The economic value of insurance broking
National Insurance Brokers Association
Box 5: Role of a broker in providing industry-specific risk solutions Ros Stewart is the Managing Director of Queanbeyan Diesel, a mechanical diesel fuel injection business. Her business insurance is arranged by Sydney brokerage,Austbrokers ABS. Ros explained the value of her broker in providing risk solutions that are relevant to the business’ industry and operations. The business’ insurance policies and sums insured are reviewed annually, in line with changes to the assets owned by the business, which include high-value, specialist technical tools that are regularly replaced or updated. Ros sees the value of using a broker to ensure that her business’ insurance is as customised: “our motor-trade cover is tailor-made for what we do, for our industry.” Ros is also a member of the Australian Automotive Service Dealer Network (AASDN). Insurance brokers regularly present to this group, explaining emerging risks and insurance products that are particularly relevant to the industry. Presentation topics have included the need for cybersecurity, the risks of underinsurance, and an overview of insurance options which are specific to the motor trade industry. This information is valuable for the network, because brokers can provide advice which is relevant to current state of the industry. Ros believes that if the business had purchased a generic insurance product (even from an insurer that specialises in motor insurance products), this level of industry-based risk advice would not be available.
2.3 Increasing competition in the insurance market Brokers support clients by reducing the information asymmetry they face in the insurance market. This information sharing increases the level of competition between insurers, in terms of more precise pricing to reflect the clients’ risk profile, and increased product competition, particularly in terms of the range and customisability of products some through the broker channel. 2.3.1 Price competition There is a high level of information asymmetry in the insurance market. In the absence of brokers, clients do not have the tools to accurately compare the product premiums across insurers and may not have sense of an appropriate benchmark for the appropriate premium for an insurance line. Given that insurers price based on the information they have about the client, clients working with a single insurer may have a limited sense of how competitive a price offer is.
• Brokers provide clients information in the form of comparisons of product premiums. This allows clients to make comparisons of the prices of like-for-like products. • Brokers provide insurers with client information. Risk premiums are most competitive where the insurer believes it has good information about the client and is confident about efficiently pricing this risk. Brokers information sharing can increase insurers’ price competition, to the benefit of the client.44 Another way brokers can reduce the premium to the client is to tailor or customise products to clients’ specific needs. For example, homeowners often purchase separate insurance for jewellery; however, if this is bundled into their home and contents coverage, the premium for the consolidated product is often lower than for the two separate products.45 Surveyed brokers were asked to consider their most recently acquired client, who was not previously using a broker to purchase insurance. When asked about the prices which these clients were paying for their insurance, prior to engaging a broker, responses were mixed.
Brokers reduce the level of information asymmetry which clients and insurers face in the insurance market:
Chart 2.9: Client’s level of insurance, prior to engaging their broker
Paying more on their insurance policy than they are today
33%
Paying less on their insurance policy than they are today
30%
Paying about the same for their insurance Policy
24%
Don’t know / not applicable
14% 0%
10%
20%
30%
40%
Proportion of brokers Source: Deloitte Access Economics, Broker Survey (2020) Note: n=421. Single response
29
