The intermediated distribution model is under threat
In 1965 Intel co-founder Gordon Moore penned a “rule of thumb” to quantify the impact of technology in the computer hardware space. He estimated [thanks to wikipedia.org for the information] that “the number of transistors that can be placed inexpensively
In his presentation at the 2012 SAUMA Annual Conference, Peter Todd, CEO at short-term insurer Mutual & Federal, singled out technology as one of the major insurance trends of the 21st Century. He observed that the free flow of information had implications for traditional insurers because it had become easier for consumers to engage directly. Technology, therefore, is a major driver of disintermediation. “The intermediary channel is under immense pressure,” said Todd. “Mutual & Federal is extremely reliant on brokers and as the average age in the broker community increases we have to ask how sustainable this part of the business is?” From a product provider perspective technology makes it easier for new entrants to come to market and encourages innovation. Unfortunately this technology-led competition results in increased regulation too.
An abundance of regulation
An insurance presentation is not complete without addressing the impact of regulation. In this regard, South Africa’s insurance companies are struggling on two fronts: First with the sheer volume of new legislation – and second, with the difficulty in interpreting it. Aside from the massive workload to comply with the new laws, certain clauses are open to interpretation and can be misunderstood. “[The regulatory environment] is complicated by the fact that the regulators are trying to cover life, short-term and investment under the same blanket,” said Todd. “It can create confusion when we look at the legislation and try to understand it!” He offered a number of reasons for the ongoing regulatory onslaught.
Top among these is to eradicate conflict of interest by increasing transparency across the insurance sector. Todd observed that the regulators were keen to enforce regulation such as Treating Customers Fairly (TCF) from the top down. The easiest way to narrow the enforcement footprint is to ensure the six TCF principles are “policed” at product provider level. The onus will be on insurers to develop, distribute and service their products transparently and to ensure their business partners, including intermediaries, do likewise.
An obvious driver of regulation is financial security, which exhibits in regulations worldwide. Banking institutions have Basel III – European insurers have Solvency II – and local insurers are putting the finishing touches to our very own Solvency Assessment and Management (SAM) regulations. Todd said the current wave of financial system regulation was in response to a financial system that got out of control. Regulators are putting banks and insurers under similar scrutiny despite insurers enduring the crisis far better than the banks. Todd noted that insurers worldwide had withstood the double impact of financial contagion and natural catastrophes (topping $400 billion in 2011) with flying colours. Although the responses could be viewed as an overreaction on the part of regulators, some intervention was needed!
But regulatory intervention comes at a cost. SAM will be expensive for regulators to enforce, and extremely expensive for insurers to comply with. The regulation will increase both the human resource overhead (as specialist skills are retained) and the cost of capital.
Ideal conditions for the direct insurer to flourish
Technology and increased regulation have played into the hands of the direct insurers. “[The rise] of the direct insurance model sent a wake-up call to traditional insurers,” noted Todd. The competition introduced by direct players domestically proved both a catalyst for lower costs insurance offerings and for innovation. Love or hate them, the direct players have poured millions of rand into marketing, thereby raising awareness of insurance among consumers. This positive contribution is largely undone by the direct insurers’ disdain for the intermediated distribution model.
“We have no problem with an insurer dealing directly with the customer – but object to them running down someone else’s value proposition,” commented Todd. “The irony is that the need for advice, in today’s complex financial services environment, is more important than ever before.” Advice is important because of another financial services trend – consumerism. One of the most worrying consequences of TCF – based on lessons learned from its UK implementation – is that regulators are clamping down on high-margin niche insurance products. It remains to be seen whether the legislation will be similarly applied locally. “The power of social media means that there is nowhere to hide – in terms of transparency and fair treatment – if you try to rip consumers off you will end up on You Tube, Twitter and other platforms,” concluded Todd.
Insurers, financial intermediaries and UMAs will have to leverage the developing insurance trends to trade profitably into the future. The Binder Regulations will combine with SAM to change the insurance landscape forever. Underwriting managers have already had to alter their business structures – and higher costs of compliance could lead to consolidation and mergers in this sector of the market. Todd said that UMAs might benefit as mono-line insurers expand their businesses to reduce the strain on their capital requirements and that niche specialist UMAs would be in great demand as insurers diversify.
Editor’s thoughts: Mono-line insurers will have to consider the cost of capital imposed by Solvency Assessment and Management (SAM) versus the additional compliance costs were they to diversify their businesses. At this early stage it seems that SAM could trigger consolidation among UMAs. And fewer UMAs mean less produce innovation. Are you concerned that rising compliance costs will impact insurance innovation? Add your comment below, or send it to [email protected]
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