The economic value of insurance broking
National Insurance Brokers Association
Brokers can support insurers to distribute their products more efficiently and effectively. Insurers can use brokers to minimise their product distribution and tailoring costs, access a greater range of clients, and support product innovation. These outcomes also have flow-on benefits for brokers’ clients. 3.1 Saving resources for insurers Brokers can save resources for insurers by: • Reducing the transaction costs of engaging with clients directly • Reducing the time which an insurer spends engaging with clients directly • Avoiding the costs of establishing or upscaling internal distribution networks, and • Supporting client management and the quality assurance of client provided information. 3.1.1 Working with clients Brokers support insurers in connecting with clients across the insurance lifecycle. This includes: • Building face-to-face relationships with clients • Improving the efficiency of data collection • Providing insurers with useful and relevant client data in order to efficiently price risk • Providing clients with product information
Brokers save insurers time in every stage of the insurance lifecycle. Brokers provide insurers with an efficient channel to provide clients with product information, to measure customer risk, manage the sale of the insurance product (including to collect premiums for the insurer), and to provide other risk advice to clients. Surveyed insurance brokers were asked to estimate the time taken to arrange a typical business insurance policy for an SME client. Brokers were then asked to consider how much time they thought it take an insurer to arrange the same policy, directly. On average, brokers estimated that their role in distributing products saved the insurer 3.3 hours per policy.71 A breakdown of the components of this time saving is provided in Chart 3.1. Notably, brokers’ estimates of the time these processes would take insurers changes considerably (see Chart 3.2). Considering that more than 803,000 Industrial Special Risk (ISR) policies were arranged by intermediaries in 2019, a saving of 3.3 hours for each ISR policy equates to more than 2.6 million hours or more than 1,380 full time equivalent (FTE) staff working for a year. This represents a significant efficiency benefit that brokers bring insurers. Given that the average business tends to have a range of different policies beyond their ISR product, this is expected to be an underestimate of value of the total time saving.
• Facilitating product tailoring, and • Supporting insurers to work with clients during the claims process.
Table 3.1: At each of these stages of the transaction, the brokers’ service reduces costs to the insurer are the client Transaction stages Searching and matching
Availability of products and immediacy
Negotiating and contracting
Monitoring and guaranteeing
Intermediary service
Cost reduction
• Direct sales of information
• Search costs
• Matchmaking
• Information costs
• Market-making • Compensation of variances in demand and supply
• Opportunity cost of time
• Strong bargaining position
• Negotiation costs
• Exploitation of differences in contract terms between supply and demand market side
• Information costs
• To standardise contracts
• Opportunity costs of time
• Expertise in determining product and service quality
• Information costs
• Cross-sectional and temporal reuse of information
• Costs resulting from uncertainty
• Guaranteeing high product quality Source: Eckardt & Rathke-Doppner (2010)
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• Opportunity cost of time
• Administrative costs
• Monitoring and control costs • Investment in expertise
