in the future. But fashion is not the be-all-and-end- all. Businesses survive and prosper because they fulfil a need, just like broker-only insurers and their broker partners - and the need is not going away.
NOVEMBER 2011 insurancepeople 19
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