Over the past few weeks I had the pleasure of meeting with a number of insurtech startups. Their mission? To create a customer-first company. One team in particular is building their company based on customer insights of the insurance industry. So far, their findings indicate customers believe insurance has more of a transparency challenge than suffering from a trust deficit – there is an increasing desire to know how their premium dollars are spent and how an insurance company views their risk.
Many of these meetings were held shortly after Evan Greenberg, CEO of Chubb, commented on broker commissions and fees in the commercial insurance market. Whether or not you agree with Mr. Greenberg’s comments, what really attracted customers’ attention is the lack of fee and commission transparency within the commercial insurance market. Furthermore, many insurtech articles stress that, for a long time, brokers have been able to capitalise on the industry’s lack of access and transparency. These articles rarely highlight existing customer rights, nor do they articulate how the issue of commissions and fees has evolved in the commercial insurance industry.
Customer rights and the evolving issue of transparency, commissions and fees
As a reminder, regulations in a number of jurisdictions make clear that insurance buyers are entitled to request the actual level of commission and fees earned by their service provider. For those jurisdictions where customer rights are not as clear, any customer is still within their rights to request this information as they are paying for services and products.
For the past 20 years, brokers have shied away from having a frank and open dialogue with customers about the true costs of servicing a customer’s insurance programme for fear of losing business to competitors. This fear of adequately charging for broker services, combined with decreasing standard policy commissions, led many brokers to consider alternative ways to make up revenues shortfalls. Increased profit commissions and fees from insurance companies provided the answer via traditional placements and/or the creation of broker facilities. Simultaneously, customer service has been redefined over time – many brokers now focus on reducing customer premiums as a way of evidencing value to customers.
The focus on reducing customer premiums as a way of evidencing value is not a true service, nor is it really reducing overall costs as broker commissions and fees are passed on to customers through insurance premiums. These increasing costs negatively impact an insurance company's balance sheet. Just a quick reminder, a healthy balance sheet is required to pay claims!
Why does a healthy balance sheet matter? Have you ever experienced the insolvency of an insurer or reinsurer? Have you ever informed customers’ they may only receive 5 cents on the dollar for existing and future claims? Unfortunately, I had these experiences on a number of occasions during my early career as a claims manager - and I hope to never experience again! Fortunately insolvencies are now rare events, due in part to the prudential regulatory regimes applicable to insurers, but that does not mean there is a bottomless commercial insurance company treasure chest for ever-increasing commissions and fees. These are ever-growing costs that negatively impact an insurance company’s balance sheet!
Can insurtech companies lead the way forward?
Full disclosure: I’m currently in the process of buying insurance for my consulting companies. This buying exercise extended my scope of product, service and transparency research when comparing quotes from commercial insurance incumbents and insurtech companies targeting SME customers. Details of the buying experience will be discussed in a future article.
A considerable amount of marketing materials stress insurtech startups are “customer focused” and their propositions are characterized by “convenience, on-demand, personalization and transparency”. For some of the startups, the company website and buying process stress “the business aims to provide transparency”.
Other startups list their fees on the company website and clearly evidence commissions on customer quotes. One insurtech broker has taken additional steps on the company website to 1) define profit commissions and 2) provide a schedule of profit commission schemes currently in place with insurance partners (none listed as of 3 May 2017).
This level of detail provides the customer with highlights of financial arrangements and improves financial transparency in the customer-broker-insurance company relationship.
The future of transparency?
A number of insurtech companies are leading the way to create new levels of transparency. SME customers can now compare commercial insurance products and services on offer, while improving their knowledge of products and service costs.
Commercial insurance brokers can lead transparency efforts by initiating frank conversations with customers about the true costs of products and customer-specific services and negotiate commissions and fees accordingly. However, as noted in my previous operations and product development articles, brokers, insurers and reinsurers must simultaneously review existing operations to create better efficiencies, reduce costs and improve customer services. These changes can be achieved through cutting edge change transformation programmes, investment in new technologies or partnerships with insurtech companies.
Why is a simultaneous review important? Because customers are not only bearing the costs of current broker commissions and fees via premium payments, they are also bearing the high costs of supporting antiquated commercial insurance operations. Let’s improve all levels of service and transparency in the commercial insurance buying cycle and help customers make better informed decisions!