The Distribution Challenge Of 2000

The North American Insurance Conference, recently held in St. Petersburg Beach, Florida, drew an equal crowd of Canadian and U.S. insurance attendees, the event speakers covering a broad range of subjects from reinsurance market conditions through to the impact of primary company consolidation and the evolution of financial services distribution. However, a panel debate on future distribution and marketing trends, with views from the different industry sectors involved, drew the audience’s undivided attention.

An across-border panel debate of Canadian and U.S. property and casualty insurance speakers focussing on future trends in distribution presented a mixed outlook on the likely future success of hi-tech alternative distribution channels and the advances currently being attempted by some insurers toward direct customer relationship building. The panel debate was hosted by the recently held North American Insurance Conference.

The distribution panel speakers all agree that technology will play a significant role in reducing industry operating expenses through enhanced efficiency. And, while Internet-based marketing will likely garner serious attention this year, the speakers were at odds to whether web selling will in the short-term gain much sparkle.

In particular, the panel speakers presented alternative views to whether, in the long run, Internet selling will achieve greater success in personal lines or the commercial market. Broad consensus was, however, made on two issues, that being brokers and insurers alike can ill afford to buck the trend of technology application and secondly, the need to either develop a niche marketing approach or enter multi-product selling. In essence, the speakers concur that no dedicated approach to distribution or single product design will work in the future insurance markets.

Multi-approach

Staying in business will mean adapting to a changing customer profile, observes Terry Squire, president of The Co-operators Group Ltd. A member of the panel debate, Squire says personal lines insurers cannot rely on any one distribution channel in serving a rapidly fragmenting consumer market (see accompanying chart on consumer profiles). In particular, he believes that consumer segmentation is more acute in Canada, which consists of diverse cultural and geographic markets. As a result, Squire stresses the importance of multi-distribution application.

And, Squire notes, the p&c insurance industry is not just facing increased competition through alternative distribution from within its own ranks, but new entrants such as retailers and consumer buying clubs which have entered the fray. Clear evidence of broadening market competition lies in the declining level of industry policy renewals, “which is not surprising when you look at the options out there”. In essence, traditional insurers need new products and tools if they are to hold their own against the stream of new competitors. As importantly, he adds, insurers need to redefine their vision of service standards, “the industry has to realize that customers are the ones redefining service”.

In response, Squire stresses the need for insurers to develop closer relationships with their customers through brand-building. “The winners will be those [insurers] who establish close relationships with customers…insurers need to build brand equity, this is what The Co-operators has been doing, and I believe it is a significant advantage the company has.”

In examining the evolving consumer market, Squire refers to recent independent research indicating that only 20% of today’s consumers are willing to pay more for a personal relationship approach with their insurer/broker. In contrast, the study shows that nearly a third of the consumer market is driven by price as a priority with a further 25% placing convenience and speed as their buying preference. When weighing up these numbers, insurers have to take cognizance of the fact that a single distribution approach will not succeed in serving the future market, he comments.

Adopting a contrary view, Laird Laundy, formerly with the Equisure Financial Group and currently working as an independent insurance industry consultant, believes that the vast majority of consumers will continue to support broker distribution. Although the broker share of the Canadian personal lines market is expected to fall to 50% by 2005 compared with the current stake of 65%, Laundy expects this will bounce back to today’s level as consumers become disenchanted with the service levels of other distribution channels. “Just because the opportunity is opening up for technology-based selling, it won’t necessarily go that way. All these market predictions exclude the ‘human nature’ element. Most people are still going to want to deal with another human being,” he predicts.

That said, Laundy is of the view that the broker networks will ultimately gain the lion’s share of the broker market, with up to 30% of overall marketshare, by 2015. Agreeing with Squire on the issue that future growth will depend on multiple product distribution, Laundy believes that the broker networks are the most appropriately positioned to maximize on the combination of personal service and convenience of options. “From a broker standpoint, I expect future growth will be in selling multiple products under financial services by building on ‘trust relationships’ with customers.”

Commenting on the U.S. market, Bill O’Brien, of USA Insurance Group, affirms the increasing pressure of competition. While the size of the market has been declining in real terms, the number of competitors has been rising, he notes. These conditions spurred the industry’s consolidation drive with the objective of diversifying across the business lines and achieving “big is better” cost efficiencies. Whether the mega-mergers and acquisitions have achieved the latter objective remains to be seen, he observes, however, this push has intensified the need for smaller players to develop niche markets. For instance, he adds, USA Insurance Group has been developing specialized programs such as in the trucking industry. O’Brien believes the merger and acquisition trend will continue this year in the U.S.

The technology gambit

“Even if you’re a broker-based company, you’ll have to embrace new technology applications [in distribution], whether it be Internet or call center,” says Squire. In line with a multi-distribution, multi-product approach, Squire expects Internet and call centers will have a significant impact on the future market. Even companies sticking to a primarily agent/broker approach will need to incorporate technology applications in a service support role, he states.

Laundy shares this conviction, noting that technology will likely be a significant support factor backing distribution. However, he does not see much demand materializing in terms of consumer on-line buying of financial services products. That said, Laundy admits that Internet selling has a major cost advantage over other forms of distribution. “If I try to compete against the Internet [selling] on cost alone, I’ll lose every time. However, I think company-to-consumer marketing is a long way off, although that might not be the case with business-to-business selling.” In that respect, Laundy emphasizes the need for the Canadian industry to solve its electronic real-time interface problems, “insurers and brokers need to get efficient and reasonable price delivery [through technology], namely the whole electronic interface issue. It’s not that complicated.”

O’Brien does not agree that on-line selling will be more effective in the commercial lines arena. He points out that the real attraction of on-line buying lies in price, simplicity of product and convenience. These are typical traits of the consumer market, he notes, whereas commercial programs require greater customization and therefore personalized service. However, O’Brien also believes that the Internet will ultimately play an important role in the distribution of commercial insurance, primarily in a support role, and possibly in marketing to the small business community.