Servicing multinational risks--profitably. (Global Issues).
As brokers, risk managers and carriers draw up their budgets and strategies for the year ahead, many of their peers in other industries are asking whether an end to the economic downturn is in sight. Like any return to leaner times, the economic recovery that now seems under way will probably remain slow. As a result, companies outside the insurance industry may resist hiring, opening new offices and investing in new IT systems.
When they are finally ready to invest, the return to double-digit profit growth rates of the late 1990s seems improbable. Beyond the insurance industry, business leaders and managers are struggling with a new challenge: coping with the possibility of falling prices. This is a new experience for almost all industries. In recent times, only the telecommunications and computer industries--industries that underwent rapid expansion followed by even quicker commoditization--had to deal with the tricky issue of price contraction.
An Underlying Growth Market?
While the rest of the economy struggles with fears that growth is no longer an option, the insurance industry sees no end to the inflated prices of a hard market. Whereas the prices of cars, food, clothes and many services are declining in many large markets, soaring reinsurance premiums, the risk of terrorism and skyrocketing jury awards on liability claims will keep the price of risk high for the next 18 months to 24 months. The plummeting stock market and low interest rates will continue to undermine investment earnings for insurers, forcing them to write risks at a profit, driving up prices still further.
So, while other industries are using the global downturn to explore new opportunities or to find ways to cut costs, the insurance industry--and brokers in particular--may be tempted to rely on the benefits of an underlying growth market. It would be easy to conclude that as we are all working a little harder to bind our clients' risks we simply deserve our share of the price increases.
But this is a dangerous position for any insurance executive. The perceived underlying growth in the industry is due less to good business fundamentals than to the economic growth of the 1990s. Much of that growth, inside and outside of insurance industry, was created through mergers and international expansion strategies.
Despite a decade of unparalleled consolidation, brokers, insurers and reinsurers witnessed a gradual erosion of their stock market value compared with other industries during the soft markets of the 1990s. By Sept. 11, 2001, traditional insurers controlled only 56 percent of U.S. commercial premiums, according to Conning & Co., and had suffered a 60 percent drop in share value over the previous 10 years relative to the S&P 500, according to Goldman Sachs Group.
This is hardly surprising when you consider that this unprecedented consolidation among brokers, insurers and reinsurers failed to address structural inefficiencies that still consume a significant part of client premiums in antiquated paper-based production, distribution and settlement processes. The "mega brokers" and "global insurers" that tend to view consolidation as a solution have failed to realize the appropriate economies of scale from their acquisition strategies. Bigger is not better. If anything, bigger has resulted in more inefficiencies and poorer service.
Insurers and reinsurers might be able to increase underwriting profits in 2003 by raising the price of coverage and brokers might, therefore, see their commission revenues grow with further hardening. But rather than hiding behind inflated prices, senior management at brokerages and carriers need to respond to the hard market in the same way their peers in other industries need to respond to the economic slowdown. We need to grasp that these hard times actually create opportunities of their own.
Now more than ever, we must re-examine potential savings and refine the delivery of products and services from the supply chain to the client. Above all, if brokers and insurers are willing to spend, the current environment offers an opportunity to introduce structural changes essential to insure long-term survival and future growth. Now is the time to consider strategies based on operating efficiencies and good service. Now is the time to devise brands and use them as a stamp of quality. Now is the time to make our customers feel special.
This was the keynote for discussions at the recent Worldwide Broker Network (WBN) conference in Manchester, U.K. For nowhere is this truer than at the top end of the market. Large, complex multinational risks not only provide fertile ground for savings. They also offer brokers and insurers a chance to differentiate their brands through premium service.
The WBN knows this better than most. Toward the end of 2001, following ahnost four years of expansion, it was time for the network to consolidate. Since 1998, membership had grown from 23 to 50. Members were operating in 40 countries, up from 18 countries in 1998. Revenues jumped from $l.8 million to $7.5 million, making the WBN one of the largest non-owned networks in the world. Future strategies need to consolidate this expansion and deliver the growth potential of our acquired scale. Like all brokers and insurers, we need to take advantage of high prices to prepare for future growth.
"Integration is the key to servicing multinational risks," explains Alec Finch, conference host and chairman of U.K.-based brokerage Alec Finch & Co. "The clients' overwhelming challenge is coordinating risks and insurances across their global enterprises. This is often difficult even within their own organizations, where corporate barriers and walls can prevent clear and efficient communication. Brokers and insurers must facilitate effective communication across and beyond their multinational clients' organizations. They must integrate themselves with their clients' needs and integrate themselves with each other, lest demand and value creation become unaligned."
The dilemma is rooted in the fact that we operate in one of the most collaborative industries that exist, according to George Worsley, executive director of the WBN.
