The quest for EFFICIENCY ENHANCEMENT

The “winds of change are blowing” observed insurance consultant Barry Rabkin a year ago when quoted in the December issue of the Belton Report. This change is being largely driven by advancement of the next generation, he adds. “A large segment of the traditional distribution system has a life span of a mere seven to 10 years until today’s high schoolers reach buying age which they will do electronically through home personal computers.”

This October, Toronto based TWA Consulting Services Inc. published a market research study, titled the “The Impact of the Internet on Insurance in Canada”. The study reports that 49% of Canadians over the age of 18 have Internet access. Just over 50% of Internet users say that they are likely to buy automobile insurance on the ‘net, while 57% indicate they are likely to purchase home or tenant insurance the same way. Almost on the heels of this market demographic is the next wave of more sophisticated cyber-shoppers. Assuming Mr. Rabkin is correct — and these statistics appear to support his claim — a large part of our business will travel along non-traditional distribution channels by 2009 or sooner.

In many countries around the world, particularly in more developed insurance markets like the U.K., 70% of personal insurance business is transacted through intermediaries — the broker does not command the lion’s share. However, here in Canada, approximately 83% of personal p&c premium volume is still flowing through broker and captive agent distribution channels. It is anticipated that 16% of this will be lost to other channels over the next five years. While direct writers and the Internet will post the largest gains, the traditional broker/captive agent will retain the largest slice of the market, with a respectable 72% share due primarily to population growth distribution and diverse landmass, namely rural communities.

The “window frame” for customer service

The largest new channel penetration will be made by the Internet — which will grow five-fold to just over 15% of all p&c business by 2003, and perhaps to 30% by 2009. Although this is presently an attack on the personal p&c market, the perception is that this is solely a personal insurance issue. However, small commercial business is next making this an industry-wide issue.

While the broker’s market power is not eroding as quickly in Canada as in other jurisdictions, direct writers and the Internet are experiencing a growth spurt which will result in accelerated market penetration. Clearly seven to 10 years is a narrow window of opportunity for traditional insurers to become truly “customer focussed” embracing the full concept of “customer relationship management” (CRM) — to re-tool and expand distribution platforms that will appeal to both the customer’s demand for increased convenience and provide value for their insurance dollar. At the same time, it is vital that their cost structure be brought in line with what alternate direct distributors can provide.

In its present form, the P&C industry’s customer base is vulnerable to new entrants — banks, direct writers, off-shore players looking at Canada as a good place to do business, and new brokerages and personal financial planners made strong through consolidation and the convergence of financial services. These players are introducing direct distribution systems that are driving down operating costs while responding to the customer’s demands on service, price, one-stop convenience, and a basket of products which includes P&C insurance. Their big advantage is having no legacy to re-engineer — a greenfield site centered on the end user.

Consumer points

Consumers shop their insurance based on one of three factors:

Price;

Relationship;

A poor experience or on the idea that a better deal is out there.

The greatest challenge is to keep the broker/company channel competitive in locating that final piece of the puzzle that will lower the cost of distribution, while maintaining a reasonable profit margin for the broker. (The acquisition cost between the broker/company channel and direct sales model, for example, can be as high as 45%. However, keep in mind that while direct players can amortize this cost over a number of years, insurers must absorb the full cost in one year. This necessitates that they attract and keep profitable customers over many years through CRM and loyalty management.) All the while, we must never lose sight that at the end of the day the customer must be the big winner.

In 1997, Canadian p&c insurers with multi-channel distribution controlled 41% of the market. Despite these inroads, Ted Belton, director of research for RBC Underwriting Management says that the sector has a long road to travel before we catch up with the life insurers in the development of multi-channel distribution centers. At Royal & SunAlliance we are expanding our customer’s distribution options in concert with our broker network. The recent acquisition of Johnson Corporation and our investment in Coast Underwriters has provided us with access to two market proven, direct distribution platforms in the personal and marine insurance sectors. But the two technology-based areas where we are definitely attaching a Royal & SunAlliance stamp of distinction are call centers and the Internet.

