Insurance Distribution: Where Are We Heading?
Originally published in Insurance Edge
This latest piece is by Nour Alnuaimi, Founder and CEO of Upsurance and looks at the traditional MGA/broker strategy and how both can benefit by adopting the latest technologies available. Distribution is getting faster as technology improves because understanding and pricing risk can be done more accurately, and with more custom features, than ever before.
What does it mean for the relationships between MGAs, brokers and insurers? Everyone has a part in the value chain says Nour.
Deciding upon an effective route to distribute insurance policies is a challenge capacity providers have battled with for many years. Historically, the choice has been narrowed for insurers because of the types of policies they are selling. For example, complex commercial insurances may need to be sold on an advised basis and an MGA or insurer is simply not resourced to do this.
A regulator always has a keen eye on the distribution chain and if it suspects a product manufacturer is aiming to cut out important parts of the sales process to economise, it’s very likely they would intervene. It is therefore inherent in many insurance products that the broker interaction is an essential part of the distribution chain. But, making it work effectively for capacity providers has always been a problem, particularly in a competitive market.
This has been managed differently depending on how large and well established the product provider is. For a significant player, the typical strategy has been to use significant human resources to provide brokers with access to all their products. The same price and terms are quoted for each risk despite receiving it from numerous brokers. The intermediaries are then left to fight it out amongst themselves in the hope the terms are competitive and they will win the business irrespective of which broker is appointed.
For a smaller insurer, MGA or new entrant to the market, this strategy is likely to be unsuccessful for a variety of reasons. Firstly, brokers may not be aware of their existence and even then, they may not wish to go through the administrative headache of opening an agency. Secondly, the resources traditionally required to proactively manage a large broker panel from both a compliance and commercial perspective are significant, and therefore probably impractical.
Consequently, they tended to work with a smaller panel of specialist brokers who dominate a certain sector. This provided access to a large portion of their enquiries, in return for a certain element of exclusivity. The challenge with this is, of course, that on an absolute basis, the available GWP is unlikely to be significant enough to justify the running of an entire business.
Digital strategy of how MGAs and insurers tackle trading challenges in SME insurance
Whilst adopting a strategy to service every commercial broker in the market was achievable for large composite insurers, it clearly had a significant impact on their operational costs. Despite the huge staff base engaged by such companies, service standards remained an issue. With pressure being applied from the customer down to improve service levels, insurers began to invest in technology rather than allocate even more labour to the problem. Policy Administration Systems were introduced to provide electronic record-keeping of transactions via a company extranet with the aim of minimising some of the manual processes and transactions
SME insurance has mainly gone online now.
Software houses also helped insurers with limited technological ability to adopt policy administration systems and the build of SME products into these systems for distribution to brokers. Despite the very large upfront and ongoing costs, a number of MGAs also found it an easy way to increase their profile.
All insurers have either implemented or are on their way to implementing back-end technology to manage their policies digitally. In recent times, commercial brokers have also sought ways to manage operational costs and the mass adoption of specialist policy administration systems has been the trend. This leaves brokers with various insurer and MGA systems to rekey the information into and then rekey again for their own system – providing their agencies have been digitised.
It’s clear that adopting digital solutions can add tremendous value from the savings that can be made to the operational cost base, as well as providing a way to differentiate a business from its competitors. These improvements can be used to attract new business by converting financial savings into reduced premiums, as well as improving retention rates by providing the broker with a relatively easier route through which to serve their client.
Mid-market commercial insurance has always considered human interaction to be important. Therefore, capacity providers should use digitisation, and in particular automation, to enhance relationships and not replace them. Being able to automate the quantitative to further leverage the qualitative will provide MGA’s and risk carriers with far greater insight into end customer requirements. This will help cement their position as the primary provider for the brokers they choose to partner with.
Future strategy of how MGAs and insurers will tackle the challenge
Rekeying continues to be an issue in the trading of SME insurance, with brokers managing the heavy lifting. While mid-market and larger risks are still very much managed in the traditional manner.
The evolution of technology, including advances in cloud technology, micro-services and the increase in number of insurance APIs, has set the stage for where the next set of technologically savvy MGAs and insurers are heading.
Real-time data, new data sources, data collection and aggregation, algorithmic matching of appetite to risk, automation, and new pricing and distribution models are technological tools that are now available due to the evolution of technology and the adoption of the initial building blocks by MGAs and insurers.
Specifically, the rise of insurance APIs will become the main driver for where the industry heads next. This means existing systems can interact with counterparties without the need for manual human intervention. This will bring value from new distribution models, new data models and the utilisation of automation technologies including machine learning, OCR, RPA, amongst others. This allows for the introduction of new products to the digital realm and allowing larger risks to benefit from advancements in technology.