10 Feb 2012
Author: Stephanie Denton, Insurance Insight
As the European insurance industry slowly starts to emulate the UK and adopt e-trading, Simon Ronaldson asks how European insurers can learn from the experience of their more mature counterparts.
While the UK insurance industry has been regarded as a slow adopter of technology and e-commerce, its European partners have been even slower to act. In the UK some insurers are managing to keep abreast of advancements, while others are struggling to add bells and whistles to outmoded systems. Legacy remains a big issue brought about by years of organic growth, acquisitions, and new products and half-implemented IT programmes, and the current economic climate has made it even more difficult to adopt transformational change.
What has brought about the growth of e-commerce in the UK and how might this translate to Europe? The commercial e-trade story in the UK started with micro-SME business, such as sole traders, shops, offices, property owners and home workers. However, over time larger businesses, such as manufacturers and wholesalers, have been able to transact property, liability and motor covers in an e-traded way. As a result average commercial insurance premiums e-traded have increased from £270 per policy to £540 per policy, with some policies exceeding £10 000 for the first time.
Acturis' own experience illustrates how e-trading has taken off in the UK market, going from under £400 000 premium bound on the system in 2004 to over £200m in 2010. 2011 is expected to see this reach an incredible £300m.
This growth can be attributed to a number of factors which created the conditions for e-trading to flourish. The first thing to note is that the initiative has been business not IT led. It has been driven by like-minded brokers and insurers, which recognised the old way of trading could not continue. A persistent soft market, the high cost of manual processes and increasing pressure from consumers to provide a speedier and more accurate service, meant things in the UK had to change in order to maintain profitability. In this sense information technology was the facilitator, not the driver.
In addition, there was a desire for common industry standards. Brokers and insurers were prepared to share ideas, and lessons learned, and work together under the industry "Imarket" banner. This cooperation enabled costs to be shared and for a critical mass of business placement to be achieved more readily
The concentration of broker IT systems also aided the process. The provincial market is dominated by five or six system providers, making it feasible to involve all solutions in the process. It is only by involving all significant parties that an industry-wide approach can be created.
The concept of packaged insurance solutions had long been established in the UK, and in many cases these were already being auto-rated internally within insurers. These simply needed to be moved to common industry standards and made available to the broker channel. Packaged policies are key to e-trade as all required covers can be bundled into a single and simple product sale.
Lessons were also learnt from the entry of Direct Line into the motor and household markets. As a large direct insurer, it massively changed the value proposition to the end customer, forcing the UK insurance market to react, both through traditional insurers increasingly trading on a direct basis and also with the broker-led personal lines channel becoming far more automated and efficient. The established industry did not want to be found 'asleep at the wheel' for a second time.
The last factor, which cannot be underestimated, is the strength of the broker channel in UK commercial Insurance. With brokers controlling over 90% of the commercial market, insurers in many respects had no alternative but to invest in an efficient broker distribution solution to remain profitable. The broker channel is so firmly embedded in the UK, that insurers do not currently have the commercial skill base in order to deal with clients on a direct basis. The cost of such a move would be punitive for a traditional insurer, and, therefore, such a play is unlikely.
So based on these key ingredients that have combined to create a successful e-commerce proposition in the UK, how is e-trading in Europe likely to fare?
Considering the example of Germany, the creation of a common market e-trading solution appears to be an IT rather than business driven process, with insurers and brokers not engaging with sufficient active involvement or enthusiasm
As a result the creation of common standards has involved several different initiatives over the years, a seemingly never ending process of discussions and committees. There are also hundreds of small IT system solutions in the market, so these committees cannot involve most of the active IT companies in the market.
Insurance products are also single class-based, with clients often having separate policies for fire, business interruption, legal expenses and liability covers. This is a legacy of the insurer/agent channel of business where agents were incentivised to cross-sell new covers, so separate policies suited this approach. The fragmentation of cover across multiple policies is a barrier to the success of e-trade.
Finally, direct personal lines have not impacted Germany to the same extent as the UK, as agents, pools and bancassurers remain strong. Also as a result of this, the broker channel, although growing, is not as strong as the UK broker channel. This is a familiar picture across Europe.
The traditional market seems to have insufficient incentive to make the quantum change that is required. In all likelihood the growth of e-trading in Europe will require an outsider to force change, in the same way as the entry of Direct Line forced dramatic change in the UK personal lines market.
The big question is really not whether change will happen, but how. Will it be a new direct brand that enters the market and allows customers to place commercial business more efficiently and at less cost? Or will a new entrant, without the baggage of an historic agent channel, offer a more efficient way for brokers to place business on behalf of their customers?
Both moves are credible, and both would result in the traditional market having to react in the same way: by cutting costs, automating more processes and offering commercial insurance with a better value proposition than is currently available.
With European economic growth rates low for the foreseeable future, and investment returns also struggling, the insurance industry needs to look within to improve margins and, therefore, profits. Small businesses around Europe would also benefit from the lower insurance costs that a dramatically more efficient placement proposition could offer.
Logically the broker channel should prevail. Advice to the end-customer is more of a requirement in commercial business than it is in personal lines, so a broker transacting business electronically with an insurer, but still having a personal relationship with the end-customer does make sense. However, a direct play at the micro end of SME should not be ruled out.
Simon Ronaldson is sales and marketing director at Acturis