Clients, fees and servicing

As most players are aware 2005 started with product providers in a defensive mode, due to the spate of PFA rulings and an industry generally under siege.

This perceptionhas been identifiedin the findings of a survey commissioned by PwC,which looked at the issues facing the South African insurance broking industry.

In spite of that the short term results are good, underwriting profits are high and follows a drought of returns, so one wonders whether consumers could expect a premium reduction?

Dr Brian Metcalf – specialist surveyor – and a Brock University associate professor in Ontario – undertook the survey into the South African insurance broking industry, and conducted interviews with CEOs of 18 firms.

The main issues include commissions to fee based income; regulations and legislation; BEE; CRM; and lack of skills and management.

So what keeps them (the brokerages) awake at night?

It starts with retaining existing clients, service quality, managing client expectations.

These three client centric issues were seen as the main issues facing the sector, while IFRS and the impact of it on assurance accounting surprisingly didn’t feature in the top three, although the recent Glenrand restatement is a case in point, as there were IFRS issues in terms of how leases were accounted for.

Growth prospects were in the region of 25% for employees by 2008, while 3600 to 4800 employees over the next 3 years, with premiums expected to rise 60% to R20bn.

In terms of a shakeout – the majority of respondents reckon that it will happen in the next three years, estimated by some to be as high as 30% of the current players disappearing.

On the personal lines side there is some price cutting influencing the softer market conditions. Not surprisingly the issues occupying their minds are regulations, BEE, consolidation, niche markets, and the direct insurers.

Having said that most said that the regulations would shakeout the industry and it was seen as beneficial to the sector. In terms of the single regulator discussion, with Australia held up as the example – there seems to be a lack of interest – and most respondents go back to the default position and want have the status quo in place.

In terms of commission deregulation, most respondents say that this should be the case. On the smaller and lower end of the market, some regulation should remain in place.

BEE is taking its rightful place in occupying players’ minds – from distribution to production development.

The brokers generally critisise their industry: there is a fragmented voice, they are slow to articulate the value proposition, there are too many players currently (on the small broker side – estimated to be between 30 000 to 50 000 firms), training and skills – less talent is being attracted to the industry, they are poor communicators, pricing isn’t transparent and comprehendable, there is too much focus on quantity and not quality.

Some of the respondents maintain that there should be some shakeout in the associations that represent their interests, as they feel they have a fragmented voice and there is ineffectual lobbying to government.

In terms of the large brokers (Prestasi, AF, Glenrand MIB, Heritage, Thebe)– the skills shortage included lack of technical specialists and the lack BEE non exec directors, producing brokers, while there were too many tax specialists.

Growth projections are surprising robust for the next three years on the personal lines front (20%) while commercial growth is consistent. On the corporate level growth levels will consistent ranging between 10% and 20%.

The 18 respondents maintain that fees will be main source of revenue, rather than commissions. Client churn was the main measurement of success, while image and reputation was seen as the second most important measure of success, and in third place was revenue growth.

The internet was seen as a servicing tool, rather than a sales tool. While the majority of respondents said there would be a drive to the web, most felt that there was still a need for face to face marketing. On the other hand there will be an increased marketing drive to the emerging BEE SME market.

So where does the major competition come from? Well not surprisingly banks see banks as competitors, while the large guys see the direct marketers as their big competitors. On the other hand the foreigners see the foreigners as competitors and the independents see the niche brokers as competitors.

On an aggregated basis, Metcalfe says that the growth opportunities were seen as life risk products, personal lines in motor, commercial lines (property); and construction projects and infrastructure was in third place.

The ‘Spitzer’ effect would be minimal, with only a trickle down impact with the South African regulator, although the larger and foreign brokerages did see this as some sort of issue.

In terms of fraud, the respondents maintain that internal staff element was seen as the main source of fraud, with the service provider collusion was also seen as a serious issue.

And the inevitable perceived performance table, as seen by brokers in terms of the various business lines.

Credit life: Hollard and Absa Life

Group business: Liberty and Discovery

Health products: Discovery

Investor products: Momentum

Life risk products: Liberty

Personal Lines: Santam

Commercial lines: Santam

Corporate lines: Santam and Mutual & Federal