Insurance brokers critical for industry

Insurance brokers are an essential and critical component for balance, not to mention an independent source for professionalism and technical expertise, in the insurance industry. Be it here or overseas, it is the insurance broker who acts as the intermediary between the insuring public and the insurance market, bringing technical expertise and an intimate knowledge of the insurance industry to the public.

As insurance is a highly technical service, the relationship between the insurer and the insuring public can be fraught with difficulty. The insurer is fully aware of the nuts and bolts of the transaction, whilst the person who purchases a policy has at best a very rudimentary grasp of what he or she has purchased and how it all operates.

The insurance broker, who represents all insurers in the market, rights this imbalance and represents the client to the insurer, making available the broker’s technical expertise, giving choice and market knowhow in negotiating to the client’s benefit the best possible solution.

Equally important, the client can lean on such expertise and acumen of the broker when there is a loss or damage and the need arises to make a claim. Some insurers tend to be closet bankers in that it takes considerable persuasion to make them see the loss in the light of an insurance policy wording and cough up.

In Sri Lanka clients do not pay for the services of an insurance broker. Due to some quirk in the historical development of our market, it is the insurer who pays the broker’s fees based on the business placed with them by the broker.

The concept

The concept of insurance brokering, now highly developed in Sri Lanka, was first introduced to the local market on 1 January 1988 when the private sector, after seven years of twin Government-owned insurers competing with each other (the then Insurance Corporation of Sri Lanka and the now defunct National Insurance Corporation), was invited to participate. A number of insurance brokers promptly commenced operations and today there are approximately 42 brokers operating in the market.

Over the years brokers have bought into the market global intermediary giants like Aon, Marsh and Wills. Many brokers have affiliations with various other international brokers, thus bringing into play the perfect combination of strong local knowhow coupled with global reach and market development. Brokers have even ventured into countries in the region, India and the Maldives being cases in point.

Currently 27% of the General insurance market (the insurance market is broadly divided into Life and General) is channelled through brokers and their involvement is increasing as entities and individuals discover the value of a professional intermediary. However, the involvement of brokers in the Life segment is less than 1%.

In order to evolve and differentiate, brokers have begun to broaden their reach and scope of activity. Rather than deal in the traditional lines of business such as fire, motor, medical, etc., some brokers have been looking at insurance requirements of clients from a risk management point of view – helping clients take a more holistic view of the risks they face and the options available to them – with insurance being only one of the many avenues available.

Some have developed their own coverage designed with the client’s interests in mind and backed by reputed underwriters. Others are looking at complex online solutions, asset valuations, medical schemes out sourcing, reinsurance services to insurers, etc., as value add.

Regulated and monitored

Insurance brokers are regulated and monitored by the Insurance Board of Sri Lanka and have to conform to minimum capital requirements, regular reporting of financial and other indicators to the regulator and conform to minimum technical requirements. The Sri Lanka Insurance Brokers Association, formed in 1988, represents all licensed insurance brokers and has as its key objectives the fostering of professionalism among brokers and representing their interests to players in the industry.

Some insurers may tell you that if you use an insurance broker, your costs increase, but this is a fallacy. In fact, the reverse holds true as one of the key aspects of the functions of an insurance broker is to look at a rational premium outlay for clients, one that addresses the transfer of risk to the insurer in a manner where the client’s concerns are addressed whilst also addressing the stability and reinsurance arrangements of the underwriter.

In most cases, a client’s rate of premium will actually reduce with the involvement of a broker. Even for their direct business, insurers incur a costing and the longevity of such business with the insurer is a challenge. Any premium has imbedded acquisition costs and insurer costs and that remains the same whatever channel they choose to use.

In going forward, if the industry is serious about delivering services and solutions which are relevant to the public and in keeping with those provided globally, then the role of the broker needs to be better protected.

Recent amendments to the Insurance Industry Act will regularise bancassurance products and services. How can a financial institution, which has a mostly uneven relationship with a client, uneven to the degree of the facility extended to the client, become involved with the protection of those clients’ assets? In the event of a loss who will the financial institution look after – client or itself?

Insurance brokers are not against such institutions entering the field, but there should be no compulsion on clients to use their services and this aspect must be made clear. Currently, there is no mechanism to prevent such ‘conditional sales’.

Intense competition

Another challenge is the intense competition for business, resulting in declining rates. For years we got away with dropping rates to beat the competition buffered by high interest rates propping up margins for insurers. But with the decline in such rates, insurers are now forced to make underwriting the basis of their terms.

Brokers must support these moves as they ultimately lead to stability in the market. Lower interest rates also means that investors have cheaper access to investment and could thereby expand businesses and/or develop new ones, which in turn will result in opportunities for the industry.

As for medical insurance, the time is overdue for a national policy on health care and the insurance industry can be at the forefront of such a policy. Medical insurance premiums have increased sharply in recent years to meet increased health costs, especially those charged by private hospitals.

Whilst large ‘corporates’ are currently meeting these costs on behalf of their staff, it is the health sector which is reaping the benefit by fleecing such costs from patients. The first thing they ask you when you enter a private hospital is whether you are insured or not. If you are, they have a higher billing system. Ultimately we all pay for this.

A compulsory national insurance scheme can prevent that – one which makes it compulsory for the individual employee/employer to contribute and which has fixed pre-agreed schemes and rates of settlement. Such a scheme could be managed by say, the EPF or ETF or even a purpose-built unit, and would be a useful tool to control the current abuse in the medial insurance system which prevents evolving of products and services. This would ensure the public a better and funded access to health care. The private sector could then be free to provide topping up schemes or alternate schemes for differences in covers, limits, etc.

The National Insurance Trust Fund, which manages the Riot and Terrorism Insurance Fund and the compulsory reinsurance from the market, is now under the regulation of the Insurance Board of Sri Lanka and that is an excellent development in the market. There has always been a strong case for a local reinsurance company. However, it is essential that the insurers and the NITF agree on a basis of settlement of claims as undue bureaucracy and delayed settlement will erode confidence in the arrangement.

The industry has to service large multinationals, operate and accept business regionally and cater to the large and small in Sri Lanka. Clients must see stability and fairness in the system.

A serious issue

Lack of penetration in the Life segment by brokers is a serious issue. The cost of distribution and lack of reach is a problem for brokers, but these issues can be addressed by non-formal means like online access, segmental marketing, group term polices and so on. Life insurance has the capacity to surpass General insurance and brokers ignore the segment to their peril.

The insurance industry in Sri Lanka is pretty dynamic and vibrant. Over the past decade the industry has posted healthy growth rates, despite the most trying of times, growth coupled with innovative services and products. Together with a sound regulator the industry is poised to deliver significant value in the growth that Sri Lanka will experience.So wither insurance brokering? Not so much to lunch in these days of cost control. The clear benefits of using an insurance broker at no cost should lend itself to both the corporate and the individual in managing their potentially knotty insurance requirements. We would like to see insurers and the regulator continuing to support the concept of insurance brokering.

For brokers, the key to relevance in the industry is innovation and value-addition. Insurance is what we do and know. It’s what we breathe in and breathe out. Your business and interests are in other areas. It makes sense to use an insurance broker. It’s free.

(The writer is President, Sri Lanka Insurance Brokers Association.)