The Leaky Bucket

Brokers today may run the risk of losing their mature clients to a younger, more technically savvy generation that prefers the simplicity of dealing with direct writers — organizations that sell insurance by means of call sites or websites. This penomenon is called the “leaky bucket.”

That means a key challenge faced by Canadian brokers will be to align themselves with the buying habits and preferences of the younger generation. In this way, when parents divest their assets and pass them down to their children, the insurance business related to those assets does not leak out of the broker channel altogether.

Ontario brokers are discussing how best to overcome the “leaky bucket” phenomenon in an Insurance Brokers Association of Ontario (IBAO) workshop entitled Understanding the 21st Century Insurance Consumer. Presented by past IBAO chairman Bryan Yetman and Bill Morris of the research company Navicom Inc., the workshop has been presented to brokers throughout the province.

Several market dynamics are leading to the gradual seepage of insurance business from the broker channel to direct writers, IBAO research shows. Brokers sold 58% of Ontario’s property and casualty insurance premium volume in 2010 and 45% of the province’s insurance policies in 2011. Compare that to direct writers who sold 18% of the premium volume in 2010 and 25% of the policies in 2011.

These numbers are in stark contrast to 1980, when broker sales accounted for 73% of the policies and premium volume. At that time, direct writers had no market presence worth recording.

Brokers have thus steadily lost roughly 1% of their market share annually over the past 20 years. Every point of lost market share is worth $87 million in revenue to the broker channel. As it stands today, there is more than $15 billion worth of P&C insurance premium in the Ontario market. Therefore, at this rate of seepage, if brokers do nothing and watch the business leak away over the next five years, they can kiss good-bye almost $500 million in revenue good-bye.

The Leaky Bucket

IBAO has commissioned detailed research to identify “what tomorrow’s customer wants” in an effort to slow, halt or reverse the transfer of insurance business from the broker channel to other insurance distribution channels. Findings point to a situation in which insurance brokers serving an aging,

mature customer base are increasingly out of alignment with the buying needs and expectations of younger consumers.

IBAO research shows that customers dealing with brokers today are predominantly classified within the “mature” category. Broker clients are typically older than 40 years old, and 30% of them are older than 60 — with 10,000 more people in North America turning 60 each day.

Clients who are working with brokers tend to be more educated than consumers who buy insurance outside the broker channel. They value a personal connection with their broker and their average household incomes are in excess of $75,000.

But as these customers loyal to the broker channel approach retirement age, the proverbial bucket starts to leak.

“They’re going to downsize, they’re going to start to shed assets,” Morris noted in the IBAO’s presentation to brokers in Brockville on May 22. “Who gets the cottage? The younger generation. Mom and Dad have a mid-life crisis, they have a Porsche, they’ve got a truck, they’ve got 6,000-square-foot house. Mom wants to travel more and doesn’t like to drive: the fast car becomes a Corolla shared by both of the parents. That big house is becoming more of a pain, and it becomes a condo.”

Those assets get transferred to the children, Morris notes. But the assets are being passed down to a generation that lacks loyalty to insurance brokers and more likely views insurance as a commodity.

This price-savvy generation, which likes technology and is comfortable with e-commerce, is more likely to buy its insurance through the direct channel. This largely younger market includes a higher proportion of Generation Y youth (born between the 1980s and 1990s) and new Canadians.

“We’ve got an aging population that is going into its sunset years and the sunrise guys don’t like us, or don’t trust us or don’t want to do business with us,” Yetman said.

The thing is, when younger generation takes over the assets, it is capable of bringing their parents’ generation along with them to the direct channel.

“Grandma says to her grandchild, ‘I’m going to give you my car.’ But the kid can’t have the car because it’s $7,000 or $8,000 a year [for insurance], so what happens?” Morris asked.

“They start shopping around,” a broker called out.

“They are taking their lives in their own hands,” Morris agreed. “They are finding out there are options. What’s the kid going to think if you in the older generation are working with a broker that’s significantly more expensive than what they’ve got? If the kid finds cheaper insurance, he says: ‘Hey Dad, I just saved $1,000 — close to half the price your guy is quoting.’

“What does Dad say? ‘Take me with you.’”

Patching the Leaks

How do brokers fix the holes in this leaky bucket? One fix involves knowing what “tomorrow’s customer” wants.

Research suggests many brokers simply don’t know how to forge links with the younger generation and/or are out of tune with their buying habits or their preferences. “As an industry, this is not your proudest moment,” Yetman said to brokers in in Brockville.

One solution is obvious: consumer metrics. Brokers should be asking clients what they want and then deliver on that. Morris gave an example from his work with the hospitality industry. Integrated hotel reservation systems amass data on individual clients based on customer feedback surveys. So when guests stay in a hotel anywhere in the chain, the hotel will be aware of the customer’s preferences — say, for hypo-allergenic pillows, extra blankets or certain bar fridge items — and all of these will be stocked in the room prior to the guest checking in.

Brokers haven’t yet insisted on a way to manage identified consumer preferences through their broker management systems (BMS). “You are the customer with the BMS, but how much time did you guys spend talking to your BMS vendors about getting customer information that you can use?” Morris asked the audience. “Did it ever come up? No, so as a result, they weren’t thinking about it. But if you are truly customer-obsessive, you have to have a connection to your customers. You guys have to care about wanting that information and wanting to use it.”

Some brokers have made the point that insurance companies control the product, not brokers. Therefore, unlike the hotel situation, brokers cannot unilaterally change the insurance service or product even if they do collect all of this information on what the clients want or need.

“Even though brokers don’t control the product, collectively they do have a voice,” Yetman responded. They can, for instance, approach insurers with information about potential high-growth areas, such as the immigration and Gen Y markets. Insurers could then use the information to design products to suit these particular markets.

Insurers might, say, design a first-chance auto rating, which is not based on age or gender until there is a claim. “The idea is that you are innocent until proven guilty,” Yetman said. “That allows an insurance company to say to a 16-year-old kid: ‘We’re going to treat you like one of the good ones. And if you mess up, we’re coming for you.’ ”