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No Growth in Large Market High Frictional Costs Inefficient Processes & Customer Service Extreme Consolidation Threats/Opportunities from the Internet Low Returns New Regulation & Different Forms of Organisation |
With 34% of premiums being consumed in 'frictional cost', the industry is relatively inefficient, unprofitable and does not provide clients with good service. Brokers and insurers will have to work together to reduce this frictional cost for the good of the industry. Duplication will have to be reduced, connectivity will have to be increased and the sheer number of handoffs and amount of paper involved in processes will need to be reduced. As with most businesses today, much of this change will involve technology. |
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| No growth in
large market On a global basis the commercial lines insurance market has experienced massive contraction; industry premiums have reduced each year for the past 8-10 years. Looking forward, the total premium volume is expected to fall even further by 2005. This trend is being driven by several factors including de-industrialisation, greater self-retention of risk and increasing price pressure. |
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| High frictional
costs Around 34% of premiums are spent on transaction costs - equivalent, on a European basis, to €21 billion that is not invested in growth, used to reduce the customer's premium or returned to shareholders. Relative to other markets, this is an extremely high figure - particularly for an intangible product. In a digital world, this frictional cost is unacceptably high and will need to reduce significantly in order to provide value to all parties. |
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| Inefficient
paper based processes and poor customer service Efficiency and client service have taken a back seat in the commercial insurance business. The same data is re-keyed up to eight times in the process and there is severe duplication between the broker and other parties in the chain. This inefficiency also manifests itself in poor customer service. Recurring interactions, such as new policy issuance, renewals, mid term adjustments and claims, can take 6 months to execute. Acturis analysis of the end-to-end process has identified some shocking statistics:
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| Extreme consolidation Organic growth in brokerage revenues has been negligible, largely due to a shrinking premium base and a corresponding pressure on commission and fee revenues. As a result, the brokerage market has experienced significant consolidation. Collectively the industry needs to make the small and midsize broker segment more competitive and efficient to enhance clients' choice and encourage entrepreneurship. Consolidation amongst insurers, due to low growth and poor profitability, has been equally dramatic with practically all insurers having undergone some consolidation in the past 3 years. |
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| Threats and
opportunities from the Internet Several new competitors are moving in order to exploit the inefficiencies in the market. Traditional brokers are under real threat. Today, only 50% of brokers have any web presence, underlining many brokers' difficulty in competing in a technology-enabled environment. Moreover, few brokers use the internet to offer connectivity to clients or third parties, which will become vitally important in the near future. |
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| Low returns Over the past 6 years European insurers have earned very low returns - around 2-3% return on equity (ROE) on their commercial lines portfolio book - which is significantly below their cost of capital. Clearly this position is unsustainable and unless it can be changed, more companies will leave the sector. In parallel insurance brokers have seen a gradual erosion in their margins. In a recent survey IMAS Consultants noted that margins for commercial lines brokers at 8% were the lowest of any broker segment in the UK - with no sign of improvement. |
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| New regulation
and different forms of organisation Pending regulation (FSA) will dramatically affect the structure of the broker market. Many small brokers simply cannot survive in an environment of greater regulation. Networks of brokers, sharing infrastructure and services, are already beginning to emerge and rapidly expanding regional brokers are consolidating smaller brokers or providing umbrella infrastructures within which they can operate. The net effect is to encourage new forms of organisation focused around distributed and connected networks, which will need a new technology solution. |
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| acturis.com: ver 2.0 | |
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