Changing the landscape

We all know that the general insurance industry is in the midst of a massive transformation by the Financial Services Authority. What is less well documented is the FSA's huge impact on outsourcing. This has been given a boost in two separate areas: on one hand, brokers' determination to achieve higher service levels and, on the other, lower costs.

The costs associated with FSA regulation mean that insurance brokers are facing a number of life-changing decisions. Finding ways to unload the financial burden is the name of the game. In turn, this amounts to reconstructing how the business is run.

Many 'one-man-bands' and single-office brokerages are simply deciding that enough is enough. The good times have been and gone and now is the time to sell up. This sector of the industry currently makes up around half of the whole but not for much longer. It is likely that within 10 years at the very most, the corner shop brokerage or small-time broker may by reduced to 10% or less of UK insurance broking.

Of course, acquisition by the big national players and, to a greater degree, by large provincial brokers has been going on for some time. However, the onset of FSA regulation means consolidation is accelerating at a dizzying rate, largely because the small broker is now prepared to sell quickly and sometimes at a knock-down price.

Centralising offices

Another consequence of the 'FSA effect' is that many brokers are reducing the number of offices in an effort to reduce costs. Centralisation, as with many banks and building societies, is one of the most obvious trends of our times. It seems, however, that the trend that is set to dominate insurance broking as part of the changing broking landscape is outsourcing.

Each broker's business may generally be divided into five separate functions. These are: policy administration; accounting; claims; new business; and management. A large-scale survey, conducted last year by WNS Assistance, found that 83% of brokers intended to outsource their accounting within two years, 78% their policy administration, 71% their supply chain management, and between 54% and 63% other aspects of their claims operations, from uninsured loss recovery to first notification of loss.

At the same time, the brokers questioned said that, although they regarded outsourcing as increasing and inevitable, those with existing providers said that they were extremely dissatisfied with their service provision.

WNS Assistance, which expects to handle around 350,000 motor claims this year on behalf of brokers, insurers, and large commercial fleets, has traditionally worked closely with brokers, mainly the big national groups. However, the research suggested that a real business opportunity now existed with large provincial brokers that were looking for a new outsourcing partnership.

Enormous range

On the strength of this, WNS Assistance recruited a dedicated team of broker champions to service all business with its existing customers, as well as looking to develop new relationships. What it has discovered about brokers in the process has been amazing.

Broker claims departments cover a massive range, from merely monitoring claims as they arrive from policyholders before passing them on the insurer, to handling every aspect of every kind of claim. Some brokers, which have been granted delegated authority by an insurer, handle claims up to the value of around £1000, which make up 70% of the total, while passing on those over and above this sum to the insurer.

Many brokers have come to the conclusion that simply monitoring claims adds nothing to the service they offer customers and is thereby pointless as well as expensive - it simply bleeds money. In the context of increased costs through the 'FSA effect', therefore, this aspect of claims management is likely to end in the not-too-distant future.

Other aspects are set to be outsourced within the next year or two. The most likely areas for outsourcing are low complexity recoveries specific to motor insurance such as excesses, loss of use and courtesy vehicles. Brokers often admit that they are not very good at ULR and that specialist operations can do it better and more cheaply than they can.

What has been surprising, however, is the extent to which brokers are willing to outsource their entire claims operation, along with their accounting and policy administration.

The increased usage of underwriters seconded by the insurer to work in-house with the broker in order to provide an instant quotation on a specific risk is a definite factor here. There has always been an element of this with the big national broker groups. It is, however, relatively new where large provincial brokers are concerned. Wherever it takes place, the greater efficiency and professionalism involved makes the broker more amenable to considering putting all their claims management into one place. In a word, to outsource.

Naturally, brokers are hoping to reduce costs in the process. Indeed, the research shows that with one-third of brokers the motivation behind all forms of outsourcing is that of lower costs.

What has been a surprise, however, is that well over half of brokers are determined to achieve higher service levels through outsourcing - as well as lower costs. It is the constant pressure on brokers of ensuring compliance with FSA rules that plays a principal role.