"Our day-to-day business depends on massive collaboration between clients, brokers, leaders, co-insurers, reinsurance brokers, cedants, reinsurers, adjusters, lawyers--the list goes on," he says. "The very nature of our business is to constantly interact and exchange vast amounts of information, data and documents. So far, the industry's only solution has been to convert anything that leaves our front door into a piece of paper. We exchange mountains of paper every day, from which information is extracted by laborious and error-prone re-keying." Studies indicate that it adds 10 percent to 15 percent to each premium dollar--that is $60 billion dollars a year of waste if we look at the industry globally. Furthermore, this process erodes client service by slowing cycle times of transactions and promoting errors.
Technology Delivers Benefits
More than $1 billion dollars of IT investment in the last three years has done little to minimize these frictional costs and risks. But brokers, carriers and reinsurers prepared to invest in technology and aggressively monitor the benefits of their investments have seen rewards.
"Communication and coordination are the weakest links in the international risk management process," says J. Scott Stewart, executive vice president at the Hylant Group, a consultancy based in Toledo, Ohio. "But the WBN continues to use technology to our clients' advantage, eradicating the risks and costs of delivering an integrated service to multinationals. In the last 18 months, the WBN has deployed global business platforms powered by Riskclick, a supplier of Internet services for risk managers, across 50 countries. With the increased complexity in brokering large risks, Riskdick allows us to prove the certainty of the international placement process to our clients."
Firms have spent millions of dollars to modernize their processes. But the retum on these investments is always limited because they fail to modernize relations between the players in the marketplace, explains Michel Schaft, chief operating officer at Meijers Assurantien in Amsterdam, the Netherlands. "Internal technology initiatives can only ever go so far," says Schaft. "Typically, less than one-third of the total cost benefits in an industry can ever be realized by internal efficiency programs alone. The bulk of efficiency cost benefits require a new way of working across and within participating firms. Only by extending existing systems beyond the enterprise boundary and by integrating them into cross-enterprise custom workflows can the industry hope to eradicate the frictional costs currently passed on to risk managers all over the world."
Thankfully a new kind of technology called Web services has made it possible for commercial insurance firms to achieve paperless cross-enterprise processes without gambling on costly and risky proprietary systems, says Jann McCully, chief information officer at Redwood City, Calif.-based ABD Insurance and Financial Services. This is part of a pivotal technology trend led by Microsoft and--for the first time--supported by all the major technology companies.
"Microsoft's new direction, .Net Web services technology, paves the way for dramatic efficiency and client service improvements in our industry," McCully says. "This approach enables transactions and processes to be completed electronically across diverse enterprises without imposing a dominant system upon the counterparties. It leaves the participants' existing systems in place and uses XML to wrap around and extend them so that cross-enterprise transactions become possible. Most importantly, .Net Web services technology eases integration with existing systems, enabling the importing and exporting of data with a fraction of the effort previously required."
Technology investments, correctly managed, can integrate organizations, collapse cycle times in multinational risk management and deliver competitive advantage to early adopters. But technology is not a benefit in itself, warns Florian Karle, chief executive officer of independent German brokerage Sudvers Gruppe. "We are aware that we are not the only brokers in the world that have harnessed [such] software," says Karle. "We must remember that technology is just an enabler--and the benefits it promises must be carefully managed. Only by working collaboratively with multinational clients and insurers can we eliminate costs from the placement and claims processes and improve client service."
Good technology is the decisive factor in international business. The key to managing international programs is the ability to move information around the globe as efficiently as possible. If correctly deployed, technology can be used to empower risk managers and integrate the services delivered by the brokers and insurers servicing them.
This is all well and good in theory, but how do brokers, risk managers and carriers achieve this in practice? "Setting clear expectations is vital to delivering international client service successfully," says Ruffin Branham, executive vice president at Palmer & Cay Inc. in Savannah, Ga. "The global broker ought to prepare and agree upon an appropriate international service plan with the corporate client, then communicate these service standards both to the brokers providing local service around the world and the client's local representatives. The service plan ought to include an action list to monitor the ongoing activities required to exceed the client's international service needs."
But once the service plan has been agreed to, the key to its successful execution is a set of trusting local relationships and an integrated communication system.
"For complex, international relationships, where the exchange of large amounts of data and documents among multiple parties in multiple locations is the norm, e-mail is ineffective and inefficient," says Stuart Brown, vice president in the International Benefits Practice of Boston-based William Gallagher Associates.
"By using collaborative Web services to manage international benefits and property/casualty programs, the insurance advisor, the client and the counterparties worldwide are able to align their energies to deliver the right program on every engagement," he says. "They can then execute the client service plan in a manner that ensures commitments are met, potential problems anticipated and surprises avoided.
"Establishing effectual and reliable communications, both internally and externally, enhances clients' perceptions of the value and quality of our service. This, in turn, helps us receive fees that reflect the value of the responsibilities assumed and are considered fair and reasonable by our clients."
This is critical if we are to help our clients understand the value of effective risk transfer. Despite our best efforts during the soft years to educate our clients to the fact that insurance coverage was underpriced, the industry is still under pressure to justify rate increases to risk managers. It does not suffice to assume that all is well if increased prices mean another year of revenue growth for the brokerage sector. This obscures the fact that the industry's good fundamentals have been undone by transactional inefficiencies in large commercial risk transfer for far too