When EDI was finally launched in the early 90s, it was proclaimed as the ultimate solution for brokers to compete against direct writers in the private car market. It would reduce costs, enable insurers dealing through brokers to offer competitive premiums and provide a tool for underwriters to react quickly to market changes. The rallying call was "EDI or DIE" as the industry encouraged brokers to invest in the new technology and trade electronically.
Was the initiative a success and will it be the saviour of brokers who wish to remain in the private car market?
At first glance, it appears brokers' private car market share has remained much the same.
In 1996, direct writers had grown their market share to 32% over a six-year period. In the next three years when EDI started motoring, they only increased their share by another two per cent to 34% and independent intermediaries market share in 1998 at 59% was the same as in 1996. Brokers' costs in handling this sector have reduced and there is no doubt premiums, mainly because of price matching and rate reductions, were competitive compared to those quoted by direct writers.
Insurers dealing through brokers were determined to keep market share and have achieved this - but at a cost.
Direct Line still enjoys a 13% expense advantage.
The impact on insurers has been less favourable. The combined expense/commission rate of handling motor insurance overall has not reduced. In 1993 it was 23% and in 1998 it was 25%. This is a long way from Direct Line whose distribution and expense base is 11.7%. The expected revolution has not taken place here.
Broker motor business has been disastrous for motor underwriters.
The total premium income for private car insurance in 1998 was £4.6 billion. This compares with £4.7bn in 1993. In this period, the number of cars insured has risen 13% so in reality premiums are 13% lower despite an increase in repair costs of 25% and a near doubling of injury costs over the same period.
The result of this has been disastrous. Underwriting losses in 1998 for private motor insurance approached £1bn. With interest rates falling, there has been no respite here against an operating ratio of over 120%.
Insurers have paid a high price for their strategy of supporting brokers.
Insurers want to reduce motor exposure. The insurer mergers of the late 90s have put pressure on chief executives to improve results and have left no room for sentimentality. Market share is no longer a primary goal and in the face of increasing claims costs because of Woolf, Ogden and NHS recovery initiatives, premiums are increasing rapidly and any reduction of exposure to the private motor market is music to analysts' ears in assessing future prospects for an insurer.
If these increases applied to all channels of sale, everyone, except the consumer, would benefit, especially the broker with the resultant increased commission income. However, this will not be the case.
EDI has made a broker business more unprofitable for insurers.
For many reasons, premiums through brokers will increase more than direct business. Apart from the expense gap, the actual loss ratios are much higher. EDI has played a major part in this situation.
It has enabled brokers to churn business between insurers seeking the lowest premium at each renewal. Insurers' brand and service have become less important and the threat of direct writers and other competition have forced brokers to act defensively. Churning is terrible for insurers. EDI has reduced transaction costs for them but underwriting profits depend on holding on to customers for three or more years. The average through brokers in a time of increasing premiums is fewer than two years. It is impossible to be the cheapest in the market every year and make money, especially if Direct Line has a 13% expense advantage.
Apart from expenses and churning, there are other reasons why broker business is less attractive. Underwriting standards such as proposals, proof of NCD and maintenance of "book" premiums have been relaxed as a means of making EDI more efficient. Control of the customer has been reduced which means less control of claims costs through the use of approved repairers.
EDI also automates the customer selection process which can still exist in direct writing where humans can exercise "underwriting" nous. The result of the impact of EDI for brokers in the current market is that the premiums for this sector will rise more rapidly making them uncompetitive. The result will be that other players will be in a position to increase their market share.
Boost for big players
EDI has also had other negative affects for the smaller broker. The collective spend of the industry on EDI initiatives has increased costs of the sector but has also created a robust e-commerce platform for the whole industry.
This has enabled volume players such as AA and Swinton to improve profitability and become stronger. It has encouraged new entrants such as Kwik-Fit and enabled some direct writers such as Budget and Touchline to change their operations from being insurers to becoming brokers. EDI has changed the costly process of handling individual car insurance to an efficient bulk process through call centres and teleprocessing. The market share of independent intermediaries masks a shift from provincial brokers to volume players which will continue now EDI has made their operations profitable.
EDI has also made trading over the internet a reality.
Screentrade could not exist unless the industry had funded an EDI platform. Policy Master and CSC RA's ventures with corporate partners rely on EDI. EDI has therefore spawned a new channel of sale which is likely to be to the detriment of the normal broker. It seems that the software houses will be reluctant or unable technically to pass on their internet offerings to their traditional booking customers. The costs will be too high and the current systems are not modern enough to deal with the new technology. Motor brokers will miss out on the e-commerce revolution unless a new software player emerges.
So EDI has provided a short-term fix for independent intermediaries. It has however:
- not reduced expenses for the insurers
- made the broker channel very unprofitable for underwriters
- enabled volume players to improve efficiency and market penetration
- encouraged new entrants
- provided a platform for e-commerce for software houses, insurers, some non-insurance entrants and "net" companies.
An initiative which started as a means of helping brokers survive in the private car market could mean its ultimate demise. EDI and DIE.
What can brokers do? They can:
- make plans to exit the sector
- encourage loyalty to existing carriers
- exercise front-line underwriting to protect insurers
- select for insurer partners.
- ensure their whole book is profitable and do bulk deals
- control claims costs
- combine their books with other brokers to become volume players.
Continuing as before is not an option.
Tony Cornell can be contacted at firstname.lastname@example.org.