Broker remuneration in spotlight as part of channel ‘frictional cost’

Broker remuneration in spotlight as part of channel ‘frictional cost’

Broker remuneration in spotlight as part of channel ‘frictional cost’ A panel of industry leaders across the broking fraternity have identified the ‘frictional cost’ of transacting business as something that may need to change in the insurance broking channel, when asked to envision challenges out to 2024.
 
Two broking bosses – Aon Risk Solutions CEO Lambros Lambrou and Arthur J. Gallagher Australia CEO Andrew Godden – agreed that the insurance broking industry faced real issues with frictional cost, including broker remuneration, as it seeks to remain competitive in the future.
 
Aon Risk Solutions CEO Lambros Lambrou said that, when looking out a decade towards broking in 2024, the broking channel needed to see the frictional cost of transacting business “reduce significantly over time”.
 
“I think the one thing we have to do as an industry which I think will naturally happen over time […] is that, the frictional cost of doing business through the broking channel has to reduce,” he said.

“It has to significantly reduce over time so the cost of engaging with the broker fraternity is aligned more with the value of advocacy.”
 
Lambrou said while different customer segments would require different thinking about advocacy, based on their preferences and needs, the relevance of brokers was based on the value they provide customers through advocacy.
 
He said if the broking fraternity did not manage to achieve a reduction in such frictional costs, it exposed itself to the risk that new players and capital could enter the industry unencumbered with the ‘legacy issues’ of existing players.
 
Arthur J. Gallagher’s Andrew Godden agreed, saying insurers were currently investing in marketing and systems themselves because they could see the broking channel taking a ‘rather large’ portion of the premium without being sure of the value the channel adds.

He said insurers were looking to improve margins and de-risk portfolios, and valued brokers where they could achieve that by bringing in desired business.

In terms of customers, Godden said brokers would need to justify their role in the process. “We are really going to have to show what we bring to the table, whether that’s a broad reach, or innovative ideas, or proper advisory; people are going to have to understand what they are paying for, and I don’t think it is going to be satisfactory to just ‘clip the ticket’ – for want of a better word – for our role in the process,” he said.

Godden said it was clear that times of claims and policy purchases was when the broker channel comes to the fore, and while clients would not want to lose the power of broker advocacy, brokers will need to justify why they are being paid for it.
 
Covering a wide range of issues, panellists identified control of distribution, data and analytics, and remaining relevant to customers as key challenges.
3 Comments
  • Ageing Broker 18/09/2014 7:59:39 AM
    Not sure what these blokes are talking about but if they are suggesting that brokers need to move away from commission based remuneration in favour of a fee for service model, then why not say that?
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  • David 23/09/2014 4:11:57 PM
    Frictional Cost is the direct and indirect costs associated with the execution of financial transactions. Friction costs include commissions and fees. It is not the entire industry facing issues relating to these frictional costs but rather the brokers who’ve potentially developed alternate methods of extracting revenue from their insurance partners. Although it can be accepted practice for insurance brokers to receive commissions and profit sharing based on the amount of business they place with insurance companies, it is not legitimate for brokers to base their decisions about which insurer to deal with solely upon the amount of money that they will receive in commission. This is where the waters get a bit muddy and it might get very interesting for the big end of town should ASIC ever decide to cast a critical eye over certain areas of their operations.
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  • Adam 25/09/2014 11:41:38 AM
    20% of broker revenue is spent on wages. Clearly this is due to broker staff being required to key the same data multiple times. Anything which reduces this overhead will assist in freeing up broker organisations to focus on their customer's needs, justifying broker remuneration.
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