Scouting Commercial Systems

One strategy brokers have used to protect themselves against the direct distribution threat is reinforcing and growing their commercial lines book of business. This tactic has proven to be successful for many intermediaries facing intense pressure on personal lines and seeking consistent revenue streams.

COMPETITIVE PRESSURE

However, this refuge is becoming increasingly competitive on two fronts. The first is that more broker distribution companies are targeting “small- to medium-sized” risks. They have begun to commoditize policies, flatten out pricing and expand coverage terms. This has created pressure on rates, commissions and margins for brokers with a significant commercial book – not to mention potentially increasing loss ratios and E&O exposures.

The second competitive front is the growing interest of direct writers in business insurance, a distinct trend clearly visible in other markets. A recent Independent Insurance Agents and Brokers of America (IIABA) market survey noted direct writers account for 20% of commercial premiums in the United States. Another recent U.K. report, by research firm Datamonitor, showed 75% of the 1,500 companies surveyed “were amenable to being sold commercial policies direct, indicating a potentially large appetite for cutting out the broker.” In Qubec, where direct distribution is more entrenched than in any other Canadian province, some estimate the market share of direct writers in commercial insurance has increased to about 20%.

Brokers who believe they have found a safe harbor from the threat of direct insurance in commercial lines may want to think again. The competitive storm of today’s marketplace is moving into all areas of insurance, but particularly into small- to medium-sized business risks that can be underwritten quickly, reliably and profitably.

In this context, market trends may follow the same arc as personal lines, in which direct insurers caused brokers to invest in automation, workflow and service turnaround. The period from 1985-2000 featured the heaviest investment in Broker Management System (BMS) technology. Not surprisingly, this period also saw the emergence of direct-response insurance distribution and the growth of direct writers.

DIRECT ADVANTAGE

Direct writers and direct-response insurers have a number of advantages over brokers in the world of distribution. First, they have invested significantly in technology and have automated many of the submission and renewal functions associated with commercial accounts. They have more harmonized systems of data collection, as well as information analysis that allows them to segment clients, select attractive risks and price appropriately. Because there is a lower commission (if there is any commission at all), rates can be pushed downwards; at the same time, coverage can be broadened for standard commercial accounts. This explains why direct writers have been able to carve out a distinct share of the commercial insurance pie over the past five years. And that share seems to be growing.

Given this changing landscape in business insurance, what is the response of brokers who have a significant commercial premium volume? In a more competitive and commodity-driven market, how can they differentiate themselves? Do the insurance companies they represent have truly unique products? Not really. Will they win on price? Not often. Instead, what they can offer is expertise, service and professionalism to provide a better customer experience. Importantly, they need to adapt their business structure to write commercial business more efficiently and to service their clients better.

Perhaps the biggest question facing commercial brokers today is this: “Can these goals be achieved within the brokers’ current business structure?” This issue is on many brokers’ minds, and it is clear they face some tough choices ahead. The current structure for commercial lines in many brokerages involves bridging a BMS with external applications such as MS Word or Excel. Some argue this process works to a degree. But it also creates manual tasks (e.g. copying and pasting, file naming, etc.), opens up a potential lack of uniformity in procedures and can lead to sloppy document creation, not to mention potentially serious E&O exposures. More importantly, the brokerage’s commercial data is either linked awkwardly or not linked at all to its BMS, which is not built to handle such data. Thus, the information brokers need for renewals, remarketing and customer segmentation is often inaccessible or unwieldy.

COMMERCIAL BREAK

Competitive pressures in commercial lines are prompting brokers to look for other solutions. But they should examine their options carefully. One option gaining momentum is the acquisition of a Commercial Management System (CMS). Unlike a BMS, a CMS is specifically designed to manage the complexities of commercial insurance.

Together, these two systems can provide an effective enterprise-wide solution. As a general guide, brokers should think of selecting an enterprise-wide solution as a consultative process rather than as a product-driven one. During such consultation, a solutions provider should demonstrate expertise in the complexity of commercial risks, understand the unique nature of your operations and develop customized options for your brokerage. There are countless questions to ask; brokers should look at several specific areas when considering a Commercial Management System (CMS).

Business Goals. Clearly Canadian brokerages come in all shapes and sizes, especially in commercial lines. They have different staffing requirements (CSRs, producers), operate in unique niches and strive for their own growth and profit goals. One of the first steps for brokers should be to map out where exactly they want to be in commercial lines – not after the next quarter, but in the next five to 10 years. What are their growth projections? What volume of commercial business can they reasonably handle? From where will this business come? What are the challenges standing in the way of those targets?

Business Process Requirements. Many brokers have a “big picture” perspective of their operations. They have intimate knowledge of whether they are making or losing money overall. However, the more progressive brokers dig deep into the specifics of their firm and look for the relationships between productivity and efficiency, or growth and profits. The amount of time it takes to complete a commercial policy from quote to submission to bind has an effect on the broker’s top line (growth) and bottom line (profitability). If a brokerage is encountering workflow bottlenecks in areas such as manual data re-entry or bridging internal BMS with external applications, more growth is only going to make these problems worse. Brokers have to look at workflow throughout all elements of the policy lifecycle – both from a human resource point of view and a technology perspective – to find bottlenecks or efficiency gaps.

Technical Requirements. Brokers can inquire about many aspects of technical information, but they should keep in mind what they want data for and how they want to use it. This focus will allow the broker to automate any commercial account from the small commercial package to the complex industrial risk. Most brokers already have a BMS. They should ask about compatibility between systems. Some providers can offer integration to key software vendors; in other cases, it is more difficult. There are other technical requirements, such as standard industry coding (IBC, CSIO) and the ability of the system to print professional-looking documents at all points during the policy lifecycle. This latter point is more complex than it seems. Submissions, proposals, binders, new policies, endorsements and renewals all require specific data and transactions at precise points in the policy cycle. Any system has to be able to generate a professional document that will show complete, accurate information on both sides of the fence – to an insurance company and to a commercial client.

Due Diligence. Unlike in the BMS world, there are relatively few solution providers for commercial lines. More may be emerging in the marketplace in the next few years. Brokers should ask any potential vendors about their experience and understanding of commercial insurance. What is their track record? What knowledge and resources have they invested in automating commercial business? Brokers should also inquire about the level of customization: is a solution “off-the-shelf,” or can it be tailored to the specific needs of a firm? What kind of implementation plans do vendors offer? How do they work with the in-house brokerage staff on the transition to a CMS? What training resources do they offer? What about after-sales service?

An enterprise-wide solution in the form of a CMS can be an invaluable tool, creating a better customer experience. It helps position the broker as a professional, efficient provider of expertise, choice and coverage. A CMS allows brokers to align data, business processes and service completely around commercial customers and their demands. For brokers considering making the leap to an enterprise-wide CMS, some preliminary research will yield huge dividends in the viability of their commercial portfolio. It pays to look before you make the leap.