What distribution strategies commercial insurers are pursuing by Sutherland Global Services

What Distribution Strategies P&C Commercial Insurers Are Pursuing? January 2014

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Distribution channel in the P&C industry mainly comprises agency writers and direct writers Distribution Channels in the P&C Industry • P&C insurers can be categorized into agency writers and direct writers, as per their distribution channel preferences – Agency writers include insurers who distribute their products through independent agencies, brokers, general agents and managing general agents – Direct writers include insurers who distribute through internet, exclusive/captive agents, direct response and affinity groups such as members of an association P&C Insurance Market Distribution

Net Premiums Written, Personal & Commercial Lines – 2012

Commercial Lines 2011

Personal Lines

2012

Direct Writers

Personal Lines Market

Agency Writers

Others

Commercial Lines P&C Market

• Direct writers accounted for more than 50% of total P&C net written premiums in 2012, while agency writers accounted for the remaining share • Commercial lines P&C market is dominated by agency writers, accounting for more than 65% of net premiums written

2011 Direct Writers

2012 Agency Writers

2011 Others

Direct Writers

2012 Agency Writers

Others

• In the personal lines market, direct writers have the lion’s share, accounting for around two-thirds of net premiums written

Source: Sutherland Research and Analysis

www.sutherlandglobal.com September 3, 2014

Trend toward disintermediation does not hold true for commercial insurance products Persistent Co-existence of Multiple Channels •

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Globally, insurers have to tackle a two-fold challenge of improving bottom line and looking for growth under the weak economic environment and protracted low interest rates. This has pushed the insurers to take the organic growth route to overcome the challenging economic situation and the competitive landscape Cutthroat competition in the P&C insurance sector has challenged each and every player to check its costs and retain the customer base, forcing them to identify new sales drivers while keeping focus on cost optimization and improving the bottom line Distribution channel is emerging as a key priority for transformation; it can certainly help insurers in improving efficiency and building on the organic growth agenda Agents and brokers have been traditionally dominating the P&C distribution channel and have always been the preferred medium to seek face-to-face interaction During the last five years, significant research has been conducted on, and industry experts have also been discussing, if technological developments, changing customer behavior, and competitive factors will push to eliminate intermediaries like brokers and agents in the insurance value chain This perceived trend toward intermediaries being eliminated seems to be true for products like auto and personal home insurance as they are simpler and far more standardized, and that they also demand lesser customer service level It is, therefore, likely that if not fully eliminating intermediaries, P&C insurers selling personal line products are more likely to adopt the multiple-channel strategy to reach the marketplace On the contrary, commercial insurance products have more complex needs, are less standardized, and require a higher client service level. In addition, they are often offered as packaged policies, and also solutions are tailored to suit a particular product segment These characteristics alienate commercial insurance products from the marketplace where direct channels are gaining momentum and may eliminate intermediaries Commercial insurers are thus still committed to the existing methods of distribution – the wholesale brokers/agent channel

Source: SGS Research and Analysis

www.sutherlandglobal.com September 3, 2014

Commercial insurers are focusing on managing the agent channel instead of looking for alternative channels… Commercial Lines Market – Trends in Distribution Channel • • •

Insurers do not intend to eliminate intermediaries but want to focus on writing significantly more business with the same number of channel partners Insurers’ priority is to manage agents efficiently and smoothen the process of Online policy-document access and New-business submission (including quoting) Insurers are investing in technology to enhance insurer-agency relationship and also lending support in terms of technology development to agencies. Some of the examples are: – Setting up of partner portals to enable agency self-service – Extending CRM platform to agencies, enabling them to manage their customers effectively – Providing productivity enhancement tools to shorten the sales cycle

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Technology is playing a key role in the transformation of the distribution environment, and intermediaries who are not able to keep pace with the new distribution environment will not be able to survive the transition – According to a report published by A.M.Best, the overall number of P&C insurance agents declined 10% between 1995 and 2011

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Companies specializing in niche markets like Excess and Surplus lines, which are dominated by commercial lines products like Markel and RLI, have invested in technology in the recent past to streamline their distribution process and services – Markel has taken initiatives to restructure its E&S distribution channel as a move to bring its underwriters closer to their broker clients – RLI invested in technology to meet the needs of distinct business units and make it easier for wholesalers and agents to do business with the company

Source: SGS Research and Analysis, Company Websites

www.sutherlandglobal.com September 3, 2014

…with technology investment directed towards facilitating the broker channel Top Commercial Lines Insurers and their Distribution Strategy •

ACE USA distributes its insurance products primarily through a limited number of retail brokers. In addition to brokers, certain

products are also distributed through general agents, independent agents, managing general agents (MGA), managing general underwriters, alliances, affinity groups and direct marketing operations •

Travelers Companies, Inc. distributes its products through approximately 10,500 independent agencies and brokers located throughout the US. Travelers focuses on enhancing its current distribution capability by significant investments in enhanced technology utilizing internet-based applications to provide real-time interface capabilities to independent agencies and brokers

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Liberty Mutual Insurance provides its commercial insurance products through independent agents, brokers and benefit consultants across the US. It has realigned its current business model in 2012 to strengthen its agent and broker partnerships by combining its US commercial lines businesses into a single strategic business unit. The result gives its 6,000 agents and broker partners improved access and consistency across the organization

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Zurich has a dedicated system in the form of Broker Advisory Council and Zurich HelpPoint in place, through which it aspires to align and expand its relationship with brokers

Source: Company Annual Reports and Websites