Article Synopsis :
Trends reflecting larger macroeconomic forces have been fuelling a contentious debate between brokers and underwriters on compensation, leading to a “war of words” in 2017 that saw leading players on both sides invest to reinforce their market positions.
The same trends are driving increased customization of products, increasing reliance on direct-to-consumer models, and greater economies of scale for an increasingly large number of market participants. Collectively, PwC categorizes these trends into the “three C’s” of Consolidation, Customization and Collaboration, with the following high-level perspectives on each:
Consolidation: Consolidating of the brokerage market is expected to continue. Conning tracked over 450 such transactions through October 2017. This activity compares favorably to 537 transactions in 2016 and a longer term annual average of 414 transactions from 2011 to 2015. Looking forward, the factors driving consolidation include a low interest rate environment, the presence of alternative capital providers, and ongoing demand for expanded broker capabilities.
Customization: Overall, the desire for more localized market knowledge and custom products is a strong and recurring trend, with historically strong insurance hubs such as Lloyd’s recognizing the increasing need to meet local demands. For brokers, the need is clear: provide local knowledge coupled with global scale to rapidly place risks across geographies.
Collaboration: Technologies such as Blockchain have the potential to fundamentally transform insurance processes providing ultra-efficiency and greater information to both brokers and their customers. It is entirely possible that brokers could operate within a fully electronic process or be innovated out of it (i.e., be replaced by electronic platforms and algorithms for many categories of risks). Ultimately, the broker’s place in the insurance lifecycle likely will remain despite increasing automation, but for those risks from which an intermediary can be removed, disintermediation will indeed occur. For example, Hiscox offer a direct to consumer model for small commercial risks.
Four more general observations, discussed in-depth in the report, include:
- Trends that impacted the personal lines market in prior years are beginning to impact commercial lines, with risk managers looking for more customized products and technology-driven innovations for even the most specific product classes.
- Three trends will continue to fuel the broker consolidation wave: 1) alternative investors introducing new capital to the market, 2) stagnating broker revenue driving efficiencies of scale, and 3) demand for greater local market presence.
- Consumers are increasingly looking for more customized buying experiences and products from all industries. Commercial risk buyers are no different, and as buyer expectations change, brokers will need to align their business models to their targeted buyer profiles.
- New technologies such as Blockchain could provide the insurance industry a unique opportunity to collaborate. How these technologies will impact the industry remain to be seen, but forward-thinking (re)insurers are already establishing collaborative initiatives to establish proofs of concept.
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Digital Insurer's CommentsQuoting strategy guru Michael Porter, ‘Strategy is about making choices, tradeoffs; it’s about deliberately choosing to be different.’ Brokers have historically differentiated themselves on a personal/relationship level.
But increasingly digital customers demand digital differentiation—which is neither easy nor cheap. As this report suggests, industry consolidation will further concentrate market power. Smaller brokerages need to determine the appropriate business strategy for a market where the top ten brokerages produce 2.5 times the revenue of the next 90 firms.
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