07 June 2001
The industry is currently recognising the need for a dramatic overhaul of the commercial lines sector to meet the challenges presented by gross inefficiencies, minimal profit margins and increasing shareholder pressure.
The issues highlighted in the post magazine round table (PM, 31 May, p21) fall into several key areas. Firstly, brokers are continuing to complain that service standards fall way short of the mark, exacerbated by incorrect documentation (due mostly to re-keying errors) and a continual series of insurer restructurings, many as a result of market consolidation.
Secondly, insufficient communication between brokers and insurers is leading to differing expectations and higher transactions costs.
Thirdly, technology is viewed as a way to resolve problems associated with poor service standards, although the current purveyors of these technology services -the incumbent software houses -are perceived to hinder rather than help the technological revolution.
Finally, the debate highlighted, an urgent need for brokers to switch to a fee-earning advisory role as opposed to a more traditional commission-driven transactional role, and the need to add complementary skills in both insurer and broker IT organisations.
Many of these problems point to an industry in need of a drastic over-haul in terms of efficiency and service standards and where the fundamental definitions and roles of the various players is changing dramatically.
Most importantly, the 'frictional cost' in the commercial lines insurance market is unacceptably high. Up to 34% of premium is absorbed in cost and, therefore, does not go toward risk ar transfer. This means that more than a third of a client's premium is eaten up by administration costs. On a Europe-wide basis this is equivalent to around €21bn (£12.6bn). Compared with other industries that sell an intangible product, this figure is high and must be reduced - particularly as that the industry has not produced adequate returns for insurers over the last few years. Slow -or no - premium growth in most European markets only serves to make the need for efficiency improvement more acute.
The level of errors and rework is also extremely high and contributes significantly to the problem. Our research points to a 50% error rate in documentation from the insurer to the broker and a 30% error rate on documentation the second time around. These errors have a profound knock on effect for reconciliation and settlement between broker and insurer, compounding the cost problem.
The industry's customer service standards are poor. Again, our research shows that over 35% of documents take over 100 days to reach the client. Slow turnarounds are commonplace and need dramatic improvement.
Contrary to popular belief, technology has not yet helped greatly. Only 8% of commercial requests for quote are e-mailed to underwriters, with the remainder sent by fax and post. This results in processes that are manually intensive and paper-based. Brokers and insurers are not maximising the use of new technologies to remove paper and digitalise processes. Many underwriters, for example, do not yet have internet access.
While there is a clear desire from a growing number of clients for a fee-based relationship, most brokers are not ready for such a system and are constrained in their ability to understand the costs of serving different clients, or the profitability of different clients - both of which are critical in a fee-based setting.
The General Insurance Standards Council will demand a more professional and transparent approach and may well fundamentally change the shape of the market, putting pressure on brokers' existing technology and internal controls which have not been configured to deal with a new environment.
Many of these issues have been around for some years, yet the situation never seems to improve greatly. Will we be reading next year's Post Magazine and seeing the same points being repeated over again?
We believe that the industry is finally reaching a turning point at which players - both brokers and insurers - need to work together to redefine how things get done in the Industry to improve the overall situation, or face potential disaster.
Shareholders are becoming impatient with the poor returns they have been earning and are demanding increasingly severe action from companies to improve things. Not only will rates harden, but further rounds of consolidation and divestitures may occur which, given some or the comments at the debate, is in no one's interest.
The need for massive improvement in cost and efficiency is clear and urgent. In the UK, the commercial lines market needs to collectively remove over £1bn of costs from the system to be in a financially viable position. Neither insurers nor brokers can achieve this on their own, they have to work together, supported - but not driven - by technology.
Technology is no panacea. In fact, IT that supports current inefficient processes can compound the problem, locking in costly activities. Used without careful process redesign, technology will only serve to 'hard-wire' inefficiencies in the commercial lines sector, which should not be there in the first place.
Theo Duchen is co-chief executive of insurance technology solution provider Acturis.
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