Brokers are facing insurance distribution challenges that are set to reshape the insurance sector for good
Experts have predicted that the cost-of-living crisis, regulation, consolidation, emerging technologies and changing customer demands are among the factors which will drive change in 2023. But brokers also have the opportunity to prove their value in the distribution chain.
With most people tightening their belts, it is no surprise that the insurance sector is feeling the impact of the cost-of-living crisis.
Steve White, chief executive of the British Insurance Brokers’ Association (BIBA), said the trade body had seen “worrying trends”, with brokers reporting that customers were cutting down on insurance cover to save money. BIBA research from Autumn 2022 showed that 40% of broker respondents had seen some SMEs no longer buying cyber cover, while 30% had seen customers reducing their buildings and contents cover. In addition, 43% of brokers had spotted an uptake in clients wanting to spread the cost of their premiums using premium finance.
The problem with people trying to save money on insurance is that they will often try to cut corners on the cover they need.
Jordan Gregg, managing director of Cedar Underwriting, warned that this would lead to a “false economy” once a claim occurs, adding: “There is also still very much a hard market across most sectors, so insurance prices are increasing like everything else. The cost of building materials, for example, is badly hit by inflation, which has a knock-on effect on rates.”
But the crisis also presents an opportunity for brokers to prove their value to both clients and to insurers. “It’s about being creative in the way in which they present the risk, adding value for clients by looking at the covers they’ve got and ensuring they are adequate,” Chris Withers, broker distribution director at Ecclesiastical, said.
Changing distribution landscape
The broking sector has been an attractive environment for private equity for the last 10 years, and the pace of consolidation remains high. Experts agreed that this trend is likely to continue.
Mike Keating, CEO of the Managing General Agents’ Association (MGAA), said: “I’m not of the view that there won’t be enough choice for customers, but inevitably the number of brokers will decrease due to consolidation.”
According to Keating, when it comes to broker distribution, MGAs are continuing to expand. “That’s driven by insurer service not being what it needs to be and brokers getting easy access to decision-makers at MGAs,” he said. “MGAs are also both innovative and agile, and they didn’t miss a heartbeat during the pandemic, which has led to continued support from brokers.”
The heavy burden of regulation is also having an impact on the insurance distribution landscape. Following the Financial Conduct Authority’s General Insurance Pricing Practices market study, the regulator introduced new rules last year, requiring insurance distributors to ensure the products they sell offer fair value to their customers.
Withers argued that the need to complete fair value assessments will likely result in brokers narrowing down the number of products they offer. Add to that the Consumer Duty, which will come into force later this year, and it will be even harder for distributors to maintain a big agency base of insurers.
“Insurers are being challenged by the fact that there’s going to be fewer distributors because of consolidation, and those distributors will then choose to work with fewer insurers because of the regulatory burden and the challenge around managing all those different insurer products,” Withers said. “It will mean insurers will have to work harder to ensure that they maintain a position with brokers.”
There’s no denying that the high consolidation pace has led to fewer brokers in the market, but new start-up businesses are filling some of the gaps. And while the regulatory burden is making it difficult for new brokers to launch, this challenge has paved the way for AR networks.
“We see a lot more Appointed Representatives entering the market now,” said Gregg. “Compliance can be such a drain on resources and costs, and with a good principal or network behind a broker, there are savings to be made.”
The AR model has come under scrutiny from the FCA in recent years, and Withers noted that it does come with its own regulatory challenges because it is important to keep track of where in the chain the responsibilities lie. “But that is a way in which new brokers can start up; and where the principal firm takes on the responsibility for the fair value assessment, so there’s an appeal in that model,” he added.
Brokers have been moving towards more digital ways of working for years, and the pandemic forced them to re-evaluate their models at greater speed.
“We had several brokers telling us they accelerated their digital proposition very dramatically over the space of a few weeks in the Spring of 2020,” White said. “That has led firms to either accelerate their existing digital plans or, for some, create digital plans.”
Where insurers have sometimes been slow to innovate because of legacy systems, MGAs have traditionally been quicker and better at developing digital solutions for brokers.
However, Gregg stated that the insurer markets are catching up. “With brokers and capacity alike being more used to Zoom and Teams meetings, solutions tend to be found quicker around schemes and opportunities,” he continued.
Changing customer demands
The demand for digital solutions is no longer exclusive to younger generations, but experts have seen an increased demand for speed, with customers expecting their needs to be met immediately. As a result, younger customers expect to go directly where possible, particularly for Personal Lines Insurance, as advice is less important.
Keating further argued that technology will play a big part in making brokers more cost-effective and efficient. “The use of technology and AI, in terms of improving effectiveness, will accelerate over the next twelve to fifteen months,” he predicted. “There is certainly AI tech which can remove frictional costs, in terms of reviewing documentation and presentations to get to the risk information.”
Meanwhile, White added that another aspect of attracting younger customers centres around company culture, with a particular focus on ESG and diversity and inclusion.
“Young people are becoming more interested in the culture of the companies they do business with,” he added. “They want to do business with people that look and feel like they do, so the whole diversity aspect and the ESG piece, there will be some customer demand driving that.”
At Stubben Edge, we’re on a mission to supercharge insurance distribution. Whether that’s helping more people start up on their own, or providing the technology to enable existing brokers to grow their businesses. If you’re interested in finding out more about what we can do, book a quick demo here.