the intermediaries as a business engine of the insurance industry

Some Studies of Economics Changes, ISBN 978-80-89691-27-2

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The intermediaries as a business engine of the insurance industry - the transformative influence of

the change management? Leonid Nakov, Igor Ivanovski

“Ss.Cyril and Methodius” University in Skopje, Faculty of Economics-Skopje, Republic of Macedonia

[email protected], [email protected]

Abstract. There isn’t dilemma with regards to macroeconomic influence of the

insurance industry to the financial system development and stability, as well as the economy growth in whole. The insurance industry has "survived" the financial crisis and after a period of recovery, started to strengthen and positive trends reappear.

Besides the originery functions of the insurance, primarily decreasing the total risk in the economy, its' contribution to reallocation of resources, investments and solutions

to demographic issues and risks, the insurance industry functioning is in the focus again as one of the needed answers for the growth models in the economies. In that context, the insurance industry is struggling to produce higher capitals' rate of returns and to redistribute the vast funds in the productive areas and other industries of the

economy. The specific strategy for "zero interest rates" requires innovative approaches for higher profitability related also to higher prudent regulations criteria.

Therefore, the issue of intermediaries in the insurance industry, as a proven business engine, exists with reference to their size, functions and portion of insurance

companies' profitability and management models. Precisely, the developmental tendency of the insurance industry is highly connected and inter-dependent to the

potential for a continuous and profound transformation of the nature of intermediaries inclusion, by introducing planned and persistent changes of the modalities, character

and scope of the insurance services. In this process, the holistic integration of the changes in the processes and behavior, while managing the changed intermediaries is of an utmost importance for the overall transformation of the insurance industry. In our multidisciplinary approach, we analyze the particular role of the intermediaries in the insurance industry, that become more than a distribution channel and offering a possible solutions from the change management stand point, for the future trends in

the industry, in particular its' growth, profitability and assets value. We use the empirical evidence from the developed and developing markets as an evidence to

question the role of the intermediaries, submitting the alternative models for the insurance companies, focusing to the possible decreasement of the intermediaries'

influence Vis a Vis the authentic insurance companies' model for growth.

Keywords: Insurance industry profitability and growth, intermediaries, continuous and profound transformation, holistic integration of the changes


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The insurance industry and the role and overall influence of the intermediaries The substance and the role of the intermediaries in the insurance industries is increasingly becoming a topic, more for the regulatory agencies than to the scholars. The growth of the financial system and its largest contribution to the GDP, as well as its broadening and deepening, the role of the financial intermediaries is growing, less for the dominant banking system, more for the stock market transactions and personal finance, and insurance intermediation, by its nature and practice is closer to high end of this frame. However, with enhancement of the influence of the insurance companies within the financial system framework and their actual and expected micro and macroeconomic value, we analyze the intermediary's position beyond the traditional approaches, i.e. their functions and relations to regulatory regimes and patterns that vary across the markets and even within EU joint market.

In relation to that, we are assuming the general definition of insurance intermediary as an individual or business firm, with some degree of independence from the insurer, which stands between the buyer and seller of insurance, and furthermore who bring the parties together and match particular needs of policyholders with the products of insurers (Cummins and Doherty, 2005, p.5). In addition we make no difference at this point between the insurance agent, insurance broker or forms of bankassurance, with regards to legal definitions, and accept all the channels as intermediaries, i.e. written premiums in both life and non-life insurance differently from direct insurers sale. Still, basic hypothesis for insurance intermediaries exist.

Primarily, it is the well known and dominant issue of asymmetric information consistent for the insurance activity. It is complex, with conflict and partial information between the insurers and insured, burdened with large scale of legal and regulatory requirements, unknown and unclear for the end users as well as the issues of transformations from highly to moderately regulated market segment, is not decreasing the lack of transparency but is fueling the possible confusion in consumers needs and decisions. The informational function is crucial one, both for insurers and insured. Practically, intermediaries can give information about the insurers offers, premiums, commitments and "sell to consume" to consumers facts for the complex process, as well as they are simultaneously fulfilling the asymmetric information gap for the insurers. Acquiring and processing more information about their clients’ level of risk than is possible for insurers (Sirri and Tufano, 1995) is fundamentally beneficial for the insurers, for the risk acceptance and transfer process, rather then overcomed position of using that advantage for allowing the insurers to price policies more competitively and fairly(Rothschild and Stieglitz, 1976), having in mind the regulatory regimes for premiums tagging and mainly the structure of the premium as an actuary fair prize. What is more important are the intermediaries result in cutting the participation and transaction costs of the clients and insurers. In the regulatory competitive market, we find the intermediaries function crucial for lowering the costs for acquiring, acquisition and finalization of the insured contract, with less knowledge, risk and liability for the insured and less marketing, human resources and time for the insurers. Practically, it is a unique model for making profit for everybody, with the same risk product selling and buying. We point out the daily business practices of the intermediaries and their client base as a key stimulus for profilation, expertise and skills that allows to do wide spread the basic core of insurance to the clients, thus making the primarily selling channel into one of


