Consolidation and Technology

The markets with which a brokerage chooses to write over the next couple of years will quite possibly determine the sustainability and profitability of the brokerage. In the past, a brokerage chose markets based mainly on insurer rates and available coverage options.  Today, other important factors must be considered that are equally or more important than insurers’ rates and available coverage options.

The distribution of book to the insurers has always been a factor. But in a consolidating market, where to place a book has become a critical decision point. In deciding where to place a book, brokerages should consider the following questions. The answers to these questions will highlight potential areas of concern as the Canadian property and casualty insurance industry continues to evolve.

• Will the insurer be around in the next two to three years? If so, will they gobble up an existing market that is already heavily used within the brokerage?
• How many more mergers will it take for the regulators to allow the banks to have unencumbered access to the insurance market?
• Does an insurer have an equity stake within your brokerage, and what impact would that have if they controlled more of your book through consolidation?
• Will these newly formed mega-insurers adjust their commissions?
• Do the markets you write with have strong technology solutions that make working with them efficient? If not, are they committed to doing so?
• Does the insurer to which you move support automated book transfers that minimize the impact on your staff?  

Many other considerations could likely be listed, but focusing on these questions should dramatically assist a brokerage in their decision as to where to place their business going forward.

Consolidation in Canada

The recent purchase of AXA Canada by Intact, the pending outcome of Economical’s demutualization and the constant rumors of other major insurers trying to tie the knot have brokers scrambling to find a safe haven for their respective books. Brokers rightly have concerns about the effects industry consolidation might have on their customers. A brokerage heavily marketed into a few large insurers is especially at risk to turmoil once a merger occurs. The merger of Intact and AXA Canada meant many brokers had a very substantial book with one very large insurer. Brokerages need to properly diversify their portfolio to minimize the impact of these mergers.

For books disrupted by a merger, a brokerage may choose to allow the transfer if their overall book is still well diversified. Brokers will want to maintain a portion of their books with these newly formed mega-insurers as a good strategy of diversification. However, if over-exposure to one market requires a book transfer, the brokerage should determine the likelihood of the target market to become a part of a merger itself. A high likelihood exists that many of the Top 10 P&C insurers in Canada will become active participants in mergers and acquisitions activity simply to better compete with the new mega-insurer Intact has formed. At minimum, all would entertain an acquisition. But as the saying goes, ‘everyone has their price.’ And when you throw the prospects of demutualization into the mix, “everyone” does mean everyone. The Tier 2 insurers make great acquisitions, since they provide Tier 1 insurers with quick growth revenue and greater access to specialty and commercial lines.

Mutuals – more specifically, the provincially regulated mutuals – for the most part provide a very safe location for a book, since it is not as easy for them to be acquired. Other low risks include insurers that are part of a larger organization specifically within the insurance industry. Publicly traded companies, international insurers specifically, face substantial pressure to retain their market position relative to their competitors.  

Technology Implications of Consolidation

Insurers supporting technology that allows once-and-done connectivity will maximize productivity for the brokerage and should be considered when placing books. Several insurers have implemented these types of solutions, such as Dominion, Pembridge and Grenville Mutual. What sets these companies’ implementation apart from the others is the ability of brokers to work almost exclusively within their respective broker management systems. Unlike traditional portals, they do not have extensive pages to navigate or require information to be rekeyed.

Some insurers have implemented upload functionality into their existing portals. This also provides efficiencies to the brokerages using them. In addition, insurers benefit greatly from supplying these solutions, since their costs are minimized internally. A recent Brovada survey showed that, assuming equally competitive rates between insurers, the vast majority of brokerages would move more business to an insurer that supported once-and-done solutions.

Grenville’s move into a once-and-done solution is timely.  First, it will be positioned with the best upload technology in the marketplace. Second, because Grenville is at low risk of being acquired, brokerages may view them as a safe location to which to move their books.  Other mutuals, such as Lambton Mutual, have also realized this opportunity and are following suit. Many mutuals share a common, very modern policy administration system that makes implementations consistent and very functional.

Another key factor is whether or not the insurer taking on a brokerage’s prospective book supports automated book transfers. A manual keying effort to place books can have a large impact on the brokerage and is fraught with errors.  Several of the larger insurers support an automated transfer solution that eliminates the rekeying effort.  Brokers should request this as a prerequisite to moving books.

Insurers implementing a new policy administration system can easily be distracted from providing connectivity solutions such as once-and-done; this should be a concern for brokerages determining new markets.  Most of these implementations take five or more years to complete, which can add to the problems of doing business with these insurers. Many insurers realize the disruption that policy administration system implementations can cause; they address it by implementing improved connectivity in parallel. Brokers should feel justified in requesting this kind of information before moving book to an insurer.

The potential reduction of commissions resulting from mega-mergers is a real concern for brokerages. In countries such as the United States and the United Kingdom, brokerages have seen commissions reduced under the similar circumstances. Smaller insurers (such as mutuals, for example) will be less likely to reduce commissions. And regional insurers do not wish to reduce commissions. Their solid underwriting position is based on their superior understanding of the local marketplace.

As the industry continues to consolidate, brokers and insurers will have opportunities to position themselves to capitalize on a competitive advantage. The key to success will be in picking the right markets that provide stability and efficiency for the longest amount of time possible.  Brokerages ignoring these concerns will find themselves regularly moving books at a great expense, both internally and externally, with the risk of a customer shopping elsewhere.