Direct insurers: throwing poison where they eat?

While direct insurers are gaining market share, their 'tar-and-feather' marketing tactics are negatively impacting the industry as a whole.

The debate over the direct versus broker-based short-term insurance distribution channel has raged in South Africa for a number of years. In the Financial Mail's Top Companies 2009 Stephen Cranston leads with the comment: "In short, going direct is gaining market share over broker-based shops!" And he's spot on.

Although broker-focussed short-term insurers such as Santam, Mutual & Federal and Zurich control approximately 50% of the motor and personal lines market, direct insurers are gaining market share hand over fist. Companies like OUTsurance (launched in February 1998) and Dial Direct (operating in South Africa since 2003) account for an increasing slice of written premium each year. But it's not the market share dynamic that concerns insurance intermediaries as much as the 'tar-and-feather' marketing tactics employed by their direct competition.

Guerrilla marketing tactics

When Dial Direct entered the market they raised the ire of insurance intermediaries with their extensive 'cut out the middle-man' campaign. Ironically, the direct insurer spends much of these commission 'savings' on aggressive advertising campaigns. Their guerrilla tactics plunge the entire short-term insurance broking community into disrepute. Earlier this year OUTsurance hiked the 'short-term insurance broker bashing' bar a couple of notches with a series of television and radio adverts in which the insurance broker was depicted as someone who knowingly misleads his client by over-insuring, neglecting to mention waiting periods and failing to inform them of applicable excesses. We asked some of our readers for their views on the advertising practices employed by the direct insurers.

The majority of respondents felt the direct insurer advertising campaigns were in poor taste. Geobin said while he agreed the advertising campaigns were 'clever' they were "misleading in all aspects – and doing damage to the image of the short term insurance industry [as a whole]." Chris was more direct. He said "the OUTsurance radio and television adverts are the most annoying and irritating advertisements possible! Anyone who tries to get business by bashing the opposition loses my business." If the only offence was 'broker bashing' then our readers would be more understanding. The problem, according to Louise van Schoor, is the direct insurers are deliberately misleading the public. On average a client is better off through one of the broker-based insurers even after commissions and the creative cash back bonuses are accounted for.

Commission by any other name...

Geobin dismisses the popular 'cut-out-the-middleman' claim out of hand too. "The advertisements claiming that [direct insurers] do not pay the middleman are a load of hogwash. Many of these so called direct insurers solicit business from many sources. These sources get paid a once-off introductory commission (up to as much as 8 to 12 month's statutory commission), so there is definitely a middleman of sorts. Commissions are definitely being paid regardless of how they are disguised!" Wayne agreed with this sentiment. "Consider a 15% cross the board commission paid to brokers compared to the enormous advertising costs spent by direct insurers… And don't forget the call centre agents – who we assume are accredited to offer financial advice – are also earning commission!"

Where's the broker marketing?

There's a bigger picture to consider. A recent entrant to the financial services industry, Alan Hall noted: "There are a number of areas of concern with these advertisements; but they are not limited to what they are doing to [brokers] but more what we are not doing for ourselves. As a fraternity of brokers, we are not adequately marketing ourselves! I must admit to being perplexed at the lack of exposure brokers are given. And I have found it quite amusing that the bulk of marketing in terms of 'contact your broker' is found in broker publications!" Alan would like to see a more proactive stance from insurers using the broker distribution channel to actively promote the broker. His campaign slogan of choice: "We've entrusted our brokers with billions for years, why don't you give them a call and let them advise you on how best to cover your assets?"

Most readers felt it was unfair of direct insurers to cast aspersions on the integrity of insurance brokers in such blanket fashion. Alasdair – an insurer and broker with many years in the industry – suggested the OUTsurance advertisements "belittle the people in our industry, making them out to be similar in character to the witches in Macbeth!" He added that "there are thousands of genuinely interested and decent people looking after their clients – and to have [the direct players] come along and pretend we are only in it to con the clients is downright insulting!" Elna, another industry veteran, was amazed at how insurance brokers were "continuously slandered by the direct insurers". She noted that direct insurers regularly approached her for "help" in repudiating claims. "I get regular calls from them to get information [about previous clients] in order to help them avoid paying claims." Why would they do this? The answer is because they underwrite at claims stage rather than at policy inception!

Direct not a bed of roses

The direct insurers aren't without guilt. Ordinary consumers can get a sense for the problems they might encounter with direct insurers by logging into the consumer website hellopeter.com. According to Gideon van der Merwe the number of complaints recorded for some of the direct insurers versus those lodged against major broker-based companies is frightening given respective market shares. Insurance brokers are quick to deflect the criticism levelled at them by direct insurers.

Marc says their tactic of recording all calls and recording assessor visits is simply a way to "find fault in order to reject claims". And Craig wondered "why the Ombudsman for Short-term Insurance refuses to issue statistics relating to the insurers who repudiate the most?" He believes this information would soon settle the debate. And once the public realise who is standing up for them when it comes to claims the game will be truly turned on its head. "I have heard rumours that the vast majority of repudiated claims come from the direct insurers!" said Craig.

Are the rumours that the direct insurers repudiate almost 25% of their claims compared to an industry average 4% true? Short-term Ombudsman, Brian Martin, might be the man with enough statistics to answer the question. Some time ago FAnews Online requested these 'name and shame' statistics, but Martin simply referred us to the rules under which the institution was established. His hands are tied – he cannot publish the information even if he wants to.

Clients' best interest

For now it seems the regulation is stacked against the insurance broker. Mel notes that "brokers are compelled by the FSB to disclose all information, be it excesses, premiums, commissions earned the lot". An insurance broker has to tell the client the truth or be held to account. In contrast the direct insurers tell clients only "what they think the client should hear!" The true test of an insurer is client satisfaction. "We encourage our clients to shop their policies with the direct companies. A number of them then change to these direct companies; but after the first year they are back with us," said Mel. They usually return when the first year's guaranteed premium is drastically increased in the second year!

According to Mel, an insurance broker is not concerned with "how much they earn on each client; but rather with looking after the clients' best interest and ensuring they remain on the books!" With a direct insurer clients are just another number. The message to the direct insurers is clear. Clean up your act. Insurance brokers are tired of being bullied.