5 Key Trends Shaping Broker Strategies in Commercial Insurance

Transcription

1 Commercial Transformation: 5 Key Trends Shaping Broker Strategies in Commercial Insurance 1 / 12

2 Table of Contents 3 Executive Summary 4 How and Why Market Share is Eroding in Personal Lines 5 The Broker Response: Re-Evaluate Personal; Strengthen Commercial 6 5 Key Trends Shaping the Commercial Market 11 Conclusion 12 About Policy Works Inc. 2/12

3 Executive Summary Canada s independent insurance brokers are losing market share to the direct channel at a rate of roughly 0.43% per year, according to a recent study by PwC. At that pace, the independent broker channel s market share of 64% today will drop to roughly 60% by This decline is most sharply felt in personal lines, where brokers are losing 0.81% per year in auto insurance and 1.27% per year in personal property. To counter this trend, many independent brokers are re-evaluating their personal lines portfolios and seeking growth strategies in commercial lines. This paper explores key trends that may shape the success of brokers as they build and enhance their role as business insurance consultants. 3/12

4 How and Why Market Share is Eroding in Personal Lines From virtually a standing start more than 30 years ago, direct response insurers and banks have grown to become formidable players in the Canadian personal auto and MOST OF THE DROP IN BROKER property insurance market. In the early 1980s, MARKET SHARE OVER THE PAST THREE DECADES IS ATTRIBUTABLE brokers controlled roughly 77% of the property TO THE BURGEONING DIRECT and casualty insurance market, sharing the RESPONSE CHANNEL. pie with direct/agency writers such as The Co-operators, State Farm and Allstate. Most of the drop in broker market share over the past three decades is attributable to the burgeoning direct response channel. In fact, today for personal property and auto, brokers only control 56% of market share, according to Randy Carroll, CEO of the Insurance Brokers Association of Ontario (IBAO). Brokers are slowly losing market share and their strong positions in the marketplace, Carroll noted at a recent IBAO Young Brokers Conference. Our message is that it s time to take notice. The recipe for direct response insurer growth was simple: invest heavily in direct-to-consumer automation/transaction processing, create visibility with high-profile advertising campaigns, drive costs down through low expense ratios and offer cheap insurance quotes. For many independent brokers, these are daunting challenges to confront. Economies of scale have grown exponentially in personal lines, as has the infrastructure required to handle the volume of business, says Jim McGregor, President of The Precept Group. You have to be able to make significant investments in technology systems to compete. The key in personal lines is technology and efficiency, says Andrew Cartmell, President and CEO of SGI CANADA. If the underwriting rules are consistent and the products are fairly standard, then the goal is to process transactions as quickly as possible. That clearly puts pressure on independent brokers. The general trend points to a 1% to 1.5% increase in market share for direct insurers annually. The uneven nature of direct insurer penetration is interesting for Cartmell. He notes that the most prominent market share gains for direct insurers have been in Quebec, followed closely by Ontario and, in some cases, Atlantic Canada. Consumers in Alberta and other Western Canadian provinces (public auto) have been slower to embrace the new channel, likely because auto insurance is often viewed as an entry point by direct insurers, who then typically move into personal property. Next on the radar screen for direct insurers is small commercial lines, a trend that Cartmell notes is already well underway in the Quebec marketplace. 4/12

5 COMMERCIAL LINES HAS BECOME A HIGHER STRATEGIC PRIORITY IN THE INDUSTRY Greg Purdy, Managing Partner, Pathway Partners Ltd. The Broker Response: Re-evaluate Personal; Strengthen Commercial At the 92nd Annual Convention of the IBAO in Toronto, the question was posed to five insurance company CEOs: What are you doing to help brokers fend off competition from direct insurers? George Cooke, CEO of The Dominion of Canada General Insurance Company, turned the question on its head. The question should be: What can you brokers in the room do about it? We re supposed to be partners, he said. We can t fix it for you. The bottom line is that if we don t change, if you don t change, we re dead. At least part of this change required for brokers is a re-examination of their business portfolios. While exclusive personal lines brokers are not extinct, some are concerned they may be moving rapidly to the endangered species list. Many brokerage principals have seen their volumes shrink dramatically over the past ten years as the aggressive marketing, competitive pricing, user-friendly online tools and innovative technologies of direct insurers take their toll. With no one right strategy to combat this trend, brokers have pursued different options. Some have invested in technology, staffing and aggressive remarketing to win back personal customers. Others have concentrated on commercial clients to compensate for lost personal business, often choosing to write only VIP auto or property. Yet others have sold off their entire personal lines book to focus strictly on commercial lines. McGregor s Precept Group chose the latter strategy two years ago, selling its personal business to another firm. My trading area is smack dab in the middle of the sweet spot for personal lines competition from direct insurers, he notes. Most brokers just don t have the critical mass to compete on this commoditized business. Others agree. Commercial lines has become a higher strategic priority in the industry to offset the increased commoditization being felt on the personal lines side, says Greg Purdy, a Managing Partner with Pathway Partners Ltd. Brokers are looking for ways to generate revenue as they see portions of their business being taken over by direct writers and company-owned brokerages. Building the commercial book is a generally favourable development for many brokers, as figures show their channel still controls more than 90% of this market. However, direct insurers and banks have begun to aggressively market commercial products to smaller business clients, particularly package policies. Simply applying the same old approaches to commercial insurance is not a sustainable option for brokers. They need to be aware of, and act on, pivotal trends, challenges and opportunities to prepare for a different business marketplace. 5/12

