Every broker as a priority must have a customer ownership strategy. On a regular basis, the issue of customer ownership raises its head and hits the headlines in the insurance press. It has been a continuous source of debate, mostly acrimonious and the profile of this issue has probably never been higher than now.

Ownership of the customer
To a broker, ownership of customers equates to the value of the business. If a general insurance brokerage has commission income of £500,000, it is worth approximately the same figure. This value may vary 20% either way depending upon the strength of the relationship the broker has with his clients. A strong professional relationship is likely to command a higher price, a transactional one will mean a lower value.

Brokerages, in the main, have few tangible assets. What they have normally consist of cars, computers, office furniture and equipment, which if they were sold would realise little. As goodwill is defined as the value of the business, less tangible assets, in most cases the value of a brokers' business is virtually all goodwill.

Goodwill means customer ownership and protection of this asset is even more important than insurance of the physical assets of the business – and it is probably the most vital task of any managing director or proprietor if he is to increase or retain the value of his operation. How many brokers have a defined strategy in this area?

Placing a value on customer ownership has never been given a higher profile with the emergence of dot.com companies. As there is no profit performance to measure value, the value is calculated on the number of customers. Value varies between £1,000 to £5,000 per customer. If a broker with 10,000 clients were measured as a dot.com company it could be worth between £10m and £50m. There are, therefore, huge stakes to play for.

Beware the big bad wolf
Insurers are frustrated by the ownership issue. A number have employed high profile marketeers from outside the industry to leverage their customer base. These non-insurance people lured by the number of policy holders to whom they can upsell, cross sell and use in "members get members" campaigns soon become disillusioned as they realise customers are not wholly owned by themselves.

The value of the customer base is enormous, but in reality it is in joint ownership with thousands of small businesses. If insurers can get total ownership, shareholder value would increase significantly and therefore there is no wonder that there is widespread talk of disintermediation and increased focus on direct. There is also a creeping strategy to gradually take control under the guise of improved efficiency. Brokers need to be aware of the big bad wolf.

So the battleground is set, ownership of the customer is the broker's only asset and needs to be protected at all costs. For insurers it is their biggest under-utilised asset and needs to be unlocked to increase shareholder value.

Insurers own the customer, brokers the relationship
There is little doubt that, legally, insurers own the customer unless there is a separate agreement stating otherwise. Brokers act as agents of insurers, receiving their income as commission paid by them. Insurers, therefore, have a right to cancel agencies and deal direct, move business from one agency to another, mail customers direct and intercede in any sale of business if they do not want a broker to buy what it sees as its customers.

As recent actions have shown, they do this where they see the agent is weak, but seldom do it if the agent has the collective strength of a trade association around him or is powerful in his own right. Although they legally own the customer in reality the broker controls the relationship. This means at the moment that there is an uneasy alliance.

The ABI code of conduct supports any action insurers take as service to the customer is mandatory in the event of disintermediation. GISC may be less helpful to insurers as it may need to define ownership on a more pragmatic basis. Perhaps this is something on which the trade association should concentrate.

Data Protection Act is the broker's ally
The Data Protection Act is an ally of the broker if used sensibly. Data cannot legally be given to third party without the consent of the customer. Insurance data would probably be treated as sensitive and therefore needs clients written consent. Insurers can, therefore, not give business to other brokers unless the customer agrees. It can't sell non-general insurance products direct without their policyholders implied consent.

Brokers should therefore be careful not to do anything to compromise their rights. They should not allow customers to sign proposals that give insurers the consent to use sensitive data. They should also have their own written agreements with clients so that their own associated companies such as financial services organisations can cross sell products.

Treat creeping ownership with suspicion
There are many examples of creeping ownership's such as direct dealing of claims, surveys, insurers' premium finance, on-site underwriting or processing, direct policy handling, internet trading where customers go straight to insurers, mid-term cross selling and loyalty programmes and tied agencies. All of these should be treated by brokers with suspicion and recognised for what they may be, a way of obtaining control with the potential of cutting out the broker.

In this changing world of insurer consolidation, brokers would be unwise to place their complete trust in verbal assurances by current senior management of insurance companies. The stakes are just too high.

Client ownership is a huge issue and MD need to have a defined strategy in this area and ensure it is implemented. There is nothing more important to the prosperity of the business.

MDs should have a client ownership strategy

This strategy needs to consider:

  • Being a member of a trade association, so that there is collective strength in resisting any insurers unilateral action
  • Getting insurers to sign client ownership or terms of business agreements ceding ownership. This is crucial if there is any suspicion of creeping ownership
  • Never allowing clients to sign proposals giving insurers the right to cross sell
  • Getting all clients to sign agreements with the broker regarding ownership of data and cross selling rights. Ensure that this is kept and computer systems are marked to this effect.

    Avoid creeping ownership such as:

  • Direct dealing of claims
  • Insurers instalment facilities
  • On-site processing
  • Direct dealing of administration
  • Tied agencies
  • Internet trading direct unless a written, legally binding statement of ownership is obtained

    Consider taking more ownership from insurers, examples could be:

  • Outsourcing claims handling to your own nominated companies
  • Use a third party finance provider in all cases
  • Set up delegated authorities and policy issue schemes
  • Try to obtain underwriting agencies
  • Operate own brand schemes and facilities
  • Negotiate wordings etc. on an exclusive basis

    Use customer ownership to the full by:

  • Cross selling other general insurance products
  • Up-selling more covers
  • Cross selling financial services
  • Launching own loyalty programmes
  • Consider joint venture alliances with non competing suppliers

    Never allow insurers to cross sell or mass mail clients direct unless there is a written undertaking of ownership

    If a broker follows these principles and persuade all clients to become internet customers, they could become dot.com millionaires. If they don't, they may be worth nothing and insurers will become the new economy.

  • Tony Cornell is an independent consultant and he can be contacted at tony.cornell@talk21.com.

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