What are the options for insurers?
What are the options for insurers?
There can be no question that the issues facing the commercial lines industry are complex and that incumbents will face some tough choices in adopting an ecommerce strategy.
A few insurers will doubtless be successful with seller-centric sites. Where there is only a limited number of carriers, or where there is one of the few industry-leading sites, from which a quote is a “must have” that may not be available through an intermediary, these might work.
Vertical and diagonal emarkets are expected to be key for transactional buyers, especially for small to medium enterprsies. They can meet the purchasing and information needs of their buyers across all purchases, including insurance, and will be able to provide suitably targeted insurance packages – based around the industry or function of the emarket.
For the dialogue buyer segment, wholesale ebrokers will be the winning intermediaries, bringing in business for the insurers from their physical brokers/agents.
A strong brand and notably efficient operations might underpin the case for a seller-centric site for an insurer, and be a good springboard into the emarket in those industries where an insurer finds itself well positioned. Similarly, a strong broker/agent network could ensure a successful broker/agent access site.
A low cost operator with robust underwriting systems might supply online intermediaries, winning the commodity game.
Finally, to forward integrate and set up successfully as an intermediary, an insurer should have – or be able to build – a reputation for fairness and objectivity.
Naturally, there are risks in entering espace. Significant among these is that incumbents will overestimate both their brand strengths and their relationships with intermediaries, rushing with the crowd to rely on seller-centric or broker-access sites. However, while it is difficult to predict how soon ecommerce methods might penetrate commercial lines insurance significantly, any insurer who has a strong position in a particular sector should seriously consider whether to join forces with other suppliers or intermediaries to create these new emarkets.
The risk posed by resistance to change is that ultimately, the circle of poor returns remains unbroken and players operate in an increasingly crowded “me too” arena instead of breaking new ground.
Potential cost savings are compelling for insurers
Web technology presents incumbent insurers with many opportunities for substantial cost reductions, mostly in distribution and policy servicing.
Potential impact is most significant in the small commercial segment – ie, companies employing fewer than 100 staff. Here, the expense ratio could be reduced from around 43% to 13% or 23%, depending on whether the business is conducted through fully electronic means or whether physical brokers/agents are still involved.
A reduction from around 29% to 20% could be achieved in the expense ratio for medium-sized corporate businesses with up to 750 employees. For large account business a reduction from 20% to 16% is still possible for insurers who improve their processing through the internet.
What are the options for the large brokers?
The large incumbent brokers will also face challenges from ecommerce. They, too, will need to address issues on brand strengths and networks and may choose to operate outside their traditional frames of reference, entering emarkets as owners or suppliers.
Those with distinctive brands might be able to set up ebroker sites or, if supported by a strong network of independent brokers, become the primary ewholesale broker in the market. Both options would also support auction activities. Those who are able to reduce their costs radically could find positions in the emarket as transactors, ensuring that they are the insurance player of first choice for any one of the new intermediaries that emerge
It must also be considered that the emarket is a market of many partnerships; a place where it is frequently more viable to identify a key partner with a strong reputation than it is to build a new in-house capability. So those with good relationship and project management skills could succeed as emarket joint owners.
Predictably, each choice has associated risks. Emarket owners face competition from other emarkets in what is becoming a high growth industry, although brokers will have advantages over insurers here as buyers will be seeking neutrality in these markets. A transactor will need to penetrate a large number of markets to achieve economy of scale.
In considering an ebroker site, it might emerge that data aggregation and purchasing power benefits are more limited than expected, especially in comparison with the emarkets covering multiple products. If brand strength is overestimated, a high remedial marketing spend will be needed.
Wholesale ebrokers – who will rely on independent brokers using them – risk being bypassed by those independent brokers who access insurers direct.
Although the changes will be fundamental, is it for the commercial lines insurance industry to decide whether its concerns about embracing ecommerce can hold water for much longer. Or will the attackers begin to set the agenda?