In a market as complex as insurance, change doesn’t come easily – but when it does, real change tends to happen quickly. Change never impacts evenly, but the winners are always those who turn challenge into opportunity.
Right now we’re seeing our major general insurers increasing premiums as they recover from massive claims losses and other capital challenges like reinsurance, and that’s not likely to ease anytime soon.
Twenty or so years ago commercial insurance underwriters’ calculations were often based around recent loss experience, the state of the premises or equipment to be insured and not a lot more, except perhaps the local manager’s last round of golf with the broker. How else to explain, for example, the competitive premiums that used to keep North Queenslanders happy even as insurers so regularly replaced their cyclone-flattened homes?
Today our largest insurers are made of sterner stuff. They are controlled by directors who these days have onerous responsibilities to their shareholders. Profit is everything. While directors may not understand all the nuances of insurance and risk, they can see which products aren’t making money.
For business units that don’t financially perform, for whatever reason, there’s very little financial slack available. And brokers’ commissions are sitting there in plain sight, an additional cost that isn’t being used by the insurer to make money.
Personal lines is pretty much commoditised and is kind-of predictable, but commercial lines is crowded with products, complex and often volatile. That’s a good enough reason for directors to look at marginal business classes and ask, ‘If we’ve lost money or made a marginal profit with that class for five or so years, why are we offering it?’
Niche products that struggle to perform in the bigger companies often find a home in underwriting agencies, whose practitioners have a deep understanding of the niches. Otherwise insurers have raised premiums to the “technical” level, which is a shifting target and often means cover might be available but for most unaffordable.
As you have read in Miranda Maxwell’s deep dive into CGU’s decision to drop the 20% commission on crop insurance (Page 18), there are a lot of factors at play, and rural brokers have found themselves caught between opposing forces – profit and availability – where you can’t have one without the other.
CGU is a big player in rural insurance, and crop insurance is a basic farm product. But in straight money terms, it’s marginal. CGU has decided to stop including brokers’ commissions as part of the asking price for their crop policy.
That’s 20% more that goes back to the insurer, and presumably somewhere in that gap is the difference between profit and loss.
Crop insurance is marginal for most insurers – one farm insurer is struggling to find an underwriter willing to back it at all – and CGU argues that dropping commissions is the only way it can afford to keep offering crop.
Telling brokers what it was going to do and why wasn’t handled particularly well – Insurance News knew about it before many brokers had received CGU’s advisory note – and not surprisingly there were some angry brokers out there who made the point that they “don’t work for nothing”.
But brokers don’t work for insurers, either. The logical counter-argument is, of course, that the broker can always add a broker fee on top of the premium cost.
If there’s kickback from the client, that’s no longer the insurer’s problem. It’s a classic example of cost-shifting – a practice common in state government programs, where local councils are given added responsibilities but not necessarily the money to make the programs work effectively, forcing them to raise rates (and be criticised by state politicians for doing so).
Brokers do have alternatives, like seeking crop cover from another insurer (good luck with that); or they can go along with CGU and do the job for no payment, secure in the knowledge that their clients’ crops are safe from loss for another season and things will return to normal next year. (And that). Or they can charge the client for their services.
Commissions are efficient, but as a glaringly large part of the package the insurer is selling, commissions are also a target.
By offering cover without commission, CGU has effectively pushed the remuneration issue straight back at the broker. The unspoken logic is this: We the insurer supply a product; you the broker “own” the client (which was a long-ago cultural battle that brokers sort of won), and how much your client pays on the final invoice is between you and your customer.
Extend that logic to other marginal products and you may be seeing where this is heading.
Several years ago a very senior executive at a major insurer outlined to me the many advantages of offering products to brokers at a price, and leaving it to the brokers to do the deals and set their own price with the customer.
It’s an attitude you’d expect would appeal to those myopic company directors who don’t understand the risk business all that well, and it’s one with pros and cons that brokers must consider.
It’s quite possible, maybe even probable, that in future we will see more insurers adding that “no-commission” arrangement. The end result may well be more combative business relationships between insurer and broker as each fights for their corner – the insurer for its product and the broker for their client.
This is possibly how it should be.
But also consider this: In this chaotic market, brokers’ professionalism, their customer service skills and their ability to offer effective risk advice and find appropriate cover are increasingly valuable to commercial insurance-buyers. New niche channels for placing risks are emerging, and brokers are masters and mistresses of their own destinies.