VENTURE
Having created a number of insurance supply chains and helped a number of startups do the same - it strikes me that insurance might better think of its capacity as if it was a retail product. Insurers might be pricing capacity all wrong with their distribution partners. Let's explore.
It all starts with a true story. Yonks ago, when I was quite green and optimistic about competition - I was looking for suitable products to sell online and explored Professional Indemnity. I didn’t want to give recommendations- but I did want to offer choice. So I’d decided to try and secure not one but five insurers - and sell their product on a delegated basis. It would have been a small business product. I figured two or three wouldn’t always be able to offer a quote - so I’d go for five and settle for four. (Some of you learned in agency will already be chuckling - yes. I know, right?)
Reality hit me though - it was naive trying. I was a new intermediary - I had no tenure and only a small but growing book from my first product launched just a couple months prior.
Insurers each asked for between £500k- £1m in premium. If you assume I was after a product that translated to about £500 average premium, perhaps for 25% commission - at a 1.5yr payback on acquisition costs in best case - that would have required between £937k- £1.8m on marketing alone to achieve the premium goals over 1-2 yrs. Notwithstanding the challenge of the tech, the operational strain that comes with servicing 5-10,000 companies, the location, etc. The more you want to control the way a buyer gets the price - more process with the carrier is required. Complexity brings cost and the prospect of that might put off carriers if they don't find your product or plan plausible.
This would not intimidate a category specialist per se, like Simply Business or new Insurtechs like Digital Risks, but I wanted to offer a little and a lot. It gives a snapshot as to some of the reasons there isn’t a supermarket that literally sells every single type of insurance as an agent. It also highlights the challenge that competition and Insurtechs has to create choice for buyers. The math starts to get a little crazy the more agencies and products you compound onto it.
Imagine you’ve cracked one line - but it isn’t yet at a scale where it “buys” you a really good metaphorical second album with another carrier. That’s been an issue for me - and I’m sure I’m not alone. Regardless - it got me thinking. If something like an agency - the right to sell on what is effectively someone else's product - doesn’t cost anything, what is its value?
So how does pricing agency improve things?
Let's go back to two distinct points in that anecdote. I said I hoped to get 25% commission. I also cited the informal (but kinda formal) premium targets set by carriers before they even let you near their rates and pen.
Most insurer agencies offer Gross Rating - be they open market, delegated or e-trade agencies. I don’t know the numbers - I’m not even sure there’s data - but I’d assume it’s the majority of agencies. That means it’s up to brokers to negotiate better deals - many of course do so, including profit commissions and more. This creates a friction between the chains. You might have noticed Aviva released a sizeable broker they deemed to be putting the squeeze on. Insurers often flush the pipes, too, of inactive agencies. That’s their prerogative - but we should never forget it’s easier for your phone to ring than to ring others. I think it’s a huge mistake to damage relationships by rejection. The solution is to offer choice and certainty for both parties.
There’s a nuance, though, which opens a tantalising window of potential. Sometimes delegated authority in particular is “Net Rated”. That gives you a wholesale price. As long as the carrier (MGAs do this) gets that cash sum, plus IPT, price it however you like. In my experience it’s been for policies that are quite generic. How about it wasn’t - what about other and all delegated lines, non-delegated lines, open market risks or e-traded risks?
In my examples so far you can see the wholesale market for insurance capacity isn’t like the wholesale market for tangible products - like cans of coke.
If I were to start a small tuck shop. I could head to a wholesaler - buy a batch of cans, mark them up, and maybe next time I buy more. The more I buy, the better my economies. This does not happen in insurance because there actually isn’t any agency model I’ve found that allows the intermediary to buy supply - guarantee their cost base - mark it up, and then come back for more.
It would have actually been better for me to “commit” to £50,000 for each of the 5 insurers - and financially guarantee it somehow - rather than the amount they set as an arbitrary hurdle.