Call center study

Call centers and the Internet are responding to customer demands for value-added service and convenience, helping to streamline the claims process, and creating new opportunities in product branding. Royal & SunAlliance is already seeing benefits of broad support for our national broker, customer and claims call centers. The customer/claim centers are integrated with the broker network. It has also become the centerpiece for our product branding and consumer advertising strategies. Unlike many of our competitors, both traditional and direct, the claims center allows Royal & SunAlliance representatives (not a third party servicer) to talk to the customer directly without compromising the broker relationship.

Shifting some of the administrative functions to our call centers has accomplished three objectives:

Deliver a more consistent, high quality service to the customer in concert with the broker;

Preserve the broker’s margins by lowering administrative costs and overhead;

Achieve greater control of distribution and operational costs.

Call Centers complement the Internet by providing the cybershopper with an authoritative resource for inquiry and clarification. Research indicates that cybershoppers of financial services like the opportunity to access “bricks and mortar”. Call centers and electronic connectivity are only part of the customer convenience/cost reduction platform.

Power of POS

The biggest gains will be made in the rollout of standardized “point of sale” (POS) technology. POS still represents the largest, single step toward closing the insurance sale cycle in one streamlined transaction. What is going to advance the arrival of true POS capability over the next two years is the web and web-enabled technology. The publication the Economist predicts that by 2003, business-to-consumer e-commerce type transactions in the U.S. will have increased 1,250% to US $108 billion. Expect transactions by Internet to experience a similar short-term boost here in Canada. According to Canadian Facts, a local research company, 8% of Canadians have signed up for PC banking. Another 10% plan to register for electronic banking in the next six months. These consumers tend to be well educated with higher than average incomes. Once they have experienced the simplicity of banking, it is difficult to imagine such a group accepting anything less when purchasing or renewing p&c insurance. Already the web is streamlining functions in the broker’s office and moving the broker/company partnership closer to one universe. Commonality of e-business applications is also eliminating much of the guesswork that was once spread over many competing systems.

Going for the golden ring

What is preventing brokers, who represen t the traditional distribution channel, from becoming the main intersection in a multi-channel network? …Nothing.

U.S. research indicates that a third of the market values relationship selling, with value as money, one third prefer direct, the remaining third have no preference. Therefore any traditional insurer that tries to solve its growth, retention, cost and distribution problems in isolation of brokers is pursuing a narrowly focused strategy that will alienate a significant distribution channel which will continue to be strong — even when cybershopping has reached its peak.

To a certain extent, the proliferation of new distribution channels has placed the captive and independent broker channel under threat. International brokers are merging; independent brokers are consolidating. Nevertheless, brokers will remain the dominant distribution channel for the foreseeable future. In the absence of that elusive piece of the puzzle, insurers and brokers are going to have to work together to streamline practices as a means of squeezing out unnecessary costs while continuing to capitalize on the pro-broker mindset that still pervades the Canadian landscape. Customers enjoy the convenience of direct channels, insurers are attracted by the reduction of costs but the value of brokers cannot be discounted. Nor can the expertise they offer ever be truly automated.

Royal & SunAlliance remains committed to the independent broker channel — reflecting our confidence that brokers will not only survive changes in the insurance marketplace but, given the right mindset combined with technological solutions, will also thrive. Nevertheless, we anticipate the broker network to be a more aggressive and less traditional animal than the one that exists today. As with insurers, weaker brokers will merge with stronger organizations or go out of business. At the same time, a large number of brokers will recognize and seize opportunities presented by the changing marketplace, particularly in the area of consolidation and the convergence of financial services. These brokers will emerge larger, leaner and stronger. We are seeing evidence of this already taking place.

Insurance companies who do not provide brokers with solutions to enhance customer service, reduce costs and compete in today’s multi-channel environment are going to find their traditional method of distribution working against them. Insurers who arrive at customer focussed solutions first, will be the ones who win big with the brokers and the market. Customer focussed service at an affordable price is the key — he who gets there first wins big!