Surviving as a traditional intermediary in a disrupted environment
Jonathan B Rosenberg, CEO
Renasa Insurance Company Limited
- Technological advancement: Which allows better control of and efficiency in dealing with usual things and the ability to handle new things.
- Changing demographics: With new market entrants and existing markets requiring new products.
- Increased consumerism: With a more informed customer base demanding greater accountability and better service.
- The impact of regulatory change: Which affects market structure and raises capital and compliance costs.
With the intermediaries left moribund by legacy systems, technological advancement favours the direct market. In terms of demographic change, the direct market has greater control, more advanced systems and is able to be more pro-active, leaving the intermediated market less competitive. As for the impact of modern consumerism in commercial lines, the benefit of independent advice available favours intermediaries, however the direct market is highly systemised and better placed to deal with the volume of commoditised transactions leaving intermediaries disadvantaged in personal lines.
Finally, regarding the impact of regulatory change, there has already been significant consolidation in the intermediated market leaving intermediaries less competitive with the reduced choice. Furthermore, the purchase by corporates of brokers not willing to embrace regulatory change or feeling unsettled by the uncertainty of income streams with the advent of RDR, is already a common occurrence leaving that market more consolidated.
The upshot is that, with the exception of the ascendancy in the commercial market afforded intermediaries because of their independence, the intermediated market is left the loser, disadvantaged and less competitive than direct insurers by all the natural disruptors, technological advancement, demographic and consumerism developments and finally regulatory change.
So, what of the future? If the UK example is anything to go by, extrapolation of current circumstances will tell you that the personal lines motor market will be absorbed by the direct market and aggregators and lost to the intermediaries as they fail to achieve the actuarial pricing (with its associated risk selection) practised by the direct market and battle with high claims costs in the absence of the systemised claims cost control exercised by the direct market.
What has not been assessed, is the cost to intermediaries of this loss. Of the total market, personal lines is the single largest category of business in short term insurance, representing 51,5% (58,1% motor), a total of R 27,2 billion. The best estimate of the direct market’s share of personal lines motor is R 10,8 billion leaving R 16,8 billion as the personal lines motor class in the intermediated market. Were this to be lost to the intermediated market, the loss of commission and fees could amount to as much as R 3 billion and no less than R 2 billion if intermediaries manage to save the distribution of half of the current personal lines motor business by accessing aggregators.
So, should the intermediated market abandon personal lines motor or fight to retain it? Well, to retain this business, which is currently unsustainable in the face of the superior risk selection and claims control in the direct market, the intermediated segment needs to assimilate the direct market’s controls. That means, it is first essential to maximise claims cost efficiency by achieving real-time control over claims costs. Then, it is necessary to achieve real-time control over pricing and adopt actuarial pricing disciplines.
This, although daunting, is not an impossible task. Renasa has maintained a stable rand repair cost over the past four years despite the impact of inflation, a weakening rand and a 40% increase in average sum insured. The ratio of repair cost to sum insured has fallen more than 40% in that period. But that is not enough to arrest the charge of the direct market. To achieve that, it is also necessary to be able to price in an actuarial fashion. That is, a price is deployed, this causes an experience, the causes of the experience are actuarially analysed and the pricing changed to favour the safer risks and penalise those with a poor experience. But this process must be seamless and managed using a system sealed from uncontrolled interference. Yet, such a system it must be capable of operation in the intermediated market where administration has traditionally been free of insurer control. Discounts can be permitted, but not indiscriminate discounting. As with its real-time claims cost controls, Renasa has likewise implemented a system of real-time pricing control which avails the intermediated market, for the first time, of rates determined in the same scientific, actuarial fashion as is employed in the direct market, yet preserves the competitive ability of intermediaries and provides smart technology to authorise immediately any justified discount in excess of mandate.
Renasa has achieved these controls to the benefit of the intermediaries it services. It provides them for the first time with the tools to defend the attack of the direct market, by advanced integration of its claims and pricing modules with the independent systems operated by intermediaries. These intermediaries can now benefit from Renasa’s scale and control in the claims cycle. They can also now price correctly, not exposing incorrectly overpriced risks to the attack of the direct market and not under-pricing more than is necessary to remain competitive. And yet they can do this free of overbearing insurer control, while operating on their own independent systems.
And this is what is necessary to defend the R 3,0 billion in commission and fees most of which will otherwise be lost to the direct market. THIS IS THE ULTIMATE DISRUPTOR. IT IS IN YOUR HANDS.
Renasa Insurance Company Limited
Breaking News »