Data is now the most valuable resource in the world. And when something is valuable there’ll be tension around who owns it and can make money from it. The volume of available data about insurance customers and their risks is growing exponentially, but the current insurance distribution model means that very little of it feeds through to the insurer and that’s a source of increasing frustration and one that inevitably forces an examination of the benefit case for an intermediated business model.
Ever since the dawn of the internet there has been high expectation of broker/agent disintermediation, but by and large it’s not really occurred. Sure, personal lines is now mostly direct to consumer and that’s creeping into the S of SME, but other than that there’s been no major structural realignment in commercial and specialty insurance nor indeed in reinsurance.
Nearly all insurers depend to a large extent on brokers for distribution and there has always been an understanding of the benefit of that model and by and large a willingness to pay for it. However, for a decade or so brokers have sought to maintain margins by gradually increasing the price of distribution while insurers themselves are grabbling with the combined effects of excess capacity, low interest rates and a soft market. The average cost of acquisition of a risk in the Lloyd’s market is now running at over 40%!
Now, I think that’s a jaw dropping statistic so presumably insurers get good value for it. For that level of deduction to be sustainable one would have thought there would be an efficient transactional mechanism seamlessly delivering a high quality data set, but the reality is very different. Here are a few of the reasons why:
- The value chain often includes includes several parties for the data to pass through
- The persistent use of pdf’s for contractual terms and other unstructured data formats to transmit data between parties.
- The growing reliance on Delegated Underwriting models for volume business and the resultant proliferation of spreadsheets as the data sharing mechanism.
- The margin squeeze on brokers means they’ve underinvested in sorting out their internal data and the data analytics capability making it difficult to provide value adding data services (doesn’t stop the big ones trying though!)
- The proliferation of legacy systems and the near complete absence of API’s to enable easy sharing of data between systems and counter-parties.
- The inability, despite 17 years of trying, to adopt and role out utility transaction models that would provide standardised processes and straight through data output.
It’s amazing how little the insurance distribution model has changed in the past 20 years despite the astonishing speed of technological advance happening all around us. Call me an old cynic if you like, but I look at who benefits most from the status quo and it’s clearly the brokers. Sure, there are plenty of “analogue” underwriters out there keen preserve things as they are, but the leadership of most insurers understands the need to progress and the importance of data to their business, even if their technology is ill equipped to handle it.
Brokers on the other hand benefit from an imperfect market. The poorer the data the more difficult it is to properly price risk and the greater the opportunity for the broker to use his/her negotiating skills to get a better deal. In a perfect market with perfect data you get to the right technical price of risk and the opportunities for arbitrage become very limited.
Pascal Bouvier wrote a fascinating Blog article a couple of weeks ago on this - http://finiculture.com/rebuilding-truth/ It’s a good philosophical analysis of “Truth” in financial markets and how Fintech is driving us towards that. InsurTech will do something similar in insurance which is a partial explanation of why you don’t see much broker involvement with it!
So, are brokers deliberately holding back the sands of time? Are they working to preserve last millennium business models to keep control of distribution and/or provide impoverished data and non re-usable formats so as to maintain their ability to price arbitrage? I don’t go that far, but they sure aren’t helping much.
It feels a bit like trench warfare from WW1 in which brokers have dug in and are zealously defending their territory, but with no cunning plan for winning the battle or the war. It's a good way to protect your territory, but a poor way to win more.
So, if you’re an insurer and you were receiving less than 60% of the premium to take all the risk based on a fraction of the available data and what you do get is in a crap format and you hear about something called InsurTech, why wouldn’t you go and find out what’s all about. You never know, it might throw up some alternative ways of looking at things and in particular provide some alternative distribution and risk pricing models. Things like:
- Digital brokers with specialist products and automated underwriting capability in SME like Simply Business or Digital Risks
- The collapse of the value chain by specialist MGA’s and new InsurTech engagement models linking directly to risk capital.
- The ease with which portals and products can now be spun up and used to engage brokers, but also customers direct.
- And most importantly, the emergence of a new breed of data analytics propositions using machine learning and the Internet of Everything to enhance (one day do) risk pricing and provide customer insight without being dependent on the broker for the data.
Something has to give and give soon. There are plenty of ways the brokers can add value for insurers and many are of course examining the opportunities that arise from moving either up and down the value chain – or both. The great irony of that is that all those strategic approaches requires substantial investment in and refinement of the way they collect, handle and analyse data. I don’t pretend to know who the winners and the losers will be, but I know the case for substantial change - whether driven by carriers or brokers is overwhelming.
As a converted “analogue” born in the 1960's, I am entitled to reference 1970’s pop songs and having just seen the Real Thing at the Jazz Café I’m pushing for the re-release of their disco classic, “Can You Feel the Force?”
The world’s most valuable resource is no longer oil, but data