Insurance Age - Fighting to survive: "Fighting to survive"
Brokers are feeling the heat following recent moves by direct insurers and banks to gain a foothold in the small to medium-sized enterprise market, but is this as big a threat as many believe? This month's discussion looks at how brokers can hold their ground
As direct insurers and banks make even greater tracks into the small end of the small to medium-sized enterprise (SME) market, are brokers destined to retreat further into large commercial risks for their bread and butter? Or is there a way for them to fight back and retain their hold of the small SME market?
Lyn: The question states that direct insurers and banks are making even greater tracks - but is that true? I've seen no evidence that would support that view and would suggest that there have been modest gains.
Brian: We have evidence that says a broker can win between 30% to 40% of its business on this type of product, whereas the banks' take-up ratio is probably 6% to 8%, so it's still a service industry. Premiums are under £5,000 for the small side of the SME market, and there are still plenty of brokers that can deliver via systems that banks and directs cannot.
Graeme: Insurance is core to brokers - it's not core to banks. They have tried to get into insurance before by selling payment protection insurance, but look at the mess they made of that, and the government had to intervene. Brokers are more powerful now than they have been for a long time.
Martin: However, banks do have good penetration in household business. It's not impossible that at some stage they will penetrate further into the SME sector - perhaps by employing people from the industry.
Derek: Affinity groups are also a big threat to brokers. The area in which some small brokers struggle is understanding how to attract customers, and a big differentiator is when brokers invest more in marketing at an earlier stage. If they treat it as a key performance indicator, the better ones will get a return of about £15 of every pound they spend. Affinities could potentially be a threat, or an opportunity, for those brokers.
Brian: I see a bigger threat from the supermarkets.
Peter: Insurers are increasingly aligning themselves with affinity brands, and I see that as the biggest movement in distribution. This would make more sense because they will have critical mass and someone else doing the marketing for them.
Derek: The commercial challenge is the impact on the market cycle in average premiums. If a broker was able to identify a particular niche, they can ride the market cycle more effectively - they won't see the same level of peaks and troughs.
Graeme: More of our members are focusing on affinity business - it's cheaper, they make more commission and they have a much steadier renewal retention. They may choose to have a relationship with a direct insurer or a bank and move into new areas in the future.
Brian: Insurers are hard to beat but they are still going to do their business through brokers - but maybe they'll have a shareholding in that broker. Brokers are of great value to end clients but direct insurers are the ones controlling distribution along the line.
Peter: We need to look at the SME market as a whole, because that market is four million strong in the UK. Of that number, three million turnover £1m or less and a significant proportion of the market are self-employed. That type of business can be volatile in exactly the same way as personal lines was commoditised 15 years ago, there's only now beginning to be evidence of alternative distribution in this market. The balance of distribution is set to change in the SME market.
Martin: In terms of defining SME, if you're talking to the small self-employed businesses, many of them are quite happy to get their insurance on the internet. Those factors mean that if we were going to have this discussion in two years it might be different. It almost echoes discussions that people used to have about personal motor business.
Graeme: That's when commoditised products don't work and where brokers come in. The speciality of a broker is that they are client-driven, not product-driven. So while you might be developing a particular product, it might not fit well with a particular client. Brokers need to focus on the needs of clients and their relationships. They need support from insurers, and initiatives such as imarket are useful.
Peter: Where the personal lines market was 15 years ago is where the commercial lines market is today in terms of distribution - why wouldn't it follow the personal lines model?
Brian: Brokers still have control and I don't believe insurers and banks are making a dent yet - maybe in 15 years' time, but certainly not now.
Theo: We have several brokers, large and small, using the Acturis system - what I've seen is that the definition of SME is £5,000. However, a number of them are increasing their threshold to £7,500 and £10,000. The most successful businesses are brokers that segment their business properly, so they have a clear definition of what SME business is. Also, the cost of direct distribution in this market is massive. Policies can cost as much as the premiums they write in distribution because of the cost of internet marketing, which is increasing.
Martin: Rather than talking about personal versus commercial, it should be volume business versus non-volume business. I can see how the personal touch would work in some areas of the SME market, but there are plenty of other areas where the type of approach that Swinton has taken is the one that people want - rapid transactions and the lowest cost possible. They are brokers, they are just not traditional brokers.
Theo: Why hasn't a commercial SME direct been created as quickly as the personal lines direct? One of the reasons is the sheer variation between different insurers in price on a panel - you don't find that in the personal lines and household business. The variation in that is perhaps 10%; in the SME market, it can be 100%. There is real value in providing a panel-based service, and that has been eroded in some areas.
Lyn: I've got a real problem with the term SME. I see it as a market with different types of 'commercial customers'. Commercial customers don't fit patterns very easily because that's not the way they are.
Peter: In the personal lines model, ordinary customers feel they have the expertise to buy on the internet. Would a high-net-worth individual believe the same thing? It's highly unlikely because they perceive their needs to be more complex. The maximum penetration for a bank is 2%, so that tells you that their model is not entirely right - they will only be a threat if they change their operating model. There are no direct brands marketed in the SME sector. They can only go into that market if they create a commercial direct brand.
