During my time in London I have met hundreds of insurance brokers, investors and innovators in FinTech, and the surrounding, wider insurance industry. The question that I have been obliged to answer most is:
“Is Insly building and selling technology to a dying industry?”
The domination of direct online sales and aggregators in UK retail insurance market, as well as the near disappearance of insurance brokerage industry in Scandinavian countries, suggest the clear validity of this question. As I’ve built my business around developing software for insurance intermediaries, it is essential for me to have this question answered – so that’s why this blog post was written.
First, let’s get on the same page with the definition of a broker. I’m afraid that the ones casting death sentence to insurance brokers picture the broker as a 68-year-old person running a small office with 4 employees and 3 computers on the corner of Baker Street, and this indeed represents one certain type of broker businesses. Insurance broker is an intermediary that represents customers in the insurance distribution process. It doesn’t say anything about how the transactions are handled, over which channels the products are distributed nor how technologically advanced it is.
“So, asking whether insurance brokers will be replaced by technology equals to the question whether transportation industry will be replaced by autonomous cars.”
So, asking if insurance brokers will be replaced by technology equals to a question if transportation industry will be replaced by autonomous cars. Until human teleportation is invented, we still need the car that transports us, we’re just talking about removing the human operator from the driver’s seat at this point. Similarly, the nature of insurance broker business will change considerably over the course of next years to come, just as it is the case across many other industries, with just some of the trends listed below:
- increasing prevalence of interactive channels, specially mobile
- automation of business processes
- improved risk selection through IoT solutions and better data quality and analysis
- possibly profound, yet largely uncharted advances in industry structure, brought about by the blockchain technology
- decreasing reliance on costly human labour
Brokers are OK – if they’re of the new type
And guess what does the industry need for all of that to happen? It needs technology, a lot of it, and this is exactly what we’re doing at Insly: empowering insurance industry with technology to embrace the innovation in that sector. Many of the current trends concern the distribution aspect of insurance business, with the main emphasis being the move to online sales and servicing, be it over the web or mobile. Will customers start to buy more “direct” (from insurer, without intermediary)? I don’t know but it sure seems the genie is out of the bottle.
The brokers are already losing battles in some countries, for instance in UK where consumer insurance has largely moved online to bypass brokers. On the other hand, the immensely successful online aggregators can also be considered a new type of brokerage on some level (new Insurance Distribution Directive has already categorized them as intermediaries), since they too compare prices to assist consumers in their choices, and act as intermediaries. So the ones losing seem to be only those not embracing technological change and having been slow to start selling online.
In Scandinavia, customer loyalty is generally high in financial services, and people are used to buying insurance from the same company that their grandparents preferred. When you also consider the extensive lobby insurers have made against brokers, including a legal ban on insurers to pay commission to brokers, it’s not surprising there’s not much brokering business to speak of. But UK and Scandinavia are not the representation of the world. For example, thenumber of people employed in insurance intermediary sector has been increasing in US, and direct business is yet to have any serious effect on brokers. The story is similar in Estonia where brokers started to sell online even earlier than insurance companies – already in 2001. Nearly all brokers are using the Insly software, and as a result, brokers haven’t lost any market share at all.
It might be insurers in the sickbed, not brokers
The fact that insurance brokers have lost some battles in some countries doesn’t mean that insurance intermediation industry as a whole is dying. Insurance intermediary sector has shown immense capability to innovate, with most insurtech innovators (think of Friendsurance, BoughtbyMany, HeyGuevara, Moneysupermarket, WorryandPiece,Simplybusiness, Knip, FinanceFox etc) starting up precisely as intermediaries, as in principle, you can do everything that insurance company does by being an intermediary, without the burden of actually being one.
In fact, I’m having a hard time remembering any great, major innovation stories starting from the insurance companies(except DirectLine, and that was 30 years ago). This pain of stagnation is indeed also felt by the insurance behemoths themselves as nearly all of them are doubling down on innovation programs. Can these initiatives have the effect that is expected? Are they quick enough?
“In fact, I’m having a hard time remembering any great, major innovation stories starting from insurance companies.”
The war for customers is always won by companies that understand customer needs and make them happy. We are seeing many new services where insurance companies are bypassed altogether, with online channel operators (essentially agents or brokers) making direct deals with reinsurers – for instance the recently started cooperation between Trov and Munich Re.
The industry structure is shifting but as of now, it’s not at all decided which participants – insurers, brokers, agents or reinsurers – stand to gain and which ones end up losing. Some things are certain though. Only the digital will survive. And in the new world, it’s not about big eating the small anymore, it’s the fast eating the slow.