In Short-term insurance brokers struggle with broken business model, Financial Mail, 13 September 2013, journalist Stephen Cranston, observes that the core personal lines, motor and property books at South Africa’s largest ‘traditional’ insurers are under severe pressure. He further suggests that short term insurance brokers are part of the problem.
“The insurers often give their ‘pen’ to brokers, who are given the freedom to choose their risks,” writes Cranston. “As most brokers focus on the quantity and not the quality of business, the losses on these group schemes have often been high.”
This criticism of the broking fraternity undermines the role of the intermediary in the insurance value chain, not least because insurers have the final say on what constitutes an acceptable risk. Insurers need to be discerning when granting binders (giving their ‘pens’) to brokers and should undertake a thorough due diligence to ensure the quality of the book, the experience and ability of the broking staff and, most importantly, the culture of the brokerage.
There is a strict contractual relationship between insurer and broker that defines what a broker may and may not do. Brokers must take responsibility for the profitability of the book and implement internal processes to manage the conflict of acting as both a broker and insurer. If this book becomes unsustainable then the insurer – in consultation with the broker – should take considered corrective action.
“Traditional insurers have been known to take drastic action by unilaterally cancelling large chunks of business under portfolio management when underwriting margins are squeezed,” says Arnold van der Linde, President of the Financial Intermediaries Association of Southern Africa (FIA). “But not one of these insurers admits nor is prepared to take responsibility for a book of business going sour.”
Books of insurance business are ‘in the red’ due to a lack or absence of effective portfolio management rather than due to brokers making poor underwriting decisions. It could be argued that instead of knee-jerk corrective action – by cancelling a book – insurers should manage these books back to profitability. Early detection and intervention by way of appropriate risk management strategies is a far better course of action for insurer, broker and consumer.
Cranston goes on to compare the profits of the traditional insurers with the country’s largest direct insurance company. “When the leading direct insurer reports its results next week, its underwriting margin is expected to be north of 18%,” he says. This compares to the 9.6% underwriting loss that Zurich reported in the six months to June. Mutual & Federal reported a 2.7% loss while Santam scraped in with a 1.3% underwriting profit.
Why such a huge difference in profitability? Financial Mail suggests that a ‘broken’ business model is to blame, but there are other factors to consider. The traditional insurers – those that rely on broker-assisted distribution – reflect a claims pay-out ratio of almost 70% versus just 52% for direct insurers.
What this means is that 70c in every rand of premium collected by the traditional insurers is returned to consumers at claims stage versus 52c in the direct space. In other words – consumers who insure their motor vehicles, homes and household contents with assistance from an intermediary receive 35% more in claims pay-outs than those insured direct.
“It is hard to ignore that the excess profit generated by direct insurers is equal to the amount they ‘save’ at claims stage,” says Van der Linde. “Given these numbers and the fact that direct insurers also sign up bad risks, we might conclude that they are underwriting bad risks at claims stage – and that’s terrible news for consumers.”
The bottom line is that intermediated insurers’ claims settlement ratios appear to be substantially better than those of the direct players and consequently of greater benefit to the consumer. It is also more difficult for a traditional insurer to drop an entire book of business than it is for the non-intermediated writer to send an individual packing.
This underpins the FIA’s call for consumers to transact for short term assurance with assistance from a broker. Consumers’ interests are better served dealing with a broker, who as a consequence of his relationship with the insurer can negotiate a suitable risk-rated deal.
“The irony is that insurers were quite content with the broker distribution model through the good times,” concludes Van der Linde. “Insurers should address the profitability concerns by engaging with brokers to correct imbalances that exist on a particular book of business rather than trying to pin today’s ‘soft’ insurance market on them.”
“Provided the insurer and broker work together with commitment and professionalism, the current business model can be very successful.”
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