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the most important for the policy underwriting of the companies. The globalization, liberalization of the insurance market that is constantly swinging to the regulation and back forth, increase of the supply i.e. competition and financial crisis, places the intermediaries in the central point of the insurance business for the future, regardless of the advanced information and digital technologies, described id addition. Even if the insurance market is regulated, the contemporary issue of finding the buyer, whereas the seller is more than enough, persists in fostering the role of the intermediaries. The details are slightly different with regards to types of insurance, with favorization of life insurance as a predominant for intermediaries and raising bankassurance as an intermediary.

In conclusion, still non compulsory insurance classes are likely to be sold by intermediary, adding here an issue of confidence and trust, especially after the financial crisis, that shaked but not stirred the insurance industry. In overall, the insurers intermediaries by its volume of work and evolution to more advanced financial services(Maas, 2006), is contribution to decreasing the overall risk in the economy and by extending the insuring companies work, indirectly are improving the financial system performances and its macroeconomic contribution to the growth. So the main dilemmas nowadays, are how much the intermediary cost to the insuring industry, are it transferred to the consumers' premiums and is there are more efficient and profitable model of insuring intermediaries, companies and clients. Those issues are business ones, more than just a regulatory ones.

Facts showing that more than 60% of the insuring contracts worldwide are sold through intermediaries(figure 1), as well as domination of intermediaries in life and non life segment vis a vis direct writing in Europe, clearly position inevitable role of the intermediaries in the insuring industry.

Figure 1. Average premiums sales (direct vs intermediaries) by regions, year 2011-2012

Source: National insurance associations and supervisory authorities and Swiss Re Economic

Research & Consulting calculations, Sigma,2014

What is important is to do the fine tuning to the process, like the transformation from insuring agents and brokers to bankassurace(figure 2), that stresses the need for changes in the intermediation process that has already began, and we illustrate that in the chapter 2. In conclusion to this part, we can undoubtfully stress that the insurance intermediaries are the business engine to the insurance industry. And, is it going to be constant paradigm and what the insurance market is winning and losing?


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Figure 2. Change in share of premiums by different sales channels by region, 2007 to 2011

Source: National insurance associations and supervisory authorities and Swiss Re Economic

Research & Consulting calculations, Sigma,2014 The intermediaries issues-present, challenges and future perspectives Previously stated, reiterates the strong position of the intermediaries for the insurance market. Yet, a changes and innovations are foreseen in general. Firstly, even though the sales commission are placed in front and dominantly limited, they are portion of the insurer's premiums income. The main problem of the insurers, for period to come, would be related with the historically low level of interest rates, that is challenging for the investment return(in particular for the savings products of life insurers), as well as the competition in the market would put pressure for the profitability of the non life insurers. That stresses the issue of the cost of the intermediaries for the insurers. And secondly, new trends with regards to technologies and innovations, in particular internet, mobile technology and Big Data are quietly revolutionizing the distribution of insurance in the world (Sigma, 2014). Those challenges remain both for the insurers and the intermediaries. For the first, how to acquire new premiums cost efficiently, and for the second, how to survive the competition and make new businesses for themselves and for the insurers. Last decade and technology shifts, marked the evolution from the basic insurer-intermediary relation to a multiply sales channels platform(figure 3),(Sigma, 2014).