Theo: Branding is a very important issue. The costs of a commercial package is averaging £300 to £400. There are only three million subjects to market to, whereas there's a tenfold increase in terms of numbers in personal lines but the marketing spend might well be the same. The acquisition costs in the internet marketing sector are massive.
Graeme: That's why insurers, such as AIG, only do intermediated business. How many clients would understand business interruption insurance for their small business when buying on the internet? If a customer doesn't understand their cover, we know what insurers do - that's when brokers fight their clients' corner in a claim. In particular, we see all sorts of problems with insurers trying to battle claims in a soft market, and brokers have fantastic value at this point in time.
Martin: Does the average SME understand those benefits? They are not strongly advertised by the industry. There is also a generation growing up who are quite happy as 'remote transactors' - they don't want a lot to do with their bank or insurance broker - they just want it done quickly and cheaply. Brokers are going to have to market a bit more to make it clear to the public that there are real benefits in intermediaries.
Lyn: I've always believed that you should understand customers first and then drive the solution. Entrepreneurs don't understand insurance and don't want to know. It's a business and you don't take risks with business - you get a proper accountant and solicitor - you use people. I don't believe that entrepreneurs are suddenly going to realise that they understand this world and change.
Peter: One of the needs of an SME is access because they work 18 to 20 hours a day, and if there's one thing that an intermediary can do, it is to improve its hours of availability to customers. These people do not work typical hours, yet our industry traditionally services them on a nine-to-five basis.
Theo: Intermediaries should also be designing the process in a way that enables customers to be responsive. Customers can give an answer to a couple of questions and they are provided with nine to 10 quotes within a minute. That's a proposition that's going to be very hard to beat.
Peter: If you accept the average premiums are £1,000 and a broker is taking £175 in commission, they have to service that business for that amount. Unless you have an automated platform or interactive panel basis, brokers can't make money. Many are utilising technology - and those are the ones that will survive. They will have to spend more than they earn in the first place.
Derek: There is a good future for smaller brokers. Brokers that can compete against the major consolidators will have looked at where their cost base is and realised that maybe two-thirds of their account doesn't make any profit, then applied that across all of their models. One of the big challenges for smaller brokers is doing that same segmentation themselves, and then creating something that is unique about their proposition.
Martin: There are many challenges coming up. The value of brokers is clear to the people around this table but customers may not realise their worth. For the level of premiums we're talking about, having the time to do that, the cost base is going to be incredibly lean. This implies high volumes, and not everybody can have very high volumes by definition. The inevitable outcome is in investment in technology.
Lyn: Smart brokers are using systems like Acturis to help them solve their cost flow, and I've seen a discrepancy between some brokers that remain traditional and are successful at holding on to community brokers.
Theo: One of our most successful brokers that has segmented its SME area has an income per hit of more than £110,000. It now has opportunities to consolidate in the SME space via brokers and increase its income per hit further. We'll see an SME consolidation through people using technology better, redesigning their processes and getting good deals.
Brian: If brokers do not adhere to getting on board with IT, they're not going to survive in this market and they will have to move up the ladder into bigger ticket premium where clients need unique service.
Martin: If you have a value chain that is handled by different people and different companies, then it won't integrate well. If you have overlaps or duplication of costs, then that's an invitation for somebody to come in to cut out the duplication - such as what Direct Line did. Our market needs to work together to remove a lot of the overlap costs, then clients will notice and they won't be willing to pay for the frictional costs that are involved in transactions in the intermediated market.
Peter: We have not mentioned claims once in this discussion. To survive and prosper as a high-street broker, intermediaries need to take back the handling and notification of claims from customers. At the end of the day, that's what clients are expecting and what they really value.
Graeme: Our members are constantly approached by companies that want them to outsource their claims, but our general insurance brokers committee has refused to approve a scheme for that. One of the selling points for brokers is that when there is a claim, they can support their clients.
Lyn: The moment of truth is ensuring that your client has the right cover - and my experience suggests that the more distant you are from your relationship, the more difficult it is to keep pace with change.
Peter: The platforms required to support distribution have really only emerged in the past two to three years. The solutions that are required to turn this into a commodity are in place now - they weren't 10 years ago. You can't change distribution until those solutions are ready to be used.
Theo: Standards through imarket have emerged, and now the ethos for all insurers is to design their product according to these standards.
Martin: If you're going to help a customer with claims, you have to have the information to do that - claims can be one of the most frustrating parts of contact with an insurer. When the client wants to know if a loss adjuster has been appointed, or a cheque is ready - that should be available on a system very easily. However, as yet, the industry hasn't really automated that in the same way that it has focused on the sales and servicing aspects.
Derek: At the end of the day, brokers need to change their model accordingly. The reality is that three years ago people wouldn't buy commercial insurance over the internet. That moved from searching for something to transacting online. It is already happening at the lower end of the SME sector. The challenge would be if you were able to re-engineer the question set - could that not be something that employees could use that's feasible in the future? Brokers can still change their models to respond to that.
Graeme Trudgill, Manager, technical services, Biba
Derek Findlayson, UK business development manager, Groupama
Martin McLachlan, managing director, Polaris UK
Theo Duchen, Co-chief executive officer, Acturis
Lyn Carslake, Deputy chief executive, Arista
Peter Brown, Commercial director, BDML Connect
Brian Russell, Chf executive officer, Anglo Pacific Consultants.
