When motor insurers last concerted to drive unprofitable rates upwards, we witnessed how our market could be transformed by entrepreneurs exploiting the right propositions at the right time.

Telephone-based direct writers hit just the right note with consumers who resented massive premium hikes, and cemented their place in the market as a major channel.

It was some time before through-intermediary insurers fought back with competitive premiums; by which time the major motor brokers had adopted the same sales technology as the direct writers and EDI had become the norm.

Challenging the equilibrium
A crowded market place settled into a new equilibrium. Strangely, expense levels (see table 1) remained high, with the single exception of Direct Line which has stolen a march in establishing a real brand.

The new equilibrium is being challenged afresh, in a market which is hardening savagely in response to five years of severe losses.

The most prominent predator is once again Direct Line, capitalising on their low expense ratio and strong market position to quote more competitively than they have done for years.

But the driving issue is no longer direct versus broker.

The change is again expenses-led, but with the internet as the key to competitiveness. Brokernet and Directnet are the emerging channels that will reconfigure the market over the next two years.

The Net changes everything. Internet product delivery, selling and servicing will slash operating expenses, and reward brokers and insurers, which will achieve competitive edge by passing on those savings to the consumer.

Brokers and insurers that fail to realise and to release these savings face extinction. Goaded by the current tidal wave of premium rises, consumers are looking around for competitive premiums and e-trading no longer frightens them.

Round the clock service
Direct writers will become leaner and fitter by delivering quotations and sales over the net, by-passing expensive telesales centres. Brokers can secure even greater advantages, as savings percolate right through the supply chain.

Brokers gain a 24-hour marketing, sales and servicing capability for next to nothing.

A new generation of net-based broker systems will be much slicker in office use and are much cheaper to purchase, maintain and upgrade than the conventional box in the corner.

Insurers will develop and maintain products a great deal more cheaply than via the existing multitude of broker systems based on archetypal technology.

Driving the costs down
Direct client access will slash the cost of sales and administration. H&R Insurance Services have stated already that they expect to be able to run off a 2.5–3.0% commission rate for net-based motor business.

Coupled with insurer expense ratios coming down below 10%, you have a channel expenses ratio (see table 2) half of what it has been and challenging that of even Direct Line.

In this new environment, insurers have to be sure of earning a profit in each policy year. They can no longer rely on lifetime value through successive renewals, because policyholders can so easily re-quote and replace their business, either direct or within their brokers' panels.

This poses a real problem for the direct writers, whose marketing costs will rocket as they trade brands with the competition in a constantly churning marketplace.

Looking at what will happen to expense ratios in the net-based channels, it is possible to envisage the broker channel seizing the advantage (see table 3).

Enhanced viability spin-off
To remain competitive, brokers must realise the savings and trade on much reduced commission levels (net rated products will be a 'have to have' in this highly competitive point of sale environment).

One way for the brokers to realise the savings is to refocus staff energy from routine selling and administration to those areas where brokers should excel, namely deal making, cross selling and delivery of added value services. The broker can capitalise on the lifetime value of his client, in ways denied to the insurer.

A spin-off from this technology-led marketing revolution is the enhanced viability of small, local firms. Net-based product delivery virtually eliminates fixed costs for supplier and distributor. Improved trading processes will minimise brokers' administration overhead. Insurers will become more interested in the quality than in the size of a broker's book.

Brokers will be able to leverage profit from each client and connection, capitalising on the brand value of their established names and presence.

Tune up your differential
Not all trading will move to the net. There will still be a demand for face-to-face telephone and correspondence-based servicing, which brokers are uniquely positioned to deliver.

All these will generate a satisfactory return providing that brokers differentiate their prices according to the costs of the service that is required.

Brokers have always been masters of differential pricing, but it has generally been behind a cloak of concealment from the client. In the future, differentiating of servicing and of pricing will be more transparent. Brokers will have to master a new art of offering different bundles of service and products at different prices, even when based on a common product.

The consumer is king and the consumer will choose. The key to customer acquisition and retention will be to present a competitive range of offerings most suitable for the customer mix associated with each target purchasing medium.

In the e-commerce environment, brokers and insurers have to wire up for success.

This is the only way ahead. Winning brokers will make this happen, at the expense of laggard brokers who ignore the inevitable (and of those direct writers whose escalating marketing expenditure and reducing renewal retention keep expense ratios at unsustainable high levels).

1. Expense Ratios (motor) 1998 DTI returns
RSA: 29.5%
AXA: 30.8%
Bishopsgate: 23.4%
Direct Line: 14.6%
Churchill: 26.4%
Market: 30.3%