6 5 Key Trends Shaping the Commercial Lines Market 1. Changing Client Expectations Businesses are increasingly demanding more services from their brokers than just insurance. They want business partners to help them solve problems by addressing issues such as loss exposure, risk management and claims handling. More and more, they want information and data on loss trends in their sector and techniques that their competitors and colleagues are using to mitigate risk. A key part of this expectation from clients from their brokers is identification of new or emerging risks and exposures, such as cyber liability, privacy/data breach, regulatory compliance and environmental risk. COMMERCIAL CLIENTS EMBRACE OF TECHNOLOGY HAS EVOLVED SIGNIFICANTLY. In addition, commercial clients embrace of technology has evolved significantly. Their expectation is that commercial insurance protection can be purchased with the speed and seamlessness of other business transactions, such as banking, employee benefits, payroll services and real estate. There is rapidly vanishing tolerance for extended wait times, paper-based processes and lack of digital presence among brokers. Most businesses are now fully mobile and social media savvy they expect the same from their insurance partners. The demand for improved service by consumers will continue and will expand into areas that are not currently being used to a large degree, notes Purdy. The use of mobile technology and social media will change the way insurance is purchased and the industry will need to be creative in developing solutions that meet these challenges. 6/12

7 2. Increased Competition It s logical that direct insurers will make an incursion into those commercial lines accounts that can be commoditized. The small to mid-sized standardized business risk represents a potentially lucrative segment, according to industry experts. I think what has been attractive, especially recently, is that loss ratios and combined ratios in commercial business have been relatively low, says Cartmell. There are fewer regulations and it is virtually an open market for underwriting rules. So, this is a good area for a lot of insurers. COMPETITION WILL COME NOT JUST FROM DIRECT INSURERS, BUT ALSO FROM MORE BROKERS MOVING INTO COMMERCIAL LINES However, competition will come not just from direct insurers, but also from more brokers moving into commercial lines and the resulting displacement effect. Many brokers that traditionally had a 70/30 or 60/40 split between personal and commercial lines will try to reverse those percentages; business will have to be won from incumbent brokers. In addition, competition among multinational, mid-tier and regional brokerages over commercial business will intensify. Industry consolidation, on both the company and broker side, will also have an impact. On the company side, there have been some acquisitions that have had an impact on a large number of brokers, says Purdy. The reduction in the number of markets has forced a large number of risks to be remarketed. This has had a direct financial impact on brokers as they have had to move entire books of business. Direct insurers, broker competitors and consolidation trends will all have a significant effect on the commercial intermediary of the future; many will have to sharpen their business focus and invest in operational efficiency. 7/12

8 3. Brokers Seek to Segment and Specialize Commercial brokers are segmenting their commercial accounts along parameters of size, complexity and need for risk-based advice or service. One key segment is small to medium-sized standard clients that meet specific underwriting criteria and BROKERS WILL INCREASINGLY FOCUS ON AUTOMATING THEIR COMMERCIAL LINES can be processed relatively quickly. For these accounts, brokers require a more efficient business model that capitalizes on available automation tools. For small business, there are trends towards commoditization, says McGregor. We are developing the best products, service models and technology that will appeal to this client base. We are also using the Internet to drive some of this inbound business. Brokers will increasingly focus on automating their commercial lines while insurers will work on connecting to their brokers systems and automatically processing small commercial business to free up their underwriter s time so they can focus on high-valued mid to large-market risks. The insurers and brokers who are able to achieve this first will have an unfair advantage over those that do not and will be the beneficiaries of the resulting market shift. On the other side of the segmentation fence, brokers are specializing in specific industry sectors, trades and lines of risk. They are building a resource of expertise and relationships that will act as a knowledge base, differentiating them from commodityoriented competitors. We have become much more specialized, says McGregor. I would compare it to being a medical specialist as opposed to a general practitioner. We focus on certain lines of business that face issues, in terms of losses or risk management, cyber liability, professional liability, D&O, distressed property and realty schedules with vacancy issues. A similar trend holds true for insurance companies, according to Cartmell. Insurers are seeking to become much more sophisticated on commercial classes and segments, he notes. They want to also understand key industries, drill down on underwriting and data, and offer specialized policies that meet the needs of those businesses. They are looking at things like business interruption exposures, more sophisticated claims handling. I think we are going to see commercial insurers really focus on classes of business, such as mining, trucking and forestry to name a few, and know those businesses upside down. 8/12

