Another take on the direct insurer debate
Over the past couple of months we have had many opportunities to reflect on the role of the traditional intermediated model of short-term insurance distribution versus the increasingly popular direct distribution method. We have commented on the irony of
The consensus is that the direct distribution model – and therefore direct insurers – is here to stay. And few will dispute that over time the bulk of personal lines covers will be “written” online or by call centre “agents”. Industry stakeholders are also in agreement that the direct insurers will battle to make inroads in the complex corporate insurance space. These facts go a long way to explaining why leading short-term insurers like Santam and Mutual & Federal added direct distribution solutions to their business models. Their respective decisions not to make “noise” about their direct insurance businesses at broker functions are understandable.
When Santam reported interim results for the six months to June 2012 it also announced that its direct insurance subsidiary MiWay had posted a maiden profit. The country’s largest insurer does not reveal MiWay’s contribution to its R9 050 million gross written premium in the half-year results – so we asked group CFO, Machiel Reyneke to provide some insight. He observed that the direct insurer achieved a net insurance result of R16 million (2.5% of the Santam Group total) from R500 million in gross written premium. The start-up business had approximately 140000 in force policies at 30 June 2012! As things stand Santam’s R4 389 million in corporate business is “safe” from erosion by direct “competition”. But the same cannot be said for the R3713 million (including MiWay’s R500 million) in premium written in the personal insurance category.
Going direct to protect market share
Will direct insurers eventually gobble up a portion of Santam’s personal lines business? To answer this question we must consider why the traditional insurers, who rely mostly on intermediaries to distribute their product offering, entered the direct insurance market, where the broker distribution channel is bypassed and product sold “direct” to the end consumer through call centres or via the Internet.
When direct insurers first entered the domestic market they were given short shrift by traditional market leaders. But it was not long before the industry realised their market shares, particularly in the personal lines space, were at risk to these new entrants. Their response – whether an affront to their loyal brokers or not – was to establish businesses in competition with the “direct only” companies. Santam and Mutual & Federal can now go about their business confident that their direct insurers will prevent serious erosion of their local market share.
Now the question becomes how to run an effective direct insurance subsidiary without stepping on brokers’ toes! The latest instalment in the direct insurer debate appeared in an article titled The Direct Distribution Dilemma, published in the August 2012 South African Insurance Association (SAIA) Bulletin. It explored issues around the direct insurance distribution channel...
Three ways in which insurers view the direct distribution model
The SAIA article comments on three typical insurer responses to the direct distribution channel. The first grouping sees direct insurance as an opportunity to innovate and search for growth. “These insurers invest in ways to use information more advantageously and bring innovative solutions to the market and lead the direct-to-consumer market,” the article says. A second distinct grouping is labelled the “catch up” crowd. Insurers in this category have not developed clear strategies for direct insurance. “Some insurers are concerned about upsetting their intermediaries in spite of the eroding value of the direct channel… They often approach the direct channel as a way to catch up with the competition rather than differentiating their value propositions”.
In the third camp we have insurers who believe their tried and tested approaches will prevail. “These insurers continue to depend on the personal relationships between their intermediaries and customers to win in the market,” notes the article.
Consumers will tilt the scales in favour of direct insurers
It is difficult for short-term insurance brokers to come to terms with traditional insurers’ move into the direct insurance space. The fact is these insurers have no choice but to cater to consumers’ needs. If they refuse to enter the market then the “direct only” crowed will gradually erode their market share.
Over the long term brokers will be better served by the likes of Santam and Mutual & Federal if these companies retain their market share and trade profitably, regardless of their preferred distribution strategy. Brokers must make peace with the fact that MiWay and iWYZE (Mutual & Federal’s direct offering) are here to stay too… They should also appreciate that these “affiliated” direct players ascribe to the good and proper insurance taglines of their parent companies.
As Santam, Mutual & Federal and other traditional players in the short-term and long-term space go the direct route, they need to consider the following eight “rules” for successful direct insurance offerings (included here from the SAIA article, with slight modification):
1. Be deliberate: Companies must be decisive about the direction of and their commitment to direct distribution. They must understand the target segments and define the value propositions that will differentiate them from the competition.
2. Build “simple, fast and accurate” into the core offering: Customers want simple and intuitive ways to assess their protection needs.
3. Product simplicity: Product architecture needs to be simple to reduce the number of questions, trailing documents and on-boarding requirements.
4. Design for multi-channel from the beginning: The business design must address how customers can seamlessly navigate across multiple channels as well as how information and interactions can transition from online to call centre etc.
5. Build digital marketing as a core competency: Digital marketing, social media, mobile, and affinity are some of the strategies insurers can use to drive quality leads to their website and call centres.
6. Create pricing sophistication: Although insurers cannot compete on price alone, they still have to offer competitive pricing as part of their total value propositions.
7. Improve customer confidence in the purchase process: Customers often obtain quotes online but still buy through a call centre. Insurers need to find innovative ways to personalise the buying experience.
8. Test and learn before scaling: The direct channel provides an information-rich environment that allows companies to test new features and offers, and quickly adjust to consumer reactions.
Short-term insurance brokerages should not discard the above information. As the insurance industry shakes out there is no reason individual brokerages cannot create direct platforms of their own… Instead of commissions you might earn referral fees for introducing business to your preferred insurer’s direct insurance subsidiary, for example!
Editor’s thoughts: There are some in the industry who believe all personal lines business will eventually be concluded in the direct channel. This reality will force insurance brokers to migrate to the commercial lines and personal lines for high net worth individuals markets. The good news is this shift will not take place overnight. Do you agree that personal lines motor, household contents and homeowners insurance are simple enough to conclude without broker assistance – and are you shifting focus towards more complex commercial covers? Please add your comment below, or send it to gareth@fanews.co.za
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