Refpoint Global Chairman Ken Maw comments on the Future of the Insurance Brokerage Industry in the UAE & Beyond
Insurance brokers have been dancing to the same tune in the region for the past four decades and, like any product that doesn’t adapt or change to a world that demands change, runs the risk of extinction, particularly the smaller shops walking a tightrope on extremely fine margins.
Historically and in the main, brokers founded their businesses on the back of either ‘anchor client’ relationships or individuals who emerged from the insurance company / underwriting market, with an existing strong bank of client relationships ensuring the shortest road to profits.
In the 1970s and 80s, and even well into the 90s, this formula worked extremely well as the region prospered with massive growth, increasing oil prices and generally a client base who were not particularly interested on the insurance side of their business and where relationships made it easy to win and renew accounts year after year with not too much effort.
The brokerage offices in those days were fairly unsophisticated, as technology was yet to make an impact. Costs were also easy to control and the annual budgeting exercise could be fathomed out in a single afternoon by just applying a simple percentage growth in both top line income and running costs, with the latter being squeezed and kept well below the forecasted income growth to ensure increased profits and healthy dividends for all the respective partners and stakeholders.
There was indeed so much harmony in the brokerage industry in the early years that there was even a ‘Gentleman’s Agreement / Non Aggression Pact’ between the main rivals not to compete on each others business as, ultimately, this would only lead to retaliatory measures and impact everyone’s future bottom lines. We were all close friends and there were plenty of social functions and sporting events to strengthen the bonds between each participant and poaching of key staff was literally unheard of.
Life was relatively simple and staff were easy to appease although, like most other Gulf businesses, there remained a massive division between the benefits received by the general managers or managing partners and other staff. The structure of the business was in most cases a two-tier system, i.e. the general manager and/or owner and beneath them, everyone else. To maintain this uneven balance and with it an ever increasing greed, most general managers were unwilling to seek out deputies or delegate duties to others, as this would only result in their fear of be- coming dispensable. In the long run, this would be a very short sighted approach and be an Achilles’ heel for those unwilling to usher in change.
One major mistake at this time and epitomised by my former employers was the desire to repatriate 100% profits to the head office in London, as ultimately this left no room for reinvestment back into the business and further expansion in the region. As had they kept the profits locally, they could on the back of the relationship with the parent group, built a substantial regional business and achieved an even greater ROE.
With the new century being ushered in with a future period of massive growth, rapid technological development and market sophistication, the industry needed to do little to keep on target and host of new companies entered the field to try and take a slice of the action.
Increasing regulatory pressure did little to stem this flow of competition as there was still enough for all to be very satisfied, but what of the consumer? Were they really benefiting from their respective broker relationships?
From a client’s perspective, the brokers’ only job in life was to ensure they got the best possible deal. However, this is always a double edged sword as the broker too tends to always think of how much commission they are going to earn and, ultimately, may make a decision based on commission earnings rather than ensuring their client gets the best possible deal. For this reason, many businesses today want to have full transparency in brokerage earnings and/ or require their broker to work for a fee.
With the most recent onset of Compulsory Health Insurance, this argument will become more and more apparent and could potentially upset future brokerage earnings across all classes of business, quite simply as it would be unreasonable to expect a broker to earn massive amounts of commission on a multi-million-dollar healthcare pro- gramme for simply negotiating the deal. As such, the broker must offer other management services to substantiate the level of fee they should earn, particularly in the healthcare sector, where insurers could be making less than the broker if on a full commission basis.
In some markets, the regulator is already attempting to cap commission rates to ensure some degree of control and clarity in earnings. In the past, life insurance companies were heavily chastised for offering extremely high commissions to intermediaries for selling their long-term savings products and where commissions of excess of 100% the first years premium could be achieved.
This often leads to intermediaries trying to sell products to individuals for the wrong reason, only thinking of how much commission they would earn rather than protecting the interest of the consumer who, in the event of early cancellation of the policy, would end up losing money.
The UAE today is a very different country to what it was 40 years ago, and while it has matured into what is a very sophisticated business environment, the population has also increased tenfold with expatriates still accounting for 90% of the overall census. What is more of a concern to practically all businesses here is that it has also become an extremely costly place to conduct business and to survive, companies need to become lean and mean and trim off all excess fat. This is particularly true for the brokerage business and for ultimate survival in the coming years; change needs to happen.
What changes should we be on the look out for as the new generation of sophisticated consumers reaches out and demands a higher quality of service?
This could come in any number of ways for example:
• Real estate / outsourcing: The days of ivory tower offices should be swept aside for smaller compact units and wherever possible, services could be outsourced to other parties to reduce headcount; this, in my opinion, makes absolute sense. Even sales could be outsourced and the focus of the broker placed more into providing robust and adequate technical, broking and claims sup- port to their clients (not too different to that of the London market)
• Additional service offerings:
Brokers should try and provide other related technical support / value add services to their clients as this would demonstrate an ability to provide more than just ‘negotiation skills’, which clients could possibly orchestrate themselves direct with their respective insurance carrier. It also gives the broker ability to upsell other services and get additional sources of income
• Regional / international expansion:
One of the key value add services of a broker is their ability to assist clients in consolidating regional or international insurance programmes. Unless brokers have this capability, it leaves them very exposed to con- ducting business only with smaller local companies and the ability to win bigger businesses becomes far more remote. Global Network membership goes some way to filling this void
• Consolidation / M&A:
With the market being heavily squeezed, margins not what they used to be. Consolidation is an easy way to grow one’s business more aggressively, and ultimately achieve economies of scale, and in many cases, break into the international broker community. Care must always be taken to ensure key staff are retained at the time if acquisition and the legacy clients of the acquired business are protected from potential attrition
• Cost control:
In difficult periods, it is sometimes easier to just batten down the hatches, trim headcount to the extent of losing some potential clients and weather the storm and keeping their powder dry for future investment, either when the market turns or when another M&A opportunity emerges in what could be more of a fire sale opportunity.
2017 will be an interesting period for the market as the region continues to weather relatively low oil prices and other geo-political issues and increasing costs.