How might £50,000 premium capacity actually be priced? It’s a good question, I guess easily answered - how is £500k-£1m priced right now? Surely, you'd hope, the premium hurdles cited by carriers when you ask for delegated rates has a built up cost price and method behind it? Most likely, it’s a cost of service and probability of success and loss ratio combo. Setting the hurdle also selects against smaller ticket appetite that won’t scale - and the cost of servicing an agency for the insurer is fixed. Still, i'm sure intermediary account managers spend a lot of time appraising new requests.
But, if you could work out what an agency was in cost terms - then you could offer a subscription model - discounting to as much as zero for those intermediaries that you really felt had better odds. This would work best for e-trade agencies, and tight or generic delegated authorities. You could mandate in contracts that intermediaries using that model showed their mark up/ margin to buyers. Thus solving the RRP issue. (If you start setting RRP - like a current Free Gross Agency does now, you open a can of worms.) Let buyers decide.
There's constraints, though - capacity planning. What happens if the intermediary that has paid an insurer for capacity doesn't "fill" it? Perhaps a secondary market - where excess capacity is traded between intermediaries, under control of the carrier - making it an asset. I think this lends itself best to the Open Insurance future - mentality at least, perhaps not in the immediate data sense - but also works for all the carriers with huge numbers of agencies that aren't performing across open, e-trade and delegated markets.
Gross and Net Pricing
This loops back into Gross and Net Pricing. Because it’s here where I think insurers can offer choice and protect their own downside. Let’s say a Gross Price agency is free. It has a much higher premium hurdle. So it’s where the finest prospects are parked. Smaller agency needs could be subscribed. A reward for the committed cost would be a Net Rate. Let the market decide what it needs to mark up the product. Insurance is so competitive - id argue this is the safest bet for carriers. By controlling base pricing - they don’t have the headache of supply chain pressure.
So let’s consider what a need for £250,000 of capacity to sell insurance maybe should cost... I’d suggest it should be around 10% minimum deposit. This could be paid up front, or spread monthly (giving insurers a chance to differentiate by doing 0% loans or integrating Premium Credit solutions like brokers do with their FCA fees.) Products could be one size fits all, e-traded or quasi-delegated with options to configure and differentiate each one.
The advantage would also be that Networks and Associations could leverage their scale to get their members better deals or discounted deals. Perhaps building panel propositions before the fact with no heavy lifting on the product side.
Carriers could also use the “anchor point” of priced Net Rated Agency to influence their active broker count. Because this is the final issue with Free Agency - it’s a tough love model. Insurers feel conned into giving costly agencies to brokers who don’t produce - but conversely don’t give a guaranteed service or incentive offering to them either. 90:10 would likely be a rough split - 10% of intermediaries produce 10% of a carriers premium. It’s up to the broker relations team to smooth the bell curve.
How is this suggestion useful for buyers? Put simply - competition. I shouldn’t have to spell it out. But also new or differentiated models of advice. If you have a net rated product you might play about with new models of remuneration. Fees spread monthly - or tapered to the expertise of the staff, like Lawyers do oh so well! Insurers could also offer profit commissions on Net Rated Agencies as standard once milestones were unlocked - and more besides!
By creating a price point - you fix quite a lot of the problems I believe limit the choice intermediaries can actually offer buyers. Intermediaries bear the distribution risk. They have to wait a long time and pay opportunity cost waiting to convince carriers their plans work. More pertinently though - it Free Agency bakes in an instability. If the intermediary can’t source captivity like a supermarket can source cans of coke - all their eggs are in too few baskets. A carrier’s head could be turned by a bigger fish and the key product or rate undercut on reputation alone. Not on a fiduciary commitment. I don’t like that.
This is a strategic piece that I think helps solve the conflict between direct and intermediary channels. As internally - the direct channel could and should pay the net rated subscription. Making it not a cost centre or rival - but a client like any other intermediary. So there’s my challenge to those that run supply chains.... If you have something of worth in your agency solutions?
Put a price on it.