Figure 3. Changes of the distribution channels in the insurance

Source: Swiss Re Economic Research & Consulting, Sigma,2014

What can be concluded is that, even there is a significant evolution into

intermediaries dispersion, still the direct sales, including those made with the


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advanced e-commerce, is almost twice less that the value and number of contracts made by the intermediaries, even for the developed insurance markets, thus stressing the even greater value of the intermediaries for the developing markets. In fact, the growth of the new technologies and social media, is applying dominantly for the information gathering, negotiating and advising processes, and mostly for less complex, low value and compulsory insurances like auto or travel insurance, and for the younger generations per se. What is important is the fact that main insurance classes, in particular, life insurance and pensions would still be favouroized by consumer's decision to acquire them by intermediary's channels. These means that the insurers would continue to be preoccupied with the profitability of their assets and be dependant of the intermediaries for their underwriting business, transferring serious portion of the premiums to the intermediaries. Still, the intermediaries itself should act in more innovative business approach and create new businesses parallel to commissions earnings from the insurers. A complex study, made with the high decision makers representatives from large internationally orientated and risk consuming companies (Maas, 2006) clearly underlines the expected trends for the intermediaries and their possible repositioning at the insurance market. The study points out the consumers' expectations for intermediaries' involvement and support in their business risk assessment and moreover offers for "tailor made solutions" in context of enhanced need for brokers' consultancy in the overall risk transfer rather than the common cost effective offer for insurance product. In addition the study expresses the companies and insurers' expectations to see the intermediaries in creating new insurance business innovations, relying in their broad customer base as well as their, in part, international orientated work and in some cases, specialized skilled human resources. They are particular interested in developing intermediaries selective services for the consumers, when medium and large business ii in question, thus emphasizing the transformative and partner component of the intermediaries for the future, precisely in providing "sophisticated, appropriate, proactive and innovative risk solutions"(Maas,2006), (figure 4).

Figure 4. Functions of the insurance broker

Source: Maas Peter, 2006, How insurance brokers create value –a functional approach, Working papers on risk

management and insurance NO. 27, Institute of Insurance Economics, University of St.Galen


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With regards to the relations and issues of principal agent-client, a study for possible amendments to the Insurance mediation directive of EU Commission, questioned many aspects(PWC, 2011), including the relations between the market player and the end consumers, including the remuneration and its disclosure. Without entering the legal and business ethical aspects of the study, we find important to stress the findings showing the strong bond between the direct insurers and the intermediaries, still respecting the differences among the national markets. Two elements are interesting. The first one, possible disclosure of the amount or percentage of remuneration and on request, for the insurance policies sales was found negative by the market players, with the explanation that the potential system cost for the remuneration data would be nigh, and furthermore, that would be disable fair comparison between the cost of the intermediaries and the insurers, ending with disadvantaged position of the intermediaries in contrast to insurers and bankassurance, regardless it is an intermediary too, while the same issue is to be found neutral for the end users, as it was stated that it may negative influence to a insurance products demand with low value and high remuneration as well as the remuneration itself is connected with the different aspect of the product, not so important for the client itself. The study went further, proposing ban on commissions for sale on all insurance products, proposal that was evaluated as negative from both sides. The clients thought it would rise the premiums, with decreased competition, lack of international companies in the national markets, whilst the market players find the negative results in intermediaries leaving the market, making advantage to domestic over international companies, and in particular thinking that, gains in commissions ban can not be compensated with the higher policy sales volume by the insurers themselves because of loss of the customer base and network of the intermediaries. The in depth survey, once more showed that both insurers and intermediaries are responding slowly and reluctantly to possible changes or modifications to the existing business model that they are used to.

The influence of the transformative nature of change management in the intermediaries function in the insurance industry The persistent intention of determining the necessity for a continuous and profound transformation of the very insurance industry, particularly while undertaking the planned form of changes, inevitably leads to creating a basis for an effective change management concept, one that anticipate and efficiently preserve the consequences which arise from the potential that the changing environment possesses within itself. The fundamental orientation of this change concept lies in the increasing uncertainty that is encompassed within the following, in accordance with our profound explorations, dominant current and future change intermediary tendencies:

Variety of economic, social and environmental practices among different insurance tendencies, in the majority of the analyzed European countries;

Various degrees of perceived and applied holistic level integration of the changes in the insurance industry, a tendency that determines the initial change capacity of the intermediary insurance performing;

Harmonizing the differences in the regulatory regimes which are focused on transformative changes of accounting for and taxation of insurance


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investments, particularly while strategic repositioning of the insurance, as a contributive segment to the overall economic and business changes and development.

