The value in advice gives short-term intermediaries the edge
By the time you read this newsletter the FAnews team will be sitting through the morning session of The Insurance Conference 2012. The event – jointly hosted by the Financial Intermediaries Association (FIA), Insurance Institute of South Africa (IISA) and
The PwC survey is based on independent research and interviews conducted with 29 chief and senior executives at leading South African insurers (both long- and short-term) and re-insurers. “The study presents a comprehensive overview of the issues and challenges prevalent in the industry today, and presents executives’ perspectives on how the industry might evolve over the next three years,” said PwC Long-term Insurance Leader, Victor Muguto. The study findings will assist local insurers in structuring their businesses to avail of both established and emerging trends.
In his opening remarks, Muguto reminded those present of the economic backdrop when the Q1 2012 interviews were conducted. “We have traded through an unprecedented financial crisis and increasing geopolitical risk since 2008,” he said. “There is huge uncertainty in markets and both the business and regulatory environments are tough.” It is worth noting that the developed world has not recovered since the sub-prime crisis first exhibited in December 2007 and that most Euro-zone economies now face a second round of recession. Financial regulators have responded by tightening up the solvency requirements for international banks (through Basel III) and insurers (Solvency II). National Treasury has taken steps of its own by announcing a two-pronged approach to financial regulation wherein the Reserve Bank will take care of prudential issues while the Financial Services Board focuses on market conduct.
Major drivers of insurance industry change...
Against this backdrop the 29 respondents singled out “regulatory and reporting changes” as a major driver of operational change in the industry. Regulation was twice as prominent as the second (capital requirements) and third (consumerism and changing consumer behaviour) factors. Among the ironies that perhaps escape the report’s compilers is that both capital requirements and emerging consumerism are consequences of regulation. A layperson might fairly comment that the Top 3 drivers for insurance change are rooted in regulatory intervention. The Solvency Assessment and Management (SAM) and soon to be introduced Treating Customers Fairly (TCF) regimes are examples of such regulation.
Independent financial advisors will be most interested in the change drivers holding positions four to six on the PwC list. These were identified (by industry executives) as Internet and mobile-based technologies (fourth), changing demographics due to urbanisation and the rise of the new middle class (fifth) and disintermediation and the breakdown of trust in intermediaries (sixth). Point four, five and six explain why more and more short-term personal lines insurance business (and soon life business) will go the direct route. On a more serious note they foretell a serious contraction in the direct distribution channel over time. Why?
Among the insurance market weaknesses identified in the PwC study are “excessive price-based competition in the short-term insurance space, and the inability of intermediaries to reach all segments of the market.” Although technology is partly responsible for the first weakness it does so to the intermediaries’ detriment. The Internet and mobile phones make it possible for new direct players to offer simple and affordable insurance covers online. Over time the cutthroat direct short-term insurance offerings will expand to include life and other insurance products, adding to the pressure on the intermediated model.
Peter Todd, chief executive of Mutual & Federal picked up on this trend during a recent presentation at the 2012 SAUMA Annual Conference, when he said: “From a traditional insurer perspective the advent of the direct insurer has been a major wakeup call – whether we like it or not they have been major catalysts for driving down costs in the industry.”
Access to all through mobile technology
Demographic trends also contribute to the intermediaries’ dilemma, because the new middle class is increasingly tech savvy and more inclined to BREAK transact online than before. To make matters worse, attempts to expand intermediated services into the low end of the market have failed dismally. Future solutions in that space will undoubtedly be driven by the country’s large mobile phone operators, which have already indicated their intention to enter the insurance market by successfully applying for insurance licenses.
And that brings us to points six, “disintermediation and the breakdown of trust in intermediaries”. This is a concerning development for those make a living from selling insurance, and can largely be attributed to the rapid growth in the direct insurance distribution model. The erosion of trust in the intermediary has been contributed to by the ongoing negative (towards intermediaries) advertising and marketing campaigns carried out by aggressive direct insurers out to “win” market share.
“Direct insurers have tarnished the role of advice in our industry,” said Todd. “It is all very well having a proposition to deal directly with the customer, but that does not mean to say that you should run down somebody else’s value proposition.” It is telling that the country’s largest intermediary-based insurance companies have established direct insurance offerings of their own.
Editor’s thoughts: Sir Isaac Newton’s third Law of Motion states that for every action there is an equal and opposite reaction… The theory holds for business too, where regulation and competition have consequences. Increased regulation makes financial advice dearer with the result that fewer consumers benefit from it, while increased competition (in the direct short-term insurance space) has unfairly tarnished brokers’ reputations. Would you agree that both regulation and competition from direct insurers are putting the squeeze on the traditional intermediated distribution model? Add your comment below, or send it to [email protected]
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