Efficiency fuels profitability for insurance broking firms

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Forging a new path to growth

Efficiency fuels profitability for insurance broking firms

With the softening in premium prices and ongoing consolidation, there's no doubt that the insurance broking segment is facing a number of challenges.

Brokers are experiencing flat to negative commission income growth, and increasing competition from alternative channels – from online aggregator sites to insurers going direct. Vero's SME Insurance Index 2013 also highlighted an increasing use of the internet as a default channel for gathering information.

But some firms are finding new opportunities for profit growth by focusing on improved efficiency and value. Industry experts share how.

Paul Cilia, Executive Director for Macquarie Business Banking

According to the most recent Macquarie Insurance Broking benchmark report1, over 50 per cent of insurance brokers say improved efficiency is an important driver of higher profit – a big spike on the previous year's findings.

"The major insurers are predicting generally flat insurance markets over the next 12 months, and we suspect that's fairly bullish," says Cilia.

He believes insurance broking is still very much a relationship-driven industry – and that's where the value is. Given salaries is the biggest expense for firms (on average one-third of revenue1), using technology to automate transactional processes and enable more time for client service is essential.

"There is technology out there you just can't afford to ignore anymore," he says. "You don't have to develop it yourself. For example, Macquarie Premium Payments Online lets brokers automate the process from insurance quote to binding."

Stephen Humphrys, Steadfast Chief Financial Officer

Steadfast has purchased more than 60 businesses since it successfully floated on the Australian Stock Exchange in August 2013.

"We're creating hubs to get common infrastructure between brokers in the same geographic area," explains Humphrys. "They share IT systems, trust account licenses, external accounting and audit costs, and premises. This gives us economies of scale – but there's no point putting two brokers together if there isn't the right cultural and business fit."

Humphrys also believes systems are essential in a high volume business. "If you're spending time manually processing and reconciling, then you're spending too much time on things that don't add value to your business."

Steadfast has developed its own platforms to support growth: Project 360 automates the full cycle of transaction flow, and Steadfast Virtual Underwriter (SVU) lets brokers generate a detailed market comparison report in minutes for a client.

"To continue competing for new business, you need to look more closely at operations, back office efficiencies and protecting revenue by diversifying income streams," he says.

Mark Searles, CEO and Managing Director, Austbrokers

Austbrokers' unique ‘owner driver' business model gives insurance brokers a 50 per cent stake in their own business. According to Mark Searles, this means their entrepreneurial flair comes to the fore in finding new business and revenue streams when the market is challenging.

"What we're seeing is although commercial lines premiums are generally declining, broking income is remaining constant and client numbers are increasing. However, it's hard to cut expenses, such as salaries, because you need to service more clients, which can result in short-term margin squeeze," he says.

Searles says his strategy for growth across the Group involves diversifying into new revenue opportunities. "For example, we're investing more in risk services – areas that are complementary to insurance, such as services that assist injured employees to get back to work after a worker's compensation claim."

By having all brokers on one system, Austbrokers can share benchmarking reports with its broking partners, such as staff to income ratios. The group uses its scale to increase efficiency and effectiveness – for example, it runs the data centre for 80 per cent of its businesses at cost, and is rolling out a group-wide CRM system to help brokers with new business development.

"Technology is an important enabler for us," says Searles. "I also believe risk will become an increasing issue for our commercial clients in the future – we're starting to see new risks emerge such as cyber risk, and brokers can be both their advocate and their risk management expert."

Gary Gribbin, Director, Insurance House Group and Director, Austbroker and IBNA Member Services (AIMS)

IBNA has partnered with Austbrokers to create AIMS, giving brokers better access to market-leading products and member services with its combined premium pool of around $3.5 billion. It also owns a broking management platform, Broker's IT.

"Far from seeing the web as a threat to our business, we've embraced it – and not just for sourcing new customers," says Gribbin of IH Group's strategy. "The holy grail for business management is a single entry system." He also points to Macquarie's DEFT system as a great tool for automating receipting.

"Improving efficiency is also about paying attention to the fundamentals, staying on top of salary expense and being selective with new business. Brokers aren't going to shape the market, we have to adapt to it. And we need to be smart about where time and effort is devoted," he says.

Having seen IH Group through a number of acquisitions for geographic expansion, he says the benefits are generally 12 to 18 months down the track. "They're usually back office benefits rather than front of house. If brokers are growing, they need to be growing for strategic reasons, not to achieve scale."

Dallas Booth, former CEO, National Insurance Brokers Association (NIBA)

NIBA represents the interests of Australia's insurance brokers – and Dallas Booth believes it's in their interests to realise that new channels of supply are already out there, including retailers and digital platforms, and there is no room for complacency.

"Everyone wants to be more efficient, and make their operations more cost-effective. But you need to balance your ability to process transactions quickly with true client engagement, and delivering real value in the eyes of your customer."

He says the broker's role is three-fold: to assess risk, help the client manage and finance their risk, and act as their advocate if a claim arises. All are equally important. "You need to really understand your clients – who they are, how they want to interact with you, what channel they prefer. I believe brokers do engage more effectively with their clients than insurers."

Booth also believes the way insurance is now transacted is increasingly entrepreneurial – and that's a good thing. "It's fascinating to see so many new business models being trialed. Many are using it for back office rationalisation – as long as it also provides customer value it's a great thing."

Looking to outperform in the current environment?

You may need to think a little differently. Here are some things to consider: 

  • critically assess your portfolio of clients – look at margin, revenue and cost to service, and avoid false economies
  • procuring new clients can be costly, so maximise the potential in your existing book through a disciplined approach to cross sell
  • can you better use technology to streamline client acquisition and ongoing service? Macquarie's 2013-14 Insurance Broking Benchmarking report highlighted a strong correlation between high profit firms and those who embrace technology1
  • can you tier your service model in line with client needs and returns – rather than one size fits all? Some may prefer to deal with you online, over the phone or face to face.

Five tips from the industry insiders

  1. Minimise time spent handling data or payments, and maximise time available to service clients
  2. Acquisition enables rapid economies of scale
  3. Merging like-minded broker businesses creates hubs of efficiency
  4. Invest in technology – make your systems do the heavy lifting
  5. Create a point of difference with exceptional service platforms.
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1Building on success: 2013-2014 Insurance Broking Report