Time for broker evolution

A widening split in the broker sector between 'traditionalists' and 'innovators' will see competitive pressures intensify on those unwilling or unable to embrace change and look to the future.

This is a key finding of market analysis conducted by the CII's Faculty of Insurance Broking, in conjunction with software company Oracle. The report, Opinion Leader Research: Broker and Insurer Relations in a Regulated World, assesses the state of play in the broker market and looks at the current and evolutionary trends marking out the future of the industry.

It says the new broker will be more professional, focus on value, use technology as an enabler and take on the role as business continuity advisers, rather than mere insurance providers selling on price.

"The traditional insurance broker model as we have known it is in terminal decline and will soon be dead. In order to survive in the industry, the broking business model must undergo fundamental changes," says Steve Wellard, CII communications director.

National brokers, together with some larger regional firms, appear to be evolving in this direction at a much greater rate, opening the prospect of a battle for business using contrasting approaches.

Wellard further warns broking firms are at risk of losing ground if they do not embrace change. "There is a wide consensus that brokers need to change their offering and boost the value of what they do by increasing the advice and consultancy element.

"The larger firms have recognised this, but smaller ones are in danger of falling behind, which will make them vulnerable, especially as direct sellers increasingly encroach on their traditional hunting grounds of commercial lines to the SME market."

The research also identified a widening split in the way in which regional and national brokers charge for their services. National brokers are much more in favour of full disclosure of fees and commissions, with 47% having already adopted this practice, compared to 27% of regional brokers.

Wellard says: "The larger regional brokers and broking groups, super regionals and - in some cases - pseudo nationals in their own right, are more aligned to national brokers than their regional counterparts on these issues. In light of this, a regional versus national division may no longer be adequate in the future, with innovators versus traditionalists perhaps a more suitable classification."

But the research found that while the industry is set to undergo fundamental change, regulation is only part of the driving force behind this new future.

"While FSA regulation has created a new starting point for firms to operate from, the research indicates that it is competitive pressures, from both existing and new entrants to the insurance space and the changing needs and buying patterns of clients that are driving the changes," says Wellard.

Yet the research also highlights an ignorance about the possibilities that technology holds for the industry.

The industry still views technology with suspicion and is reluctant to invest money in it, with questions remaining about the benefits improved systems and solutions are able to deliver. In particular, the idea of working together to create shared platforms is met with resistance as businesses fear a loss of competitive advantage.

Chris Westwood, head of insurance at Oracle UK, says the market needs to focus on technology and overcome its scepticism. "To compete in this increasingly competitive market, insurance companies and brokers need to innovate and be fleet of foot - and outdated legacy technology cannot be allowed to stand in the way. Using technology as an enabler will benefit the industry as a whole, with insurers becoming more efficient and brokers able to service the needs of clients."

The research found that the FSA is making its mark on relationships between brokers and insurers. Brokers feel overloaded by documentation, are concerned about the cost of compliance, and have doubts about what regulation is achieving. Despite this, they believe they are providing a good service by Treating Customers Fairly and being transparent.

But overall, professionalism is the new buzz word - or at least it should be. Both brokers and insurers are planning to employ more technically qualified staff in the future.

"Brokers will look for advisers who are able to add value to their customers in order to protect their business from the threat of direct competition. Insurers will increase the number of technical posts in the front office and look for efficiencies in administration and the back office," says Wellard.

The conclusion is that the broking community is at something of a cross-roads. Wellard adds: "Regulation is clearly a major challenge, but it is those brokers and insurers who are focusing beyond this that are likely to emerge as winners. Be that through their people, their infrastructure and the delivery of value." IT

What the industry says about regulation and the future
73% of brokers back an urgent review of FSA regulation among customers, as do 43% of insurers

96% of brokers and 90% of insurers say customer needs haven't changed post regulation

94% of brokers feel well prepared for an FSA arrow visit, despite their doubts about the FSA's regime

72% of insurers and 86% of brokers believe they have always treated customers fairly

72% of insurers believe contract certainty is a big issue affecting relationships between insurers and brokers. However, underwriters and brokers in the London market believe it is more important than those outside the market

47% of national brokers have adopted full disclosure of fees and commissions, compared to 27% of regional brokers.

57% of insurers and 43% of brokers plan to increase the ratio of staff they employ in technical and advisory roles compared to those in administrative roles in the future

20% of brokers want the CII Faculty of Insurance Broking to focus on providing qualifications that will help with FSA compliance while 19% of insurers want it to improve the industry's professional image

57% of insurers compared to 36% of brokers would like to see full disclosure

86% of insurers and 71% of brokers believe brokers need to be more professional and position themselves as advice providers. National brokers are more likely to become advice providers and move away from selling on price than regional brokers.

The majority of both brokers and insurers say breaking the underwriting cycle is the one challenge they would throw down to the other.