The internet is becoming the most important market place for buying insurance, and the aggregators are leading the pack. Simon Burgess says brokers must get online to survive
The writing is on the wall. And that's exactly where some brokers will end up going if they fail to take notice of the threat to their business from insurance aggregators. Sure, we have been here before and saw off the threat that was posed by the advent of the direct insurers 20 years ago. But this time it's different.
A KPMG report, The future of general insurance, prepared for the FSA notes ominously that "aggregators will become the dominant intermediary business model, disintermediating both insurers and brokers in the process".
It's all down to the power of the internet. The number of people using search engines for the most popular insurance products illustrates the importance of the internet as an information tool for UK insurance consumers. Insurance-related searches for motor, household and travel cover exceeded 7.6 million in one month in 2005.
The percentage of people arranging motor insurance online has more than doubled since 2003 with the number of quotes being started online increasingly rapidly across motor, household and travel insurance. That's because it is so user-friendly.
Consumers simply use a search engine and type in 'car insurance' or whatever and are immediately bombarded by insurers' websites. The internet and future technologies will continue to be the main driver of new retail business models.
Consumers are already moving from using the web for investigation to transactions and service. The success of this web-based approach is dependent on companies scoring highly in natural listings.
However, insurance providers are increasingly competing for rank with a variety of players, including aggregators such as confused.com and specialist online brands like gotravelinsurance.co.uk.
Over time, the growth of internet aggregators will transform personal lines retailing. What we must guard against is that this leads to the intermediary channel contracting so much that it becomes concentrated into a few majors and smaller specialists.
For what is certain is that aggregators' transparency will force down margins in commoditised markets in which brand and product benefits offer no defence. Consumer behaviour will increasingly be driven by quality of service in addition to price sensitivity.
Broker sites are also subject to the aggregator as the model will move from personal lines into SME and commercial. Ominously, the KPMG report concludes that although the cycle may " bottom out over the next two to three years… will insurers continue to support retail brokers?"
It's a good question. And brokers need to adopt a defensive position – especially as the arrival of the aggregators is sure to lead to a shrinkage in the number of product providers, the people that pay the commission that many brokers rely on.
This means that brokers need to re-examine their own proposition and this must start by asking what they bring to the party in the new paradigm that is dominated by the internet-savvy customer.
The first thing to recognise is that distributors will increasingly be forced to compete on brand strength, not just price competitiveness. Price competition will further increase the commoditisation of products and erode part of the brokers' value to the client.
This means that brokers will have to re-adjust their position and bring true added value to the policy buying process. They will need to concentrate on customer service and giving the customer a real reason to return next time he or she is in need of cover.
It may also mean specialisation. If you are already known for expertise in a certain class of insurance, it might pay to concentrate all of your energies in this area to become the recognised centre of excellence where customers will automatically navigate to for their specialist insurance needs.
But brokers also need to compete on the battlefield – the internet. If that is where most of the custom is coming from, then that's where you need to have a presence. The days of marketing your business in the pages of the local press and in Yellow Pages are fast disappearing, since customers are increasingly eschewing this information delivery channel.
Don't fear the internet – embrace it and let it work for you. A good template can be bought off the shelf and is the best way to get started. They should offer services including standard text and standard design, or a selection of design templates. Calculators and tools should also be included, as well as "hosting services" (space, web and email forwarding), control of admin plus an ability to incorporate your own material.
The key to building and maintaining a good website is the level of training and support offered. A domain name looks professional – this will give you a web address of for example, www.yourname.co.uk.
Start work on your website and set about booking your domain name through your internet service provider at the same time. Being on the internet is of little use if no traffic goes through the site.
Key to the success of any website is getting the address listed in all the relevant directories and search engines. Space on the front page of the listings can be bought, however this will eat into the profit that it creates.
Search engines use so-called 'spider' programmes to search through the internet. These follow every link on every website that is indexed with the search engine and the contents of each of the scanned pages are logged.
These are regularly upgraded and developed, their contents are refreshed and their position noted within the search engine's database. It is, therefore, important that a firm's site is focused and clear in explaining exactly what it does.
However, it is also important that it has other sites linking into it as well. This means that not only will the original site be registered by search engines when they look through it directly, but also when they search through the links on other firms' sites that lead back to it.
Brokers will compete in the new environment only by being proactive and exploiting the customer migration to the web. IT
Simon Burgess managing director of britishinsurance.com