In terms of intermediary management and remuneration, are insurers responding accordingly? Increasing direct-to-consumer (D2C) distribution remains an aspiration, so there is still a high dependence on intermediaries as a channel for increasing the addressable market and revenue growth. Yet the costs of intermediary management and commissions are large for the industry as a whole.
Over the next five years, CEOs in the insurance industry foresee major changes. Let’s look at each of these changes and how they may impact intermediaries and insurers.
Regulatory burden is the No. 1 risk the industry faces, and only two percent of organizations rate their current technologies “excellent” for compliance needs.
In the UK, brokers operate in one of the most burdensome and expensive regulatory systems in the world. While the aim of regulation is manifold, the impact on intermediaries is higher costs – in fact, the regulatory cost for small brokers has increased by 70% in a three-year period.
Yet the UK government has raised concerns about the productivity of UK firms, while regulators apply yet more compliance and disclosure/reporting pressures.
Is it time for the insurance industry to work with its intermediaries to address how they can ease this burden and increase efficiency?
Often, intermediaries have multiple relationships with insurers and the consumer/corporate market and have different priorities and loyalties across the landscape. At the same time, digital technology is fueling the drive for D2C distribution, and consumers’ appetite for buying direct is an increasing threat.
This and the financial burden of regulation and competitive landscape exacerbate motivation for higher pricing and hence higher commissions and revenues. This is at odds with the pressure on insurers to sell at lower costs to compete.
Trust in the industry’s impartiality remains low after the PPI scandal, leading to a shift in the remuneration of internal sales teams and to team and balanced scorecard approaches. This is a cultural change, and current system capabilities do not support the agility of change.
Digital technology, social media, and other industries’ business models are creating a new type of consumer with very different levels of trust and expectations. They want to be able to trust an insurance provider or intermediary and be assured of getting the best advice.
Much of the regulation introduced since the Retail Distribution Review in 2013 is designed to ensure the best outcomes for customers, rather than conflicts of interest creating less advantageous outcomes. The industry needs to ensure it and its intermediaries are adhering to these regulations.
Today, there is ever-more information available to individuals, creating greater choice and more empowerment. Equally, more information on individuals is also available. There must be transparency in all interactions and communications and compliance with the General Data Protection Regulation (GDPR) introduced in May 2018 to protect the appropriate use of individuals’ data.
There is no doubt that competitive threats to the industry are driving lower cost and profitability, potentially creating conflict between insurers and their intermediaries – with the drive for competitive pricing on the one side and higher prices and commission payments on the other. Relieving this conflict and streamlining channels should be topmost on insurers’ minds.
Releasing cash into the business and increasing revenue help to fund investments in innovation that are critical for insurers to show differentiation to their customers and intermediaries and attract renewed and new business. A high focus on the cost of distribution channels is key; for instance, costs associated with:
- Onboarding of intermediaries
- Assuring regulatory compliance on both sides of the fence
- Conflicts and outcomes
- Timely and accurate commission payments
- Commissions leakage: lack of visibility into and inability to claw back overpayments
What is the industry doing?
IDC found in its 2018 Industry IT and Communications Survey of 125 European insurers that most insurers are not investing in digital solutions to manage intermediary evolution. Instead, 30% have no plans to invest, 55% will invest to maintain or enhance existing processes, and only 15% plan to invest in a new solution. As such, many insurers are at risk of falling behind in improving collaboration with intermediaries at lower cost.
Instead, investment is being directed towards attracting and retaining customers and digital engagement. However, across property and casualty, 44.2% of business is transacted through agency writers (according to the Insurance Information Institute’s Facts + Statistics: Distribution channels), while in personal lines, the number is 26.9%. Yes, digitally enabled channels are unlikely to replace intermediaries, as customers will still want advice when it comes to more complex matters.
It would seem focus is needed to facilitate business through intermediaries in a highly compliant end-to-end process. Management of the intermediaries’ credentials and performance are key to this, as is the agility to process appropriate compensation and the ability to address and resolve conflicts quickly to ensure more focus on the customers.
IDC’s report says, “Investing to fully optimise and incentivise intermediary performance, a future-ready intermediary management platform is needed.” And if it also delivers a lower cost of intermediary management, creates a positive impact on customer satisfaction, and generates a material impact on the combined ratio, then why would you not?
Reports of the death of the intermediaries are greatly exaggerated – let’s hope this remains true for insurers too.
Read more about the IDC’s findings in “Managing Insurance Intermediaries in the Digital Era.”