Insurance MD slams brokers

UNDERCUTTING: THREATENING INDUSTRY’S SURVIVAL – EXPERT

Brokers chasing contract flow often agree to cut fees without considering the real needs and expectations of clients and this is putting the entire sector at risk, an expert says.

Undercutting by insurance brokers competing to secure contracts is making a mockery of and posing a serious threat to the industry, says Michael Duncan, MD of Marsh Africa.

Speaking at a short-term insurance summit in Johannesburg this week, he denounced the commoditisation of insurance broking services.

Insurance brokers are usually independent advisors who represent the interests of their clients, rather than that of insurance firms.

He said clients often don’t appreciate the value-add or advisory services offered by brokers and see little difference among brokerages, usually opting for the cheapest options.

Duncan also chided brokers who undercut fees “without fully understanding or even ignoring the extent of the services expected by the client”.

“At times, the pressure to secure new business seems to outweigh common sense. If the competing broker is successful, the problem is that the new fee then becomes the base figure for next year’s fee negotiations.

“It’s difficult for the new broker to argue for an increased fee simply because they didn’t fully understand the workload,” he said.

According to Duncan, the successful bid for a recently-awarded large broking tender in South Africa was 45% that of the previous year’s fee.

He went on to add that there was a 550% price variation among seven Botswana pula-denominated quotes received for a risk management tender in that country, with the lowest quote coming in at P360 000 and the highest at P2 million.

“These pricing variances make a mockery of our industry in the eyes of our mutual clients: whether it be undercutting of rates or the discounting of commission or fee income, I suggest that we are successfully cannibalising our industry,” he said.

Duncan also said that sub-economic pricing has led to detrimental outcomes for clients, such that insurers facing a profit squeeze are stricter in their interpretation of claims, while lower revenue for brokers results in service cutbacks.

“Ideally, we should be motivating our fees based on the added value services we’re providing. We should seek to avoid negotiations which focus purely on cost, because this serves to further commoditise the services we’re providing and ultimately destroys our brand,” he said.

He said brokers should seek to find a compromise to justify reducing fees.