Insurance broker’s role more important than ever before

George Steuart Insurance Brokers Ltd. Managing Director Joachim Caspersz in this wide-ranging interview expands on the concept and effectiveness of insurance brokering in Sri Lanka, with an overall outlook on the insurance industry. Caspersz is a seasoned veteran, having spent over 40 years working in and representing the industry while heading several leading insurance brokering companies, alongside being director of a leading corporate in Sri Lanka. Following are excerpts:

Q: The insurance industry appears to be doing well, despite the challenging environment. Do you agree?

This is not quite so. The industry is facing multiple challenges, some of them critical. For a number of years, claim ratios of the overall general insurance market have hovered around 65%. That is, for each Rs. 100 that the insurers charge as premium, they pay out Rs. 65 as claims. If you add management overheads and other expenses to this figure, it does not take much to realise that operating margins are thin or non-existent. If you add to this, the low interest rates (which impact investment income) and the lack of growth in the market, you begin to realise the scale of the problem. 

In addition, the reinsurance market has changed dramatically over the last few months. Reinsurance is the mechanism where insurance companies protect themselves against the risks that they accept from customers, by sharing that risk with specialised reinsurance companies. Consequent to COVID-19, the reinsurance market has changed with a reduction in the number of players and those that remain, restricting terms and charging far higher rates than they did before. 

The net result is that rates of premiums will increase significantly, terms will be restricted and there will be a tighter control of claims. In some cases, insurance coverage may not be possible at all. On top of all this, the economic environment is not conducive to growth and the market is facing negative growth. We are witnessing the makings of a perfect storm. 

The insurance industry – insurers, brokers and agents, responded very well to the challenges of doing business in a COVID-19 environment, rapidly adapting to technology to continue to deliver services to clients. However, these measures, as innovative as they are, do not negate the challenges now facing the industry.    

Q:  So what is the role of the insurance broker in this environment? 

 The use of an insurance broker is now more important than ever before. An insurance broker represents the interests of the client (corporate or individual) to the insurer. As a professional in the field of insurance, the insurance broker brings its considerable expertise (on par with those of the insurer) to the disposal of the client. 

To be able to advise a client, you need to understand his/her business, its inner workings and how insurance can help economically transfer risk. The broker does this. Therefore, as a broker, one has a wide spectrum of involvement from an individual’s personal requirement to the complex risks of a corporate entity. Moreover, the broker will also help in the handling and negotiation of claims when they occur, which is an important aspect in the insurance transaction. 

Insurance brokering is an essential link in the insurance transaction. The relationship between the insurer and the person/entity purchasing insurance can be one sided. The insurer knows intimate details of the insurance policy and how the mechanism of insurance works. The purchaser has at best, a rudimentary grasp of insurance. The insurance broker rights this imbalance – at no cost to the purchaser. 

An insurance broker has a team supporting its operations, made up of members who have an intimate and thorough knowledge of the inner workings of the insurance industry. These members have sound relationships with all local insurers and frequently international partnerships as well. All of this is at the disposal of the client. 

Currently, insurance brokers are involved in the General Insurance (non-life) segment of the market and command a market share of about 25%. Many corporates and more than a few individuals use the services of a broker. 

Given the challenges already outlined, clients need the services of an insurance broker now more than ever, to help navigate what is going to be a very choppy environment for insurance. 

Q:  Does the use of an insurance broker add cost to the client?

 It does not. As practiced in Sri Lanka, insurance brokers do not charge fees from their clients. The insurance companies pay the broker based on business placed with them. Even if an insurer deals with a client directly, there is a cost to the insurer in inter-phasing with the client, marketing, servicing, technical support, claims and so on. Most of these aspects are taken over by the broker and therefore the insurer does save a considerable portion of these costs when a broker is involved. 

In fact, one of the key elements in the role of the insurance broker is to save money for the client whilst ensuring as wide coverage as possible. 

Q:  Are the challenges the insurance industry faces in Sri Lanka the same as those faced in developed markets?

 There are similarities as well as differences. Given the current economic climate, the issues of tighter reinsurance, challenging growth rates, falling rates of interest and claim ratios are the same all over the world. Significant differences would include the lack of choice in our market due to a reduction in the number of insurers, lack of capacity (ability to take on large and specialised risks) and the relatively low percentage of customers using brokers. 

