Insurance Distribution

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Insurance Distribution Customer Value

• Mode of distribution
• Direct e.g. agency, internet, call centre, mainly
  SMEs personal lines
• Intermediaries e.g. brokers, mainly corporate
  risks
• Brokers act on behalf of the insured, typically
  servicing corporate clients with complex and
  large exposures
• Significance of broker distributions channel
  varies by country
• Significant, stable, long term market shares in
  Anglo-Saxon market
• Increasing market share in some countries in
  Continental Europe
• Low market share in Japan, S. Korea, China and
  India
• Global commercial brokerage revenues between US
  27-30 billion (2002-2003). Reinsurance brokerage
  contributes to approximately 10
• Some emerging markets such as Bermuda have been
  fueled by broker investments and are broker
  oriented

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The Role of Insurance Brokers

Source Swiss Re Economic Research
Consulting
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A Brokers Value Chain

Source Swiss Re Economic Research Consulting
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Insurance Distribution Customer ValueBroker
Evolution

• From market matcher to service provider
• From transaction executor to enterprise risk
  management consultant
• From conventional insurance to ART
• From property and casualty risks to human capital
  risks
• From primary risks to hybrid primary and
  speculative (secondary) risks
• From insurance capital to financial markets

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Importance of Brokers in Todays Market, 2002
Source Reactions
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Markets Perception of the Role of the Broker,
2002
Source Reactions
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Brokers Share of Non-Life Distribution, Personal
and Commercial Lines in Selected Countries

• Country Total
  Personal lines Commercial lines
• United Kingdom
• - UK domestic 56 32 85
• - London market gt95 not meaningful gt95
• Ireland 68 40 95
• United States 52 34 69
• Canada 75 70 90
• South Africa 70 50 90
• Australia 48 9 86
• New Zealand 50 15 90
• Notes Joint ventures with a foreign share of
  49 or above are included. Latest available
  figures are used, which typically refer to 2001.
  Hong Kong is not included due to data limitation,
  but foreign companies should have a large share
  of the market.

Sources National insurance statistics Swiss
Re Economic Research Consulting
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Brokers Share of Asian Non-Life Distribution

• Country
  Total Country Total
• Japan lt1 India lt1
• South Korea lt1 Malaysia 30
• PR China lt1 Thailand 25 - 30
• Taiwan 12 Indonesia 20
• Vietnam 13

Sources Axco, non-life reports, Swiss Re
Economic Research Consulting
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Brokers Involvement in the Insurers Value Chain
Traditional Core Function of brokers
Brokers assist in providing data for underwriting
Brokers keep records for policy holders
Brokers represent policy-holders
Services for policy- Holder
Traditional core function of brokers
Brokers assist with modeling and actuarial
services
Brokers provide DFA financial modeling services
and third party asset management
Brokers provide run-off services for insurers
Sometimes delegated to managing general agents
Frequently delegated to agents/ brokers
Services for insurers

Source Swiss Re Economic Research Consulting
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Insurance Distribution Customer ValueBroker
Remuneration Perceived Conflicts

• Brokers have historically assumed tasks on behalf
  on customers and insurers
• Commissions earned by brokers cover both types of
  services
• Fee based remuneration reflects value proposition
  to clients but would not cover services to
  underwriters
• There are unique characteristics and service
  requirements in some insurance markets e.g.
  Lloyds (subscription market) where brokers need
  to be compensated
• Real and perceived conflicts arising from volume
  based or profit based contingent commissions
• Remuneration models have not kept pace with
  evolving standards of governance

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Insurance Distribution Customer
ValueConflicts of Interest Issues

• Bid rigging
• Tying
• Steering

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Insurance Distribution Customer ValueSome
Food for Thought

• The current distribution and remuneration model
  has been around for a long time, it is a
  reasonably efficient system with no wind fall
  profits earned by brokers or insurers
• Elimination of contingent commission may not
  mean such reductions are passed onto the customer
• Services to insurers need to be paid for
• Clients must also know the real cost of the
  services they are getting
• Brokers must more clearly define services they
  provide to underwriters to ensure there is no
  conflict

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Insurance Distribution Customer ValueA
Possible Model that Binds Customers and Brokers
Interest Together

• Brokers must develop a more measurable value
  proposition to customers (CSM)
• Brokers must be totally transparent in terms of
  earnings for services provided to underwriters
• Insureds need to understand pricing behind a
  specific insurance or risk transfer (security,
  coverage terms etc) product
• Transparency and disclosure are the brokers
  biggest allies
• Customer focus, customer focus, customer focus