Do not blame brokers

Since the end of 2009 and the beginning of 2010, various world economies have been under significant pressure to come to terms with economic conditions which are preventing markets to return to the levels that were seen before the onset of the 2009 global financial crisis.

When this is the case, the natural reaction is to cut costs where possible. Certain investments which would be seen as normal investments in good economic conditions are now being seen as grudge purchases. It is under these conditions that companies and the public may scale down on insurance and investments.

This puts companies in the financial services sector under significant pressure. The last thing that the industry needs, is reports which suggest that brokers and advisers are adding to the industry's problems.

In a Financial Mail article on 13 September titled Short-term insurance brokers struggle with broken business model, journalist Stephen Cranston reported that the core personal lines, motor and property books at South Africa's largest traditional insurers are under severe pressure. He further suggested 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,” wrote Cranston. "As most brokers focus on the quantity and not the quality of business, the losses on these group schemes have often been high.”

The Financial Intermediaries Association of Southern Africa (FIA) feels that this criticism is unfair and underplays the important role that brokers play in the industry.

The truth explained

FIA President Arnold van der Linde explains that traditional insurers have been known to take drastic action by unilaterally cancelling large chunks of business under portfolio management when underwriting margins are squeezed. However, he adds that none 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-jerking 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,” says Van Der Linde.

Model disparity

The South African insurance market has the benefit of having a direct model and a traditional model. Cranson further explains his position by pointing out that while direct insurers are able to post double digit profits, traditional insurers are only able to post single digit profits.

The Financial Mail suggests that a broken business model is to blame, but there are other factors to consider. Traditional insurers reflect a claims pay-out ratio of almost 70% while direct insurers pay out 52%.

"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.”

Clear choice

Van Der Linde further points out that traditional insurers' claims settlement ratios appear to be substantially better than those of the direct players. This significantly benefits the consumer. It is also more difficult for a traditional insurer to drop an entire book of business than it is for direct insurers to cancel a client's policy.

This strengthens the FIA's call for consumers to purchase short term insurance 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.”

Editor's Thoughts:
The role of brokers has come under significant fire lately in the media, and the FIA has come out in their defence. Brokers play a vital role in the industry where they form the vital connection between insurers and the public. Is the FIA doing enough to support you, the broker? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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