Endangered species

First published in ITIJ 111, April 2010

As the world goes online, is there still a role for the traditional insurance broker? Roger St. Pierre hunts down the answers

Future prospects for brokers and other intermediaries in the personal sector lines of insurance, such as travel, seem decidedly cloudy. With increasingly tough regulatory regimes now in force around the world, brokers are coming under unprecedented pressure. Will their business models need to change dramatically in the race for survival? Which groups of consumer will retain an affinity with the kind of one-to-one service that a good broker provides? As online sales burgeon, will high street brokers become extinct?

A dying breed

According to a Research & Markets report: “Use of telephones and now the Internet has increased dramatically within the broker channel as brokers improve their accessibility and intermediaries adopt a quasi-direct model to stem the outflow of business to the direct and brand-assurance channels.” Face-to-face contact has fallen dramatically but there is still a value in interactive personalised advice from a real live human. Many people still prefer to hear a real voice at the end of the phone – hopefully someone who can help them make a considered choice.

Instead of trawling dazedly through an aggregator’s website, why not let an expert do the research for you? The most successful insurance brokers are those who have managed to portray themselves as direct players able to offer a wider range of products tailored to a range of risks. Adds the report: “We predict that the key qualitative factors exerting an influence on the future prospects of the broker channel will include the rate of broker consolidation, shifts in product mix, consumer demand, the impact of ever more sophisticated new technology, and niche specialisation.”

The incredible impact of technology has revolutionised the way in which a travel insurance broker does his or her job. The once stable work cycle – find client, collect commission, ensure client is happy, work to net referrals – is in flux. An empowered customer base has forced brokers to become ever more proactive.

Says Noel Pettersen, chief executive of the National Insurance Brokers of Australia: “I’m increasingly asked if the Internet has impacted on insurance-buying. When it comes to commercial cover, I really don’t think it has, but it’s a whole different story when it comes to personal lines, such as travel insurance, where there’s no question that e-commerce has become an unstoppable force, and for brokers fierce competition from the likes of direct insurers, banks, other finance providers – and from other professions as well – will always be hovering somewhere in the increasingly competitive mix.”

Is it time, then, to consider taking an early bath and looking for a new career?

Face-to-face contact has fallen dramatically but there is still a value in interactive personalised advice from a real live human

The rush for the door is gathering globally. Comments analyst Jason Fereday, from Australia’s Macquarie Bank said: “The changing landscape, combined with the industry’s new demographics, means that the principals of many insurance brokerages are deciding that now may be a good time to exit the industry and retire. There’s evidence to suggest that increasing numbers of principals are developing succession plans and are actively planning for life after insurance broking.” He continued: “Those principals who do develop strategic succession plans have a better chance of getting their original money out and are more likely to be compensated for so-called ‘sweat equity’ – the years of blood, sweat and tears that they have invested into setting up, and then developing, their business.”

Those that remain in the industry are surviving by either becoming increasingly specialist in what they do, and therefore being able to offer the levels of tailored advice and service that no inanimate website could ever provide, or they are becoming acquisitive and are absorbing other brokerages to give themselves the economies of scale provided by a bigger client register. Says Fereday: “While they [brokers] battled through and survived the introduction of the Financial Services Reform Act, they have discovered to their dismay that there are very real costs associated with ongoing compliance. In the short term, we estimate this added cost of compliance to be around 10 per cent of business costs, which obviously impacts directly on profit levels.” He added: “These costs are focused around such issues as wage efficiency, with current staff having to take time off from more profitable activities in order to meet the increased compliance and training requirements. Assuming they are comfortable with the register concerned, the benefits of an acquisition can include improved profit levels through a larger customer base, decreased over-reliance on existing key clients, improved economies of scale off current fixed-cost structures and improved utilisation of existing staff where the new register introduces good new clients who have diverse coverage requirements.” He continued: “The right acquisition could also bring into the business new, high-quality staff who could well form the basis for a succession plan in the future. With the insurance broking party winding down for now, how principals handle the end of the celebrations may determine whether they wake up with a slightly sore head or with a fresh bright outlook on the new day.”

Elsewhere, NIBA’s Noel Pettersen commented: “We live in a rapidly changing world. The new consumer is considerably better educated and more confident, demanding anytime/anywhere attention from those with whom he or she does business.

Consumers of the future will expect more service and benefits as part of the deal and that’s where the personal attention that a good broker provides will be appealing, especially for those who do not have either the time or the will to trawl through the fine print of cover levels and policy conditions for themselves.” There is a proviso, though: “That said,” he continued, “it will have to be done through e-commerce. There’s a whole new generation emerging that will depend almost entirely on electronic and telephonic mediums to transact in the future for things like travel insurance. They’re in the schools and universities now, and they’re the smart buyers of tomorrow.” It is vital, therefore, that insurers come up with innovative ways to approach the new generation of insurance buyers. “While the economic and social importance of insurance is understood in most modern economies, it is essential for our industry to engage the attention of every generation. To reach them we need to work harder to create the desire and need for our products – and brokers, by being more pro-active, have a big role to play in this,” added Pettersen.