It used to be that, as long as the provider delivered a satisfactory standard of service, then which tender won an outsourcing contract depended largely on the rate of commission. This is not the case anymore. Failure to comply with FSA regulations represents such a threat that brokers are now far more demanding of their partners. This is slowly creating innovative new ways of doing business.

In the first instance, brokers are now far more aware of their chosen risk carrier's Standard and Poor's rating, with many demanding an AAA rating, even for ULR. Gone are the days when brokers will shop around for a better deal on ULR or accident management with different providers simply for a few more commission points. The impact of the FSA means that the pedigree of their partners is all-important and if they find the right partner, they stick with them.

That, in turn, means that the pressure they put on that chosen partner to deliver a consistent level of service excellence for their customers has reached new heights. With ULR, for instance, the key measures now are the speed - and amount - of recovery. "The cheque is in the post" is simply no longer acceptable. Brokers, in short, use the quantifiable success of their service to differentiate themselves from the competition, making the cost of the service more palatable to customers.

Another aspect of the 'FSA effect' is that brokers have been forced to sharpen up their business skills. With commission rates now often taking second place to service excellence, many brokers are having to find new ways to expand sales to make up for the deficit.

A happy result of this, for WNS Assistance at least, is that its Fleet Direct service, a fixed cost-per-repair accident management service originally developed for fleet decision-makers, has actually been taken up most enthusiastically by brokers as a means of winning business in the fleet sector. As with the ULR success rate, the bottom line is a transparent success delivered through a consistent reduction in both downtime and the average vehicle repair cost.

Cost-conscious decisions

Another manifest change in the broker market arising from the need to increase fleet sales involves the growing popularity of after-the-event insurance with small to medium-sized brokerage firms. It seems that cost-conscious fleet decision-makers are highly susceptible to buying an ATE policy following a motor accident rather than a ULR policy to cover their entire fleet. The benefit for the broker is that the commission for an ATE policy is relatively high and also involves less effort to sell.

The 'FSA effect' on brokers' costs and efficiency is also closely bound up with an accelerating technological transformation in the broker market. Much of the logic behind the Financial Services Authority's rules is based on the need for brokers to develop a more transparent and accountable relationship with clients.

It is no longer acceptable for brokers to work manually or to use old and inefficient systems. They now need to invest in a single IT platform in order to ensure that client information is readily to hand, particularly where complaints are concerned. Nowhere is this more critical than in broker dealings with fleet clients, where accurate accident statistics, essential for any risk management policy, are vital.

One important issue here is the broker response to the widespread concern among fleet decision-makers over the Corporate Manslaughter Bill currently going through Parliament. The new law will hold companies to account for failing to take reasonable care for the safety of their employees or members of the public. It is, moreover, widely regarded as being particularly applicable to business drivers.

The upshot of this is that WNS Assistance's own real-time motor claims information website, Motorguard, has seen a doubling in both the number of users and frequency of use over the past two years. It has been obliged to respond by significantly upgrading the facility. As a result, it now offers brokers graphically depicted and summarised reports analysing high risk drivers, monthly accident volumes, the causes of accidents, as well as the financial cost of accidents.

As brokers' relentless seeking after higher service levels would suggest, those insurers and specialist niche firms like WNS Assistance that provide outsourcing services are having to sharpen up their act in order to meet the greater demands being put on them.

The 'FSA effect', therefore, is slowly transforming the industry as a whole. The process may be painful but it is certainly of great benefit to the customer and, to those who provide the services.

Throughout this new phase of the relationship between insurers and specialist niche firms with brokers, the ambition of certain firms has seen a greatly increased competitiveness in the market, resulting in a wonderful opportunity for growth rather than the reverse. Brokers look to benefit from their own positive response to the new conditions, not merely by seeking to offer better services than their competitors but also through acquisition of those less efficient than themselves.

This can only make for a stronger market in much the same way as pressure on car repairers from insurers and claims management specialists has improved standards and reduced average accident costs. The trend, therefore, should be welcomed, particularly as it can present new opportunities for partnership.

Tim Rankin, Managing director, WNS Assistance.