In order to increase the innovative orientation in the insurance industry, various

change management processes are empirically undertaken from the most advanced multi-national corporations that audit the insurance practices, among which, as the most effective one arises the one applied by Prize water-house Coopers (Mather, 2014), best described through the following transformative elements:

1. Establish a clear vision for managing change at the outset, maintain credibility by establishing the right tone at the top and setting up an appropriate governance structure and clear decision-making powers;

2. Understand the implications of change to the entire business; 3. Ensure the rights resources are in place and that you can develop them

internally; 4. Develop a robust conversion plan that takes into account your peaks and

valleys of activities; 5. Determine a communication strategy that takes into account all key

stakeholders, and; 6. Embrace the opportunity to make changes now and take the chance to make

other project efficiencies.

The alignment of all above transformative elements should be always perceived through the capacity of the change management programs that are in place, and possess 88% exceeded expectations, whereas those where the program is not systematically in place, bear only 17% of exceeded expectations (Prosci, 2009,). Therefore, the very process of creating and maintain the concept of ‘success’ in transforming the insurance operations, is highly connected to a prior determination of the character of the organizational change management (OCM) program, varying from imperative (strong), on one hand, and indicative (weak), on the other hand. Certain corporations, such as Ernst & Young, Anderson etc. continuously choose and implement the strong program modality, which we would detail through the one practiced in Ernst & Young, by the following change steps (Mihaliak and Vona, 2013), which have the methodological foundation in the 8th stage model of John Kotter, described as:

Set up for OCM success with a holistic, robust plan ready from the outset of the project;

Define the vision and goals in ways that are relevant to people at all levels of the organization and to key external stakeholders;

Engage and align leadership teams and stakeholders for a broader view of impacts and to define the story;

Modify roles, governance processes and operating models to drive targeted business outcomes and behaviors;

Communicate and share information to reduce resistance and sell the change; Align HR – enabling processes to reflect new objectives and ways of working; Re-skill and up-skill associates and their managers to sustain performance

improvement for the long term, and; Establish formal metrics to evaluate the success of the program and

proactively identify areas of concern needing attention.


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It is evident that the effectiveness of the transformative change concept starts from a holistic plan, which details the vision and goals, the scope of involvement of internal and external teams and stakeholders, oriented towards desired outcomes and behavior. In achieving so, communicating process, supportive HR practices, further development of the employee’s skills and developing metrical system for measuring the success, are critical, especially while managing innovative transformative insurance changes.

Empirical examples of the intermediaries significance in the particular insurance markets In summary, there is significant participation of the intermediaries in the insurance market. What differs is the raising importance of the bankassurance in the life segment that is result of the domination of the saving life insurance instruments and combined insurance products offered through this distribution channel. As for the non life segment, the intermediaries' players' key role, what we think is the weakness of the insurance companies that still rely on the intermediaries for the less complex, often compulsory insurance classes, thus transferring part of the income and profit to the intermediaries. We link this issue to the high competitive pressure among the insurers and lower demand during the crisis time. Concretely, the intermediaries are the major business platform for the insurers. A figure 5 and 6, for the major European insurance markets confirms these findings.

Figure 5. Life premiums by distribution channel in selective EU markets-2012

S Sp

Source: European insurance in figures, Statistics No.50, December 2014


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We can clearly conclude that, in general, bankassuarance is dominant

intermediary for the life insurance and for some of the major and developed market, while the agents and brokers are dominant form for the non life insurance, in particular for the developing markets that have faced enhanced liberalization and enter of international companies.

Figure 6. Non-life premiums by distribution channel in selective EU markets-2012

Source: European insurance in figures, Statistics No.50, December 2014

Additionally, in this paper, we offer brief descriptive statistical analyses for the

insurance markets in Serbia and Macedonia, as an example for the developing insurance markets in the EU candidate country, and with regards to the intermediaries in the insurance markets. As from the figure 7, we can see common trends in the insurance markets. In more developed Croatian market, intermediaries are crucial for growing life insurance segment, whilst the well kept position of the insurance companies that use its direct writing as a key sales channel for the non life segment. Similar situation is within the Serbian insurance market that is in developing phase, with still limited role of the intermediaries but with growing importance of the bankassurance, with reference to the leading role of the foreign banks in the Serbian financial system.

Macedonian insurance market is small and limited, but is interesting for conclusions from the smaller and open market perspective. Dominated by the foreign own insurance companies, highly competitive, it is largely dependant form the intermediaries, with the beginning phase of the bankassurance.


