With ebusiness creating new buying groups and retail brands bundling insurance, targetting niches may be the key to survival for many intermediaries. Alaric Nightingale questions James Woods of Mynd Innovations Group about the fate of the industry over the next five years.
QWhat is the insurance industry going to look like in five years' time?
A consolidation will continue, as will over-capacity. Personal lines and commercial package commoditisation will deliver increased choice and price performance. In these markets, good claims risks will no longer subsidize poor ones. Digital influences will have matured. New brands will play dominant channel roles, with insurance companies providing product, but remote from consumers. Retailers will bundle insurance with their goods and services. Chips in everything will start to keep risk managers updated with their exposure position. To survive, intermediaries will provide more value-added services to new niche communities. Business-to-business digital transactions and new supply web communities will drive out cost generally.
QWhat do you mean by communities?
ACommunities are groups of people or businesses in the e-business world who have common characteristics or interests. They may be transient or permanent. An example of a transient community would be purchasers of a product who might join together in order to lower the price of the product bought in bulk. An example of a permanent community could be an auction site for insurance risk, which retains the carrier and broker relationship, and where fulfilment and price are important to the winning bid.
QWhen you say that brokers can add value to these communities, how would that work in practice? What do you see the intermediary's / broker's full role being?
AThose were just examples of new communities which will form, amongst many new types that the new economy in insurance will encourage. Brokers will work with affinity groups, groups of common interest (e.g. substandard risks), or groups which can be formed together to demand insurance product innovation, perhaps packaging together risks and sections to create new variants expressly for the need of the new community. Although this is no different from what many of them do now, in the new economy, they will need to work harder to understand the needs of new communities, in order to demonstrate that they have a greater role to play than just simply placing business. These new communities will not map onto current traditional segments of the market. Some brokers will be able to exploit their current knowledge of particular segments of the market. Others will have to work a lot harder to stay in business, because as it becomes easier to buy insurance directly through new channels, much of the traditional market space will contract.
QCan you give a concrete example of a ‘community' that is currently not serviced by intermediaries/brokers that could be exploited?
AI don't think it is particularly interesting to give concrete examples of what will prevail in five years' time. It remains to be seen what communities will form, but the point of my argument is that “the internet and all that” will create new communities. You can think of thousands of new types of groups now possible because of lack of geographic or temporal barriers: people with similar leisure or consumer buying profiles; people who have particular lifestyle attributes, hobbies, sports, political or religious affiliations, or common interests in general; as well as businesses with common factors distinct from their current geographical or line of business profile. They are all served now by brokers and intermediaries. The trick will be for intermediaries of the future to spot the new communities which will emerge, in order to predict and cater for their needs.
QSo what is your take on virtual insurers and virtual intermediaries? How much of the market to you think they will take and why?
AFor me, there is a distinction between virtual insurers and virtual intermediaries. The virtual elements are different. Intermediaries don't have the same extent of back office administration and legacy infrastructure to lose by going virtual. The ebusiness element of a virtual intermediary is the most distinctive factor, and represents the largest potential for cost and administration savings, not back office and infrastructure IT.
There will however be scope for marketeer intermediaries, who operate an internet model of some kind, to carve out market share amongst niche sectors – the communities I referred to earlier. Increasing competition for intermediary business is going to come strongly from the customer relationship owners – the retailers, dot.coms and high street brands – where for the masses, insurance will be bought and sold in the future. These outlets have a vested interest in acquiring sufficient expertise to perform many, if not most, of the skills of the traditional intermediary, and they have the clout to do it. The intermediary will therefore have to refocus on non–mass-market communities, where they can add value and demonstrate more dedication. They will probably need to be virtual if they are to overcome geographical and time barriers.
On virtual insurers:
We believe they will play an important role in moving forward. We have built a business model based on that view. Control of the customer relationship is key to calling the shots, so non-insurance brands will continue to increase in importance. These non-insurance brands – high street retailers, supermarkets, cell-phone operators, or new dot.com successes – will want to deliver more flexibility in the insurance products they market, and at a lower price. The traditional insurers, as potential partners for these entities, struggle to deliver the required flexibility at the right price, because they operate inefficiently. Even with large-scale mergers and acquisitions, they can only reduce costs at the margin. The virtual insurers can write the business at expense ratios approaching half that of the traditionals, because they use the most open, up-to-date and flexible systems.
The degree of market share is difficult. It will depend on the nature of interest rate pressures to make underwriting profit (as opposed to revenue from asset management). If interest rates stay low, then there is no reason to doubt a penetration as dramatic as that of the direct telemarketers when Direct Line emerged. Low interest rates also make it easier for startups, so there will be more scope for potentially new businesses which make a real, dramatic success of the virtual model. If interest rates creep up, then traditional insurers can rely on capital base, and new entrants will find it more difficult to break in.
The views expressed above apply mainly to the personal lines, commercial package and personal financial services sectors. Large Commercial lines insurers and intermediaries should be somewhat cushioned from the effects described.