If you look at large impact risks which corporates in general face, commonality of risks exists for pandemics, climate change and weather related risks, cyber, terrorism, social issues, and so on. Here in Sri Lanka, we also have issues with economic uncertainty, credit risk, HR and talent management, and regulatory compliance. 

Q:  There was a recent legal judgment regarding the functioning of overseas brokers in Sri Lanka. What is your take on the matter? 

 The legislation in Sri Lanka mandates that any insurer or broker or agent who chooses to operate in Sri Lanka must be registered by the insurance regulator. Additionally, the legislation also says that insurance may only be purchased from an insurer and through a broker or agent registered to operate in our market. The courts have upheld this legislation, as they should. None of us can go to India or the UK and set up office there and start business without a registration process.  

However, insurers have an issue as reinsurance business is handled by overseas based insurance and reinsurance brokers who are not registered in our market. The matter can be resolved if such brokers get themselves locally registered or operate through locally registered brokers. Another possible solution is to strengthen the National Insurance Trust Fund which acts as a reinsurance entity in Sri Lanka so that it is better able to support the local insurers.  

The regulator is currently looking into this matter and I am sure a practical solution will be found to the satisfaction of all concerned. 

Q:  What are the challenges to insurance brokers? 

 The core challenge facing insurance brokers is the rise of informal channels in the market. This includes banks, finance and leasing companies, car dealers, even travel agents (in their heyday). As insurers strive to expand their footprint, these channels are used to reach mass market and expand distribution. The issue is that many of these arrangements operate outside the existing legislation and apart from acting as distribution channels, do not add any value to the purchaser of insurance. 

Insurance brokers by and large are not against these channels. All that is being asked is that they conform to the legislation (to be registered as an agent, a broker, etc.). Additionally, some of these arrangements force the purchase of the insurance policy by the client with choice removed from the transaction. Brokers are requesting that these “forced” sales (which are banned in most developed markets) be removed and choice provided to the purchaser.         

The second issue facing brokers (which is perhaps linked to the first issue) is finding ways and means of broad basing distribution. Here, the challenge is that the commissions paid to the broker are frequently significantly less than what are paid to these informal channels on a direct basis by the insurers. Whilst we wait on regulator involvement in the matter coupled with market consensus, the immediate solution is the use of technology. This calls for heavy investment by the broker but will probably pay off in the medium to long term. 

Q:  What of the future of the insurance industry in Sri Lanka?

 Despite the challenges I’ve outlined, the insurance industry in Sri Lanka is vibrant and innovative and, arguably, coupled with a good regulatory environment, strongly placed to grow in relevance. Try and envision an environment without insurance and you will understand what I mean.  

There will be an increase in use of technology. Digital disruption will be the norm rather than the exception. This has already commenced as a result of the impact of COVID19, with greater adoption of online interaction with clients, the use of apps, sale and purchase of products online, the use of AI, more detailed and focus on analysis and big data, and so on. Claim settlement too will move into the virtual space. The industry will become more effective in the retail segment with a greater engagement and innovation as it seeks to increase its diffusion rate (gross premiums as a percentage of GDP). Expect to see insurance products sold along with your supermarket purchases or when you top up on fuel at your petrol shed. There will be an emphasis on service differentiation rather than product differentiation.    

For the insurance broker this environment is going to be extra challenging. As insurers move into the retail space, they will develop even more informal channels than exist currently. Brokers who oppose, or worse, ignore this fact do so at their peril. Insurance brokers will evolve to be more risk advisors rather than channels.

Q:  Insurance seems to have crisis of negative perception. Your comments?

 This is manifestly true. Recently a friend of mine referred to us as dour, grey-haired men who take life too seriously whilst a venerable senior politician once referred to insurance as a ‘Mahattaya’ type business needing change. The average person’s experience with insurance has been bad in terms of the heaviness of the transaction and the bureaucracy and fine print when a claim occurs. It appears to be as interesting as an egg sandwich – arguably essential because there is no alternative in sight.

I believe this image is changing with the advent of technology and as players (insurers and brokers) try to position insurance and the transaction of it as a 21st century essential service. One hopes though that we do not replace the egg sandwich with the image of a burger.