March 1, 2000 by Laird Laundy, an independent insurance consultant
The introduction of assembly-line principles into service businesses is efficient and enormously effective for that 85% of business that is routine. But for the other 15%, it is infuriating, enormously ineffective and inefficient. Every piece of computer software ever written needs a manual override key for the majority of its functions. 15% is far too high an exception rate unless you are trying to destroy your reputation with customers.
This is why I am an unabashed enthusiast of the broker distribution system, as well as an optimist about its future. Consumers, especially of such a mind-numbing service as insurance, want to know there is a tag team partner there when the underwriting and claims bureaucracies need to be wrestled to the ground. In my estimate, more than half of consumers want an intermediary, and will pay maybe 10% more to have one (not an average of 15%, though).
Most people will know me as a “doomsayer,” but this is in my self-anointed role as a change agent for the industry. I did not say I was an enthusiast for the way the broker distribution system is currently constructed. We do need a heavy infusion of technology, but not the overwhelming rush of total automation.
Distribution will evolve into more of a continuum than the separate solitudes we now observe. Already we see the use of mutually supporting web sites, call centres and retail outlets. Consumers can choose what part of service, sales and shopping they do in each element. Eventually, even insurance brokers must get to the use of all three. The issue will be, how many brokers can be shoehorned into each niche or communication mix along the continuum.
The historical configuration of the industry sees the vast majority huddling together at the single-retail-outlet-only end of the spectrum, with the more progressive members tentatively shuffling towards multi-branch retail and a “brochureware web site”. A few more giant steps towards supporting generic out-there-among-the public technologies is certainly a key element in preventing the replacement of a very sound insurance community with high-tech low-insurance interlopers from the butcher’s blade school of thought.
What do we have to do to get there, and quick? For those who wish to break out of the over-supplied and under-demanded niche the smaller broker occupies, a new organizational form is the first step. Small brokerages do not make enough money to support the technology budgets required to successfully exit this niche (there are other requirements, too). They must get to be bigger brokerages. I believe that the boutique brokerage of the future is the $10 million broker, not the $2 million firm. That is where the low end starts. No matter that the percentage profit tends to be rather higher for smaller brokers, the raw dollar numbers are not enough to follow the consumer even part-way up the technology curve, especially with the failure in leadership from our underwriting partners, to whom we have abdicated the task.
Technology cost driving consolidation
This is a major driving theory behind the trend to consolidation, either through local and regional brokerage groups, or through the national consolidators. I say theory advisedly. The practice differs from the intent quite dramatically, at least on the larger scale: the regional and local players are doing a much better job of it. It is also an easier job to do.
In the heady world of mergers and acquisitions the salesmen discuss with gusto the synergies of combinations and the economies of scale and scope. But once the suits have left town, very few mergers actually deliver the goods. 75 years of studies have shown that at least half, and probably three-quarters of mergers not only fail to create value, but actually destroy it. The two main bugbears are excess price and post-purchase inactivity.
In the excitement of the hunt, acquirers often find themselves throwing caution to the winds, and buying (literally) into their own rhetoric. In the absence of discipline, prices spiral up as the prey elude capture until the last nickel is wrung out. Canada Brokerlink and Vector Intermediaries are classic examples of organizations that have paid for a dream and so far delivered a nightmare.
In fairness to them, the market during which they chose to rapidly expand was overpriced due to factors other than their own exuberance. But their strategy has been risky and shortsighted. Perhaps an impending bailout and a severe fiscal haircut for the existing shareholders will give them a second lease on life. Perhaps…if the white knight knows how to get its hands dirty.
Getting the pricing right
Network rival, The HUB Group, has thus far embraced significantly more self-restraint on the pricing side. This should ensure that it doesn’t self-destruct (unless for unrelated reasons), at least. But, HUB has yet to attempt any synergies and is, in the words of a vaguely related wag who would probably rather not be quoted, a collector rather than consolidator of brokerages. This actually may be a pretty clever interim move. I started this article bemoaning the state of our technology, and clearly attempting to impose a common technological integration is risky business. As HUB is only a year old, I understand that it may not have mapped out its actual consolidation agenda. Positive value may yet be forthcoming, and since the purchase pricing has not assumed significant synergies, there is time to see.
Equisure Financial Network has achieved far beyond the other pretenders, so far. President George Hutchison’s visionary skill (or dumb luck) put Equisure into the market first, which allowed it to build up a solid mass of premium before the price escalation of the later 1990s. Pricing discipline was therefore much easier to maintain, when acquiring critical mass was not as important an issue. Couple that with some post-purchase consolidation potential, and you have the ingredients of success. Equisure has made the archaic technology of the industry actually function across a national network, building the base for real consolidation activity. It has negotiated a change in its relationship with personal lines underwriters to take advantage of this capability, and may yet deliver on the p&c side, as an occupant of an uncrowded distribution continuum niche. When it is issuing policies and internally managing endorsement information, while still offering retail client service, we may see an actual consolidator at work.
*Laundy can be contacted to express your outrage (or support, God forbid) over this article at firstname.lastname@example.org
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