The Consolidation Challenge

For insurance brokers, one of the most important drivers of change in the coming years will be the radical consolidation of the insurance industry and the pre-eminence of large multinational financial services firms. These companies will provide a comprehensive range of insurance and investment products, and present brokers with the potential to reap significant financial rewards (see Insight of this issue for current developments).

On the other hand, brokers will need to be ready to operate in a more competitive environment where consumers will have increased access to product information, plus many brokers will need to gain expertise in products beyond traditional property and casualty or life policies.

Industry consolidation

The Canadian insurance industry has been consolidating around several strong companies for several years. In the last few years this process has accelerated due to intensified competition, both domestically and internationally. This competition has come from large well-funded European firms seeking to carve out a piece of the Canadian market. It has also come from local banks that have established their own insurance businesses, acquired existing business, or both. Finally, the largest local companies are seeking to maintain their position in the market by growing their business through acquisitions.

Already the ten largest Canadian insurers have increased their market share from 37% in 1981 to approximately 50% in 2000. It is not unrealistic to expect that in the next several years Canada’s insurance industry will be centered on two or three major local firms and a similar number of foreign firms.

Shaping the future

The firms with whom brokers will do business in the future will be significantly different than many of today’s insurance companies. These firms will be integrated financial services companies whose organizational structure will be “customer-centric” rather “product-centric”. This will allow them to better understand and develop their entire relationship with customers, many of whom will do business with several divisions of the firm The development of a customer-centric organizational structure makes sense when we consider that the large insurers will also offer a diversified range of investment products. This product mix makes it imperative that the company maximize its relationship with its customers or else it will lose the potential to cross-sell its products and services. Due to the nature of these firms the cross-selling of products is of strategic importance to both their top and bottom lines.

Finally, these large financial service companies will deploy advanced technological infrastructures to support their operations. Back-office systems will be critical in unifying the policy administration systems of acquired firms as well as managing the complex relationships with customers that are demanded by a customer-centric organization. These firms will also establish broker portals that will deliver online functionality to their brokers, while simultaneously reducing their own administrative costs. In addition to individual firms’ broker portals, the introduction of XML-based industry portals providing transactional systems for the writing and maintenance of policies will provide a single-access point for brokers to conduct much of their business across multiple firms.

Broker consequences

The changing nature of the leading insurance providers will have a profound impact on the brokers who remain as their primary sales agents. Brokers will be presented with the opportunity of making more commissions and receiving those commissions faster than ever before. Of course, the other side of this opportunity is the requirement that brokers will have to be up-to-speed on a range of complex financial and insurance products. They will also have to be prepared to operate in a increasingly information rich environment.

However, through this “new environment”, brokers will be able to reap the benefits arising from an increased portfolio of products. They will be better able to cross-sell a complete range of insurance and investment products and thus greatly expand their business. Furthermore, the increased range of products will allow brokers to become true financial advisors to their clients and thus potentially gain a higher return on each of their client relationships.

In terms of relationships with insurers, brokers can expect better, and faster, service due to the improved technological infrastructure deployed. This service will include greater access to information on products and accounts as well as the ability to directly execute policy updates or changes. Brokers can also anticipate earlier commission payment, as it will generally take less time to write and approve a policy than is currently the case.

The challenges that brokers will face include increased competition due to the fact that consumers will have increased access to product information. The increased marketing budgets available to the large insurance companies will allow them to engage in more extensive product marketing. The growing sophistication of many consumers and their expectation of ever greater amounts of information will lead them to demand more information from their brokers. This will require that brokers establish the means to effectively provide information to consumers without limiting their ability to grow their business.

Skills challenge

The increased range of products that brokers will be able to offer will require many to undergo additional training in these products and to generally enhance their skill level to be better able to take on the role of financial advisor. One of the greatest challenges to be faced by brokers will be the need to change the way in which they work with the new financial services companies and accept the fact that there will be more extensive communications than ever before. Brokers may need to provide information about their customers as well as accept some degree of direct access between the company and the customer. The increased complexity of the product offering as well as the relationships between broker and firm, broker and customer and customer and firm all mandate that information be shared as widely as possible.

The consolidation of the Canadian insurance industry will have significant ramifications for brokers. The industry’s shift toward a smaller number of large companies with extensive product portfolios will require brokers to master new skills and adapt to a new environment.

For their part, the firms in the industry need to develop user-friendly tools which brokers can use to access up-to-date information as well as communicate directly with the firm’s systems. Ideally, this system would encompass all the firms in the industry and thus allow brokers a single point of access. This “industry portal” would help both the insurance providers and their brokers maximize the benefits afforded by the change in the industry. Ultimately, the changes to come should be viewed as a historic opportunity to expand both the nature of the profession, and the rewards to be gained.