Last month I wrote about the myriad of opportunities that exist within the Australian insurance broker industry, particularly around the use of technology, education of clients and transitioning into a solution-led approach for service delivery. It is equally important for the industry to learn, understand and be aware of the key challenges the industry faces to allow brokers to negate emerging threats, evolve and adapt to meet the needs of the changing and ever-increasing demand for value from clients or risk losing the ability to provide a deeper and value-adding service.
Oversimplification of insurance products
Working with clients on designing personalised cover is at the heart of the insurance advice relationship. This becomes even more important when the relationship evolves beyond policy design to where the risk experts can be a part of their trusted advice network. The issue of oversimplification threatens both.
Commercial insurance is a complex beast. The increasing trend of oversimplification within the industry increases the risk of misinformed, inadequately protected and exposed clients. The notion also challenges the very nature of the broker relationship where in the traditional model, value is added through detailed risk analysis by understanding of the client’s business and sourcing the most appropriate insurance coverage at competitive pricing through leverage of a broker’s relationships with providers. Potential deterioration in a broker’s relationship with clients, coupled with the oversimplification of products will risk exacerbating Australia’s underinsurance problem, leading to primarily price-driven acquisitions of generic policy wordings without adequate assessment of the business’s specific coverage requirements, putting clients’ business operations at risk. The industry as a whole must do more to ensure the impact of oversimplification is understood by the clients, brokers and carriers.
Technological challenges are not limited to the potential arrival of a fintech competitor into the market but also the structural issues the brokerage industry faces as a result of its ability to evolve. The industry’s ongoing reliance on legacy systems puts incumbents at a disadvantage compared to new entrants in the market who invest in greenfield technology which provides a significant competitive advantage to disrupt and accelerate scale. The high touch and subsequent high cost broker model delivers a significant competitive disadvantage in the commodotised end of the market where price can be a key determinant to a client’s decision.
The entry from non-traditional, tech-based and low capital intensity entrants with access to rich, insightful client and industry data and underlying analytics capabilities as a core differentiator constitute both a real threat and a significant opportunity to incumbents. In the medium term, the risk of disruption remains low as clients purchase insurance with a sense of comfort associated with large and historic brands. However, as new entrants reach maturity and continue to operate under a lean and data-driven model, the erosion of intellectual property and client perception of ‘brand confidence’ for incumbent insurers becomes very real, and will require a disruptive approach to maintain market share and continued relevance.
Declining trust in financial services
Post the recent Hayne Royal Commission, the financial services industry must accept and respond to a potentially dim view of the financial system by the public. Carrying out a broker’s duty of care to their clients will need to be undertaken with sensitivity to this recalibrated perception and sentiment, understanding its intent, and what it means for their clients. A broker’s value-led service, coupled with their ability to work with insurance providers when claims are being processed, will allow them to increase focus on the personalised relationship with clients.
Risk of a recession in Australia
As the LNP won the ‘unwinnable’ election in May, it did so under the repeated mantra of the ‘strong economy’. After 27 successive years of growth however, and, between a deteriorating housing market, RBA rate cuts to new historical lows (due to below target inflation and low wage growth), declines in retail spending, and the threat of a rise in unemployment, the risk of a recession in Australia is very real.
A recession will negatively impact the wider-Australian economy, particularly SMEs, with an anticipated subsequent impact on the insurance industry. While there is a risk that customers will simply forgo insurance renewals and/or demand lower prices or reduced coverage in areas they feel may be lower risk, there is likely to be a strong softening of the premium market with price expected to be a defining purchase criteria.
Responding to challenges
The important thing for the insurance brokerage industry is to be educated, informed and able to readily respond to potential challenges while building a trusted and sustainable partnership with clients. An increased focus on customer service and experience will be the most important tool, supplemented by a focused deployment of technology and leverage of data analytics to enable brokers to deliver a comprehensive proposition to their clients.