A helping hand

Given the increased competition, convergence, and change taking place across the entire financial services sector, some doomsayers may be questioning whether brokers will even have a role in the future. To this Pettersen responded: “The answer to the question ‘insurance brokers, who needs them?’ is as simple as this: we live in a busy and uncertain world where there will be an ever-greater need for specialist help and advice. If brokers are merely acting as salespeople then, yes, our industry is on shaky ground. But, if brokers see what they do as providing a comprehensive and credible client-driven advice service and not simply as providing a one-size-fits-all product for a price, then their future is very positive.

The most successful insurance brokers are those who have managed to portray themselves as direct players

“While most people in the mass market will undoubtedly be happy to buy online off-the-peg insurance products, there will always be those individuals and businesses who want a personal bespoke service. They realise they are not insurance experts and, in any event, they are too busy to trawl the Internet and make their own arrangements. They respect the value of professional advice and they want someone to be on their side if it comes to making a claim.”

The emergence of comparison site aggregators has been a worldwide phenomenon. In India, Policybazaar is the dominant force. Says a spokesman: “We are specialised in making comparative analysis of insurance products from across the industry, based on price, quality and key benefits. Travel insurance is an important line for us. We empower our customers with accurate comparative information on insurance products, combined with high-quality solution-driven customer service.”

The future is online

According to Econsultancy, organisers of the recent The Future of Digital Marketing Conference, held in London: “Digital channels are increasingly crucial for all advertising and other communications with customers. In fact, the word digital is becoming rather superfluous.” It continued: “Within a few years, one or two genuinely new technologies will burst on the scene but most of the innovations in marketing, be it for travel insurance or toys, holidays or buying a car, will simply be new applications of already available technologies. The future is unknowable but in many ways it is already here!”

However, according to Canadian-based eMarketer, a recent survey found that 40 per cent of small businesses still do not have their own website, but things are changing fast. A new Vistaprint study reveals that businesses like insurance brokers are turning increasingly to online and search advertising, with email marketing now their top tactic. Trynka Shineman, chief marketing officer for Vistaprint North America, commented: “Not only are online options like email marketing, local search and unique websites cost efficient, especially in a recession, the Internet is where potential small business customers are moving:”

Like the big tour operators, major insurance companies have been investing heavily in the kind of direct marketing that sweeps brokers’ feet from under them. Germany’s Europäische Reiserversicherung AG had been selling travel insurance for 80 years and is the clear market leader in its territory. “One of our clear strategic priorities has been to attain innovation in leadership in e-commerce,” says a spokesperson, adding: “That’s why we chose the highly sophisticated zen Platform for all our e-commerce activities, and not just the selling of insurance policies. Ease of use for the client has been key.”

It’s all about the money

Hayley Parsons, who was instrumental in setting up the pioneering confused.com aggregator and who now heads up GoCompare as managing director, has some interesting views: “Too many aggregators don’t really understand or care about the insurance industry or its customers. They are just out to make money,” Haley told the Insiders View website, adding: “I am an ex-broker myself and I think the best of them will prosper. Aggregators actually help brokers with distribution and I certainly believe the super brokers will continue to grow and compete with the direct writers.”

Adds London-based insurance industry guru Andrew Akerman: “Through aggregators, an insurance sector has been created that actually rewards consumers for being disloyal, in the sense that the best way for a consumer to get the cheapest price is to keep shopping around each year. So the goal of the consumer – and that’s cost minimisation – is fatally misaligned with that of the insurer, who is seeking profit maximisation.” He believes that such a difference in interest is not helping the sector: “Aggregators are thriving on this misalignment and will continue to do so until the industry wakes up and changes its processes. It’s odd, but where many members of the public used to view brokers as being after selling them the policy that would earn them the most commission, they now view the aggregator as their champion, whose role in life is to go out and get them the lowest price.” It seems that these days, perception is all!

An empowered customer base has forced brokers to become ever more pro-active

Akerman continued: “It’s all getting very complex and you could argue that there’s now a need for an aggregator of aggregators! We are now seeing an increase in players and in confusion, along with diminishing returns.” He has forecast a sea change to the industry – someone must go. “There are probably too many people in the insurance bed right now: the consumer, the aggregator, the intermediary brand and the underwriter. Either the aggregator or the intermediary needs to fall out as part of the evolutionary process. The question is: who will prove to be the fittest, who will survive?”

Akerman, though, is ‘convinced’ that there will continue to be a place in the market for a good broker. “There are some interesting models out there, with brokers, in the form of Budget and Outright, serving as super call centres. This may be a way for the larger brokers to survive – through large capacity, excellent cost control and trimmed margins.” For smaller brokers, meanwhile, ‘it simply has to be about service and customer care. It’s superb, totally reliable service that’s the reason brokers survive in markets like the USA’.

Look at all those TV adverts. They all try to sell insurance on price and price alone. It’s surely in the role of making sure their clients get the best coverage for their money that insurance brokers can continue to justify their existence. It should, after all, be about a decent, suitable product, and real value for money rather than just the ticket tag.