Having recently moved from a role that kept me relatively detached from the insurance and reinsurance market place to a role that puts me in the heart of the market, I feel like I have been born again. I’ve worn various hats over the 22 years I have been in the industry but I often still think of myself as an underwriter. I have, after all, worked in an underwriting environment for more than half of my insurance career. The part I relish most about my career, then and now is certainly market interaction.
Those who say that insurance is boring (i.e. a conversation stopper in social gatherings) clearly do not understand the dynamism and intricacies of the industry in general or our profession in particular. I have personally never attended an insurance gathering where the crowd struggled to have a meaningful conversation even if peppered with football, cricket, grand-prix etc.
In my current role I am back in the market, albeit in a difference capacity, talking to brokers, insurance and reinsurers. As a person coming from an underwriting background, my latest career move also served to rekindle my respect for insurance brokers whether in retail or reinsurance.
Of course the broking fraternity (like any other) consists of the good, the bad and the ugly. However, their role in the market, when undertaken professionally, can never be overstated.
Unfortunately, post-crisis, some insurance companies in the region may have started questioning the validity of a broker in the transaction chain. This is the result of insurers feeling the pinch as net margins for cedants were squeezed. Although this is arguably a last straw scenario, it betrays lingering lack of appreciation or understanding by certain insurance companies of the role of an insurance broker. The problems faced by such companies, resulting in lower technical returns, can and should be resolved by longer lasting and more meaningful solutions than crying out, “off with the brokers head!” These include for example:
a) Increasing net retention on classes that have a more predicable loss pattern, such as personal lines, medical, motor etc. And in so doing seeking to improve the loss ratio through improved risk selection / underwriting and claims processing;
b) Shifting some reinsurance programmes (or layers in them) from proportional to non-proportional;
c) Administering business more efficiently. Some of the insurance companies within the Middle East are people and paper intensive. More intelligent use of technology and third-party services would reduce the currently relatively high P&L costs of some of the MENA insurers.
As long as insurers continue to pursue a strategy of essentially living off the difference between reinsurance commissions received and acquisition commissions paid, some will continue to view the insurance broker as cost and not the partner that he really is in the insurance value chain. Some even harbour the misguided sentiment that whatever value a broker brings to the table can be provided by the customer service and relationship teams of an insurance company. This is tantamount to saying that we do not need doctors because we have chemists who can capably dispense of medicines. Both have an important role to play and the market would be a poorer place if one competes against the other.
The importance of the broker in the market place is also substantiated by figures. If we look closely at statistics from the MENA region, three of the most ‘active’ insurance markets are UAE, Lebanon and Bahrain. Not only have they been consistently more active but they have also driven growth and innovation within the regional industry as a whole. Premium figures per capita and as a percentage of GDP speak for themselves.
Some other MENA markets, in comparison, have had a slower growth.
Bahrain, UAE and Lebanon are three markets within the region where the broker is more prevalent in insurance transactions. In UAE or Bahrain, for example, the ratio of active brokers to insurers (excluding reinsurers) average at around 1 : 4. Some companies in these markets could have between 30% to over 40% of their business flowing in from brokers. In contrast, in some of the other regional markets there are as many insurers as there are brokers. Some companies even have shareholding or JV interest in some broking firms and also perpetuate spirals reminiscent (although thankfully on a smaller regional scale) of the LMX debacle in London in the early 1990s.
In addition to providing an extension to an insurance company’s distribution capabilities largely on a commission (rather than fixed salary) basis, an analysis of performance generally indicates that the combined ratio of brokered business is generally lower than that of business generated by most other sources of the distribution. Therefore, notwithstanding that the combined ratio of intermediary-generated business takes into account the direct cost of acquisition (i.e. brokerage) whereas business from direct sources does not, the overall cost to the insurance company from broker generated business is generally lower.
There are instances where the insurance company – broker relationship turns sour. For example, since the financial crisis struck there have been at least two instances within the GCC region where brokers have been unable to meet their premium obligations with insurers. However, it is pertinent to point out that these instances represent less than a decimal of the broking fraternity in the region. Furthermore, such transgressions are more reflective of a regulatory regime that has been unable to keep up with the necessary framework vis-a-vis clients’ money than adversely on the broking fraternity as a whole.
Until such time that insurance regulation in the region shapes up to the realities and requirements of the market post-crisis, one factor that may help build transparency, efficiency and cost-effectiveness between brokers and insurers is the greater use of technology. Qatarlyst, an electronic trading platform for brokers, insurers and reinsurers pioneered and funded by the Qatar government is helping to shape a virtual, transparent and more cost effective virtual market place. Close to 100 insurance entities in the Middle East region are active on the platform. The company also owns a similar platform transacting business primarily in the London and Lloyds market with around 4,000 users on it. The objective is to scale virtual insurance transactions, from negotiation through to placement, to a global level. In addition to insurers and reinsurers, several brokers are already active on the platform and they are helping to fuel risk submissions that, in turn, increase traffic on the platform. In markets where brokers are more predominant the traffic on electronic platforms, such as Qatarlyst, is higher.
In aggressively priced market environments, where pricing is paramount, it is important to realise that brokers are not part of the cost equation but of value addition. Simple internal analysis would reveal that direct business is generally costlier to acquire and/or maintain than quality broker business. Save the odd misfire, broker business in general also has less debt issues than direct business unless of course one is focusing on tele or internet sales transactions. It is certainly less of an issue than, say, the collection of inter-company balances such as in the case of motor claims and such like.
As regulation continues to shape up in the MENA region real competition will also start to replace current price-aggression. Real competition thrives on competition of non-price variables; namely professional advice and client advocacy in placement and in claims negotiation. This is a role that the insurance broker is best suited to fill.
A Chartered Insurance Practitioner, James Portelli is a Fellow of the Chartered Insurance Institute and Fellow of the Institute of Risk Management. He has been active in various disciplines in insurance since 1990 and in the Middle East since 1998. Views expressed are personal. http://ae.linkedin.com/in/jamesportelli | http://www.insuranceguild.wordpress.com