Commercial Complacency

One of the enduring myths about insurance distribution is that independent brokers are safe from any kind of direct competition in commercial lines. The argument holds that commercial insurance is unique, riskier and more information-driven than “commodity” personal lines, necessitating the service of an intermediary.

This belief rests on a few fallacies. The first is that commercial insurance is homogeneous. Clearly, it is not. Businesses requiring insurance range from the “mom-and-pop” convenience stores through to the Fortune-500 multinational firms – although their exposures and insurance needs (and budgets) clearly differ. Many insurers divide the commercial marketplace into segments. The largest category, in terms of number of clients, is small business. According to Statistics Canada, more than 90% of the roughly 977,000 firms in Canada employ fewer than 20 people. The exact definition of “small business” varies from insurer to insurer, but firms are typically defined by number of employees (under 20) with annual sales of less than $2 million and premiums of between $500-5,000. Insurers are increasingly trying to streamline the processing of this business, often referred to in commodity-type terms, such as “standard” or “package”. This represents a key area for direct writers to use the advantage of lower cost structures and gain marketshare.

The second fallacy is that direct writers do not have the underwriting skill or expertise to focus on commercial business, preferring to stick to volume-based sales in personal lines. Direct writers clearly believe they have the right skill sets and cost structures to target commercial business, especially smaller package-type policies. These policies may even act as a gradual stepping stone to bigger business clients. The belief that direct writers cannot sell business insurance ignores the inroads they have quietly made in the past several years.

STEADY GAINS

While distribution numbers in Canada’s $10 billion commercial insurance market are difficult to pinpoint, Quebec has seen a distinct increase in the percentage of commercial lines insurance written by direct writers. In the province, direct writers have gained boosted marketshare from 12% in 1993 to 19% by 2003, according to one commercial expert. Quebec’s experience may be a harbinger, given its experience with direct insurers in personal lines. The statistics may vary from province to province, but it is clear that direct writers are not content with simply writing personal lines.

The Canadian experience dovetails with developments in the U.S. marketplace: over 2001/2002, direct writers captured more than 20% of the US$203 billion commercial lines market, with that number rising as high as 43% in some states, according to the Insurance Information Institute (III). The III says several major companies in both personal and commercial lines are using, or planning to use, both insurance agents and direct sale methods to reach consumers. In addition, since the opening up of regulations in the U.S. financial services industry, banks’ sales of commercial insurance increased more than three-fold to US$11.5 billion by 2002 from 1997’s US$2.8 billion.

All this should not cause panic for commercially-oriented brokers. Independent intermediaries still place the majority of business insurance premiums in Canada. But, this also should not blind them to potential competitors, or result in a resigned acceptance of the status-quo in commercial lines efficiency. It should instead prompt some questions. Will we see direct writers take advantage of cost efficiencies to grab marketshare, as they have done in personal lines? Is the cost structure of the broker channel competitive with other players? How can companies and brokers fortify and protect their business from competitors?

COMMON RESPONSE

The obvious advantage of direct writers is their ability to deal with captive agents or direct response channels. This presents a lower cost structure and an opportunity for efficient electronic exchange of data and policy transaction processing. In many cases, direct writers can use this efficiency to enter small commercial lines at a competitive price, slowly building marketshare.

This advantage of direct writers can be turned upside down by brokers, who represent multiple markets and remain independent advocates on behalf of clients. The “Achilles’ heel” of broker distribution, however, has always been efficiency. The best way to address the threat of direct competition is to streamline commercial operations and provide brokers with a unified way to communicate with all of their insurers.

To compete, brokers and insurers need to work as a team to streamline their distribution channel. But that’s not what is happening right now. Insurers have been developing quoting websites to gain marketshare and reduce their data entry costs. This approach is one-sided as it does not reduce the overall costs or efficiency of the channel – it only transfers the burden to the broker, already facing a situation of double and sometimes even triple-entry of data. You can not get the efficiencies you need if you simply push the problem to the other guy on your team.

TAKING ACTION

One insurer who got it right years ago was Lombard Canada. Their Commercial LinCQ system provides a true end-to-end single entry system for commercial business. How? It is fully integrated with the broker management system (BMS), augments the commercial capabilities of the BMS and communicates electronically in real time with Lombard’s backend systems. Lombard got it right because they worked with the brokers (via their technology providers) to come up with a team solution. Not only does it give them a competitive advantage with other broker-based companies, it positions them to compete head-on with direct writers.

Brokers and insurers need to put solutions like this in place to compete with the direct writers – on a channel-wide scale. Luckily, this is easier today than it was when Lombard addressed the problem. A new breed of software for brokers, called “commercial management systems” (CMS), offers a way to accelerate the development of such systems. CMSs are already integrated with, and augment the capabilities of, the broker’s BMS. These systems offer the broker a structured method of collecting high-quality, comprehensive underwriting data for all of their commercial lines business. Hundreds of brokers across the country have already purchased and implemented CMSs to gain control of their commercial lines and are using them to send high-quality e-paper submissions via fax or email to all of their insurers.

But, “e-paper” is not data – it is only a visual representation of the data that must be retyped into the insurer’s system. The next logical step is to exchange this data electronically with the insurer’s systems to eliminate double entry. CMSs form a natural interface point to exchange data with the insurers. Two major insurers in Canada will be doing exactly this in the next few months, and more are seriously considering leveraging the CMS vendor products to streamline the broker distribution channel. The simple question facing traditional commercial lines is this: can brokers and insurers take a fresh approach to business insurance before marketshare slowly erodes to competitors? In many ways, the clock is ticking.