The Direct Approach

Desjardins General Insurance Group purchased the home and auto insurance operations of CIBC General Insurance just over 10 years ago. We made that big investment because we were confident the direct distribution model we introduced in Quebec would prove just as potent in the other provincial markets.

What’s our view a decade later? Do we still believe the direct channel will play as big a role in personal lines distribution in Canada as it does in the United States, Great Britain and many parts of Europe? The answer is an unequivocal yes.

Why so confident? After all, broker-based companies still account for 57% of the personal lines market in Canada, versus 30% for direct writers and 13% for the captive agent companies. In Quebec, the situation is just the opposite, with the directs at 61% market share in personal lines, and the broker companies at 39%.

Numbers don’t always tell the whole story. It is increasingly difficult to understand what is happening in the Canadian market, because players are transforming “traditional” distribution channels.

How, for example, do you classify volume written by broker-based insurers through BrokerLink, Johnson Inc., Cypher Insurance Group and Grey Power? Is it broker or direct, or do we have to invent a new name? For the moment, it’s classified as broker.

Even if the categories and numbers are a little cloudy, brokers still have a lot of the market. But how sustainable is that over the long term, given the combination of relatively simple, commoditized personal lines products and growing consumer use of Internet and mobile tools to research, compare and purchase products and services?

The trend towards direct distribution in personal lines is clear. A recent survey by PwC Canada found the broker channel lost approximately 0.81% market share in auto insurance and 1.27% in property insurance per year to the direct channel over the past decade.

There is good reason to believe the trend will accelerate. The simple reason is that the direct model offers what many consumers care about today: price, convenience and empowerment. And this is being driven by technology that is radically changing consumer attitudes and shopping habits.

Price/Cost Advantages

In terms of costs, direct companies already have an advantage when it comes to expense ratios. It’s much easier to automate centralized processes, thereby bringing about internal efficiencies. Direct insurers also benefit from economies of scale, since everything they develop for their sales force is amortized over a large volume. The same is true for the development of Internet sites.

A bigger issue is loss ratios, mainly in relation to the highly regulated and difficult Ontario market. In markets like Quebec or the United States, where directs are allowed to manage risks appropriately, the loss ratio of most direct providers is very competitive. Even in Ontario, direct providers are making headway: they are becoming more sophisticated operators, and the province’s auto insurance market is showing some signs of improvement following the most recent reforms.
 
Convenience

Direct providers also have a big advantage in terms of the customer experience. As both a manufacturer and distributor of the insurance product, they control the end-to-end process. When you own the customer relationship, you can manage the customer experience and use technology to build loyalty to the brand. It’s having one system, one set of products and providing agents with exactly the same training, goals and expectations.  

It’s also about providing the convenient and immediate service consumers expect. You don’t have to make an appointment. The call is answered right away. And because of our integrated systems, the customer can have the quote within minutes, and the policy mailed the next day. And, of course, with hundreds of agents and sophisticated Web sites, direct companies can provide weekend coverage or extended-hours service – hours that are convenient for customers. 

In addition, and this is key, Internet sales and services are a much more natural fit to direct insurers, which is why the direct companies like GEICO in the United States and Direct Line in Britain are leading the transition to online sales. Clearly the investment in brand awareness, key to the success of direct companies, provides them with a big advantage when competing online.

But the biggest gains from technology are for the consumers: 24/7 access, comparison shopping, self-updating and monitoring files online, external database links to simplify everything, and of course the new mobile applications.

Empowerment

It’s all about convenience and empowerment. Consumers can shop where they want and when it’s convenient for them. They can do their own research and make their own decisions. They are in control.

Some people argue the Canadian market is different; that we’re more tied to the traditional, personal approach. That doesn’t make a lot of sense. Canadians are going online and using smartphone applications to manage their bank accounts, their Visa bills, their mortgages and their investments. And they are booking their vacations online, without the help of a travel agent.

To somehow imagine the insurance business will escape this trend is not realistic. It’s already happening in Great Britain, where the majority of auto insurance sales are now done over the Internet, powered by the myriad of insurance price comparison Web sites such as confused.com and comparethemarket.com.

Online sales in the United States aren’t at quite the same level, but they are growing rapidly. Instead of price comparison Web sites, direct companies such as GEICO and Progressive are leading the online charge, using their brand power and massive advertising budgets to build acceptance.

It’s not a hard sell for the affluent and for younger urban customers who grew up with Internet technology. Naturally, they expect to research and do business online. Other parts of the market – particularly older customers, those in rural areas, and those with more complex insurance needs – will probably take longer to make the transition. Admittedly, some may always prefer the traditional approach. And of course, most commercial customers will continue to rely on expert brokers to meet their insurance requirements.

So the future of our industry is multi-channel distribution, with the direct approach playing an increasingly important role in personal lines. Customers will choose how they want to deal with their insurance providers – whether by using mobile applications, over the Internet, by phone or in person. They don’t care how this affects our industry or about the competition between distribution channels and companies. By making their own decisions, they’re calling the shots. The challenge to insurance providers is to respond, by seamlessly meeting the needs of all of our customers across the various channels.