Customers cannot pick up the tab for brokers' inefficiencies

"Brokers need to stop expecting customers to pick up the cheque for their inefficiencies" is a statement I've found myself making more and more in recent months. But those inefficiencies run deep and have become ingrained in the engagement model.

The inefficiency begins at the very first point of contact: customer acquisition. Costs are higher than ever. For much of the last decade, insurance was far and away the most expensive Google Adword, with "car insurance" alone generating more than 400,000 user searches per month. Whilst the current financial crisis has seen that tragically, but perhaps inevitably, being overtaken by "loans", it remains expensive. However, that problem is made worse by the strike rates that brokers deliver (typically 7-10% on new business quoted) meaning that in 90% or more of cases, they'll undertake work on the customer's behalf for free.

The worst part? It costs money to get the lead in the first place and then requires an Account Executive driving a BMW 3-series to hack around, spend a few hours with the client and then complete several hours of admin. Ignore the cast of hundreds supporting this endeavour behind the scenes.

All this is for a sub-10% chance of winning the business.

Differentiation is hard for brokers

The reason strike rates are so low is down to the inability of the modern broker to differentiate. Reuters found that customers only care about two things: price and coverage. If you can offer more of one without compromising on the other, they'll buy.

The problem is that the broker has little-to-no control over the price or cover. The insurer dictates both. The same insurer that the holding or competing broker probably has access to, who gives both brokers the same policy coverage and price. Brokers can quote service standards at a customer until they're blue in the face, but the fundamental truth is that brokers all smell, look and talk the same. The only immediately quantifiable differentiation they can present to the customer is to lower their earnings to win the business.

Insurance brokers face a 'vicious circle'

And this is where the problems begin. They can't.

Because they have been unable to differentiate, winning new business organically is neither scalable nor has the adequate velocity to appease shareholders. The result? Mergers and acquisitions at "multiples that don't matter".

But they very much do matter. Maybe not to those looking to buy, grow and sell at an even higher multiple through consolidation, but it certainly matters to the end customer, who is feeding this venture with commissions as high as 45% that reflect only the cost to acquire their business, not the value of service delivered.

The broker is then hamstrung by the financial limitations of the acquisition, more likely to walk away from a deal than ever consider cutting their commissions. Many have become like metaphorical addicts, their high commissions a habit they neither want to admit nor see an end to.

And now that they are on that path, so continues the ever-revolving vicious circle of M&A activity, each purchase piling them with more technical and financial debt. The customer is left paying the ultimate bill.

The threat of insurtech and big tech

We have often heard about the threat of insurtech and the shadow of Amazon and Google looming large over insurance. It doesn't seem difficult to fathom that with brokers operating in cuffs and insurers increasingly frustrated with their ever-increasing demands, the current model is there for the taking. After all that M&A activity, which assumes everything will stay as it is, the question is who will be left holding the hot potato.

However, the ultimate riddle to be solved is how you can acquire and service new customers with pace, performance and profitability. Many have managed to deliver one, some two, but three is the utopia.

We have seen the likes of Lemonade acquire rapid growth in the US, but at the cost of vast sums of investor funding, delivering a net loss of US$70m in the final quarter of 2021 alone. Those who have been profitable have often done so at the expense of growth, moving glacially towards retirement hoping for that inevitable phone call to buy them.

Regulatory change looms for insurance brokers

There are also regulatory question marks looming large. Currently, brokers only need to disclose their earnings when asked. What happens if and when that tightens?

When something is a "good deal" for the client, we tend to shout about it. A recent survey by hubb found that 76% of customers have no idea what they're paying their insurance broker, which tells its own story. Should disclosure become compulsory, and customers suddenly see how much they've been paying their broker, how will they respond?

Is there an obvious correlation between that sum and the service that they have received? Or have they been paying 40% commissions for a decade, to receive a forwarded email with their renewal terms, index-linked? I fear the latter may be more prevalent than we'd like to admit.

Brokers must quit their addiction to old tech

Technology is at the root of the issue, particularly an overreliance on legacy platforms that dictate the market and add an extra, exorbitant cost to every transaction. But it's not just the price that it impacts.

Overreliance on these dated distribution platforms prevents brokers from innovating and providing a truly exceptional customer experience. Double keying across multiple systems that don't talk to one another remains rife and this prevents them from leveraging the data available.

Processes remain far too manual. The Future of Commercial Broking (by PFK/CII) found that as much as 63% of a broker's day is spent on petty admin. That is as opposed to advising customers on risk, coverage and market conditions – the very thing a broker is being paid to do. Processes that should have been automated years ago cannot be, as the technology will not allow it and even the smallest of changes are, for many, cost-prohibitive. 

Broking is broken and customers are left alone at the table with the bill in their hands. Manual processes, high customer acquisition costs, low strike rates, legacy financing deals, non-existent supply chains and expensive offices that are now half-populated… the customer inefficiencies are growing.

It's only a matter of time until somebody with a fresh sheet of paper creates a seismic shift in the market and throws everything we currently think we know out of the window. Tick tock, insurance. Tick tock.

About the author: Ed Halsey is the Co-Founder and COO of hubb, a tech based insurance company focussed on the SME market.