9 4. Dual Role for Technology Efficiency and Data Analysis Technology will play a prominent role in shaping the modern commercial broker operations in two areas: workflow efficiency and data analysis. In the first space, several areas of the policy lifecycle will have to be transformed to deal with inefficiencies THE TIME IT TAKES TO rife in commercial lines today. Commercial HANDLE TRANSACTIONAL automation for brokers and commercial connectivity for insurers will be the foundation DATA IN THIS INDUSTRY IS INCREDIBLE Andrew Cartmell, of these efficiency efforts. This will apply not President and CEO, SGI CANADA only to the marketing lifecycle (RFQ/Quote/ Propose), but extend to the in-force policy lifecycle, and inquiries such as billing, claims and policy. Incoming requests for quotes (RFQs) will be subjected to electronic triage that will automatically and instantly decline risks based on market reservation and appetite. The remaining RFQs will be automatically scored and routed to either to a real-time rating system (for simpler risks) or an underwriter (for risks that can t be automatically rated). Unlike in personal lines where the rating systems resided in the brokers offices (for the most part), commercial lines real-time rating systems will reside in the insurers offices and will be able to interact with the broker directly through the brokers commercial lines system to achieve a final quote. For us, where technology really comes in is that it handles a lot of the transaction processing and tasks that we used to refer as paper pushing, says Cartmell. That frees up time to focus on business data analysis, underwriting, product development and building relationships. The same is true for brokers, according to Cartmell. If I ask myself, would I rather have my commercial brokers processing transactions and filling out paperwork or understanding the client s business and offering solutions? Obviously, it is the latter, but the time it takes to handle transactional data in this industry is incredible. It requires discipline to make the changes that technology can afford. Technology s other main advantage in commercial lines lies in data analytics. If you look at something like telematics in the trucking industry, that has the potential to revolutionize this sector, Cartmell observes. That is just one example. I think you will see insurance companies focus on data and information as a way of specializing in key commercial classes. Purdy agrees with this assessment. The use of analytics will become far more prevalent just to remain competitive, he says. Insurers are spending large amounts of money in an effort to better understand the products they are offering and the needs of consumers. Brokers will begin adopting many of the same strategies. 9/12

10 5. The Broker as a Risk Resource Acting as risk-based consultants, not commercial lines salespersons, is quickly becoming a common theme for brokers. This means building relationships with clients, providing useful advice and offering pragmatic recommendations for loss control/risk mitigation that are distinctly tailored to individual client and business sector needs. I think there is a massive sea change happening and we are already starting to see signs of it, says McGregor. Traditionally, this industry has quoted on commercial business, but now it is looking at working with clients to mitigate and manage their risks. That is quite different than looking at price point. The best role for the broker is to provide this advice and insight to clients, whether that involves risk transfer or mitigation. This is especially true for the more specialized risk clients we deal with. TRADITIONALLY, THIS INDUSTRY HAS QUOTED ON COMMERCIAL BUSINESS, BUT NOW IT IS LOOKING AT WORKING WITH CLIENTS TO MITIGATE AND MANAGE THEIR RISKS. Jim McGregor, President, The Precept Group Brokers are focusing much more on risk assessment and risk mitigation, Cartmell adds. Insurance is typically a part of that process, sometimes big or small, but what you are seeing more and more is a refined focus on the value of risk-based advice. A key challenge in this move to risk-based consultancy is human capital. For many commercial brokers, the hunt is on for skilled, knowledgeable commercial producers, account executives and risk consultants who can understand business sectors, develop lasting relationships and solve problems for clients. If brokers can find and retain these human resources, while partnering with insurance companies, they will stand out in the marketplace. Brokers who work in partnership with select insurance companies, specialize in key commercial segments and offer risk management services have an excellent chance of growth and success, Cartmell notes. 10/12

11 Conclusion The commoditization of personal lines insurance products and the ensuing gain in market share by direct insurers represents a slow but steadily inevitable trend in the Canadian insurance marketplace. There is a range of strategies for brokers to cope with this new reality; many are choosing to focus on commercial lines for growth and profitability. However, commercial insurance has also changed. Rapidly evolving consumer expectations, heightened competition and consolidation are reshaping the broker s role in the modern business insurance marketplace. Today, brokers need to segment, specialize and become true risk consultants to their commercial clients. They need the supporting technology, workflow, human capital and insurance company partnerships to translate these high-minded principles into tangible deliverables, pragmatic advice and workable risk solutions for their customers. Those that do will be able to draw a line of differentiation from their competitors and carve out a truly sustainable business strategy in commercial insurance. 11/12

12 About Policy Works INC. Policy Works Inc. is a big believer in the value of the independent broker and the independent distribution channel. We see commercial lines as the key to the longevity of the independent broker. Our goal is to help brokers fight the good fight in the commercial realm. To do this, we provide solutions that help brokers automate, standardize, and manage the complexities of commercial insurance. References /12