The Changing Face of Intermediation - what is to become of the Jack of all trades?
By Johan Botes: Manager Southern Regions
Renasa Insurance Company Ltd
The short term insurance industry has evolved significantly during the last 15 years or so. Intermediaries have to take note of and manage the changing environment and need to adapt to remain viable and to stay relevant in future. Although specialized knowledge and service are the foundations on which the Intermediary should focus his business, cost is probably the biggest driver for survival. So the question is:
“What can a small intermediary who does general insurance functions, do to survive?”
The workload of the intermediary has increased exponentially as a result of additional legislation and growing consumerism. The accepted wisdom is that a small independent brokerage would have a cost ratio of around 50% – 65% of gross income. The largest component of expenses is inevitably staff costs. One of the biggest challenges is to decide when to appoint additional staff members and to try to balance the number of employees with the growth of the book. This is a very tricky balance to perfect. This problem is further exacerbated by the fickle nature of our business inasmuch as the loss of one large account can have a serious negative effect on a business, and the labour laws are such that it is impossible to trim staff numbers quickly and cheaply should this occur. This situation encourages small brokers to run their business at the least possible expense which places an increased workload on the owner and his/her staff.
Insurers on the other hand try to alleviate the soaring costs by centralising administration. Contact- and call centres are set up in an effort to bring the unit cost per transaction down by utilising economies of scale. The down-side to this strategy is the impersonal nature of such interactions and the rule driven environment in a complex business where exceptions are difficult to manage.
This is one reason why intermediaries will seek to do the administration themselves. The time and cost saving to brokers, not to mention the frustrations avoided by not dealing with call centres and by doing these tasks themselves, will most often justify the decision to not deal with an ineffective and impersonal administration centre. Linked to this is the current legislation which allows for the payment of fees to intermediaries by the insurer, for the outsourcing of certain functions. The broker’s income stream can thus increase and help to balance the books.
Slightly different considerations apply for a small independent “Jack of all trades” intermediary.
Firstly a close examination of the company’s cost structure is necessary to establish where the expenses lie. This must then be measured against the marketing and growth capability of the broker’s book of business. If the increase in cost outstrips the growth potential, alternatives would need to be considered to remain solvent. One option could be to take on more administrative duties and responsibilities, and receive remuneration for these functions. Not an easy task as some Insurers are not geared, nor have the appetite, for outsourced models. Minimum premium income hurdles and lack of skills often hamper this strategy. Then there are the decisions regarding the IT system to be used, as systems costs can add further expense.
Lastly, the brokerage might decide to amalgamate, sell, or form a joint venture with a larger Intermediary which would have the above financial conundrum solved, be large enough to take advantage of the economies of scale and have in place the insurer agreements to make this model work. Perhaps, then the “Jack of all trades” will focus on that part of the business he/she is good at and leave the administration (and costs) to the larger partner in business?
Renasa Insurance Company Limited
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