In this Opinion piece, Vijaykumar Mahendrakar, (pictured) Vice President, Insurance Solutions, UK & EMEA at Mphasis, takes a look at how our digital economy is transforming the broker business. Online competition is driving down commissions and fees, but it’s also providing new opportunities.
Insurance brokers represent the interests of the customer and have a unique role in the distribution chain. Customers value brokers’ ability to provide risk management and consulting advice regarding coverage, and to recommend and structure appropriate insurance products, among other services. Brokers earn revenue through commissions as a percentage of the insurance premium and fee income for risk consulting and advisory services. In fact, research indicates that the broker industry is expected to grow to around $60 billion at CAGR of 4 to 5 % from 2016-20.
Digital technologies are reshaping the insurance value chain. It is transforming the way insurance products are distributed, structured, placed, and underwritten, as well as claims processing. Digital technologies have the potential to provide personalised products not available today, reduce risk behaviour, monitor risk frequently, automate administrative tasks and contain impact after an incident. These efficiencies could erode as much as 20% of brokerage revenues as benefits are passed on to customers.
Customer relationship and distribution are the primary battlegrounds for emerging business models through adoption of digital technologies. As one of the distribution channels for insurance, brokers have an opportunity to reposition themselves as they face a threat of becoming less relevant to customers.
To reap benefits of the forecasted growth brokers need to address several challenges:
Threat of disintermediation in a transforming competition landscape: The ambition to gain greater direct engagement with customers and a relatively lower capital barrier are attracting a variety of competition. Insurers, reinsurers, banks, insurtechs and digital native companies are aiming to circumvent traditional brokers. Digital native businesses such as Amazon, Airbnb, Tencent and Uber have demonstrated the power to disintermediate services that do not provide value to customers across choice, personalisation, control, convenience and cost. New business models and technologies will accelerate entry of competition to brokers.
Hyperpersonalized customer engagement across commodity and complex risk spectrum: Technologies such as machine learning, Artificial Intelligence (AI), the Internet of Things (IoT), blockchain and digital assistants are transforming the delivery of risk products and services, as well as client relationship and engagement models. Customers influenced by their experiences in other industries have different expectations. On the lower end the risk spectrum, technology is accelerating automation, self-service and commoditization of risk products and services. At the same time, emerging risks such as cyber security, climate change, the sharing economy and a globally connected supply chain, are driving the need for greater customer engagement through advisory services using data and analytics. Having a one-size-fits-all operating model is no longer sustainable.
Insurance and emerging-risk trends are driving need for specialized broker skills: Insurance products are transforming beyond standard actuarial models. Connected digital ecosystems and technologies such as IoT provide opportunities for innovation in designing products and services. Brokers need to develop specialized skills within industries and across lines of business such as employee benefits, health, property and liability. The need for differentiating data science and customer experience skills within the operations and IT teams is crucial. These skills are needed to meet customer expectations of specialized advice and insight.
Increased regulation and compliance: Regulators expect brokers to provide independent advice in the interest of the customer. In addition, there is expectation of greater transparency about revenues. The Insurance Distribution Directive, General Data Protection Regulation and Senior Managers Certification Regime are a few areas for brokers to pay attention to. For example, UK regulator Financial Conduct Authority recently fined Bluefin, owned by AXA during the period of judgment, for £4 million ($5.5 million) for inadequate controls of its independence to manage conflict. Broker-owned managing general agents would need to examine any potential conflict of interest.
How to transform into a digital broker
Proximity and independent advisory expertise provide an opportunity for brokers to become customer concierges. Developing the following data and digital capabilities will enable brokers to take advantage of the role they have in insurance value:
Emphasis on cognitive and cloud
Today, brokers are constrained by the operational data residing in multiple systems or locked within software house applications. In addition, current data analysis is mostly focused on financial analytics and management information reporting. While brokers own a significant amount of data, they are unable to control and use this data for customer-driven decisions.
To transform, brokers need to prioritize knowledge management, data and analytics capabilities as a strategic focus. Data and digital technologies such as IoT and smart sensors, big data, machine learning, AI and the cloud provide the capability to hyperpersonalize each customer’s risk profile and deliver valuable insights to the business team. This enables the broker to provide informed actions regarding underinsurance analytics and design the appropriate insurance product structure and placement strategy based on data insights. In addition, this also enables the broker to monetise the data as a service to customers as well as other partners. This helps build additional revenue streams through risk prevention and reduction services, as well as post-event response and support services.
Digital and smart customer engagement
Currently, broker engagement with customers is generally limited to new business, renewal, midterm adjustments or claims. The majority of these engagements are thorough phone calls or emails and involve data exchanges through documents. In a digital environment, customers are transforming their way of working.
By providing omnichannel capabilities through apps on smartphones, portals, chatbots, Alexa and messengers, brokers have the opportunity to redesign customer engagement and data exchange. These capabilities will provide choice to customers for engagement, improve operational efficiency and release capacity through automation of transaction services such as midterm adjustments, price discovery and placement services. Transposing this engagement with data intelligence enables brokers to provide more effective and personalised engagement across their advisory service.
Connected partner ecosystem
Technology is accelerating the interconnection across multiple industries and businesses. For example, brokers are able to establish digital interface with premium finance partners to provide instant options to customers transforming the experience, as well as adding a revenue channel. Brokers have the opportunity to establish digital interface with (re)insurers to promote e-trading. Similarly, brokers have the capability to work with distribution partners like airlines, car dealers, banks, utility providers, and health care providers to provide integrated service to the customer. These connected partners will eliminate waste across the value chain.
Innovative products and services
Brokers have the opportunity to structure innovative products, choice of placement market, and services. With technologies supporting connected assets such as car, property and health, brokers can provide more certain and real-time risk data at an individual customer level. Brokers have an opportunity to collaborate with partners and with insurers to develop innovative risk prevention, reduction and post-event response services to reduce business interruption. In addition, collaborating with insurers brings an ability to innovate risk-sizing and tracking products, like pay-per-use and pay-how-you-use products. Similarly, brokers can take the initiative to develop products, services and markets around emerging complex risks.
Building and implementing these technologies requires significant commitment. Brokers that prioritise this will be able to transform successfully into trusted customer advisors. This will help brokers differentiate the traditional model, as well as reinvent their business and revenue models. It will improve operating efficiency, drive growth through greater customer retention, and increase revenue through new services.