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Figure 7. Distribution channels participation in the Gross written premiums

Source: ASO, Insurance Europe and Authors calculation

This market aspect coincides with the theoretical and empirical findings, resulting

with greater orientation of the foreign insurance companies to the broad base of intermediaries that rely on. However, if this situation persists, it would continue to be cost inefficient, having in mind the commission paid to the first level of intermediaries(brokers and agents), while expecting that bankassurance can improve the situation with the rise in the competition and cut of the costs, thus transferring them into more consumer competitive products.

Figure 8. Intermediaries' provision as part of intermediary's written insurance premium

Source: Macedonian Insurance supervision Agency, 2015

Figure 8 shows that the intermediaries have received almost 1/5 of the value of the

gross written premiums for the insurance companies that amount to the quite significant level.

Conclusion The insurance market, common with the market imperfections, and originery information asymmetry, as well as the need for decreasing the transaction, participation and functioning costs, arises the need for market intermediaries in general definition. In the regulatory competitive market, we find the intermediaries

0%

20%

40%

60%

80%

100%

Macedonia(2014) Serbia(2013) Croatia(2013)

15,52 6,522

32,5

9,5

10

1

2

12

45,2379

54

5 0 2

Agents Brokers Bankassurance Direct writing Other channels

Total premiums written by

intermediaries(2014)

Provison paid for the intermediaries(in

relation to the premiums volume)

19%


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function crucial for lowering the costs for acquiring, acquisition and finalization of the insured contract, with less knowledge, risk and liability for the insured and less marketing, human resources and time for the insurers. Practically, it is a unique model for making profit for everybody, with the same risk product selling and buying. Facts showing that more than 60% of the insuring contracts worldwide are sold through intermediaries, as well as domination of intermediaries in life and non life segment vis a vis direct writing in Europe, clearly position inevitable role of the intermediaries in the insuring industry. That underlines the importance of the intermediaries for the insurers, but at the same time, their overdependence to them, thus transferring the portion of the income, liquidity and profitability to the intermediaries, not fully using the potential of the new technologies and business models for generating new premiums.

Still, the intermediaries itself should act in more innovative business approach and create new businesses parallel to commissions earnings from the insurers. New shifts in the digital technologies and market trends points out the consumers' expectations for intermediaries' involvement towards support in their business risk assessment and moreover offers for "tailor made solutions" in context of enhanced need for brokers' consultancy in the overall risk transfer rather than the common cost effective offer for insurance product.

To increase the innovative orientation in the insurance industry, various change management processes are empirically undertaken from the most advanced multi-national corporations that audit the insurance practices, thus offering several transformative elements. In achieving and managing effective and innovative transformative change concept for the insurance industry, involving the role and position of the intermediaries, communicating process, supportive HR practices, further development of the employee’s skills and developing metrical system for measuring the success, are critical.

Empirical data shows significant participation of the intermediaries in the European insurance markets. What differs is the dominance of different channels with regards to maturity of the market, consumer preferences and the growth elements of the financial system. What can be expected, is that position of the intermediaries to remain, by achieving core business to insurance companies, which will still cope with the challenges for higher ROA and ROE and profitability in the actual and at least, at medium term, extremely low interest rates, largely influencing companies' profitability.

References ASO (2014). The Annual report on the insurance market in Republic of Macedonia.

Macedonian Insurance Supervision Agency. Cummins, J. D., & Doherty, N. A. (2005). The economics of insurance intermediaries.

Wharton School, University of Pennsylvania. Retrieved from http://www.insurancejournal.com/downloads/WhartonStudy_2005.05.20.pdf [05.01.2016].

Insurance Europe (2015). European Insurance - Key Facts. Insurance Europe (2014). European insurance in figures. Statistics No.50, December 2014. Maas, P. (2006). How insurance brokers create value – a functional approach, Working

papers on risk management and insurance No. 27. Institute of Insurance Economics, University of St.Galen.

Mather, P. (2014). Effectively managing change in a challenging economic and regulatory environment. Insurance digest, PWHC, p.1-3.


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Mihaliak, C., & Vona, M. K. (2013). The Power of Change, 8 steps or success in insurance operations transformation. Insurance, Ernst & Young, p.2

Prosci (2009). Best Practices in Change Management. Prosci Research Center. PWC (2011). Study on the impact of the revision of the Insurance Mediation Directive

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Sirri, E. R., & Tufano, P. (1995). The economics of pooling. In D. B. Crane, et al. (Eds.), The Global Financial System: A Functional Perspective. Boston, MA: Harvard Business School Press.

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the intermediaries as a business engine of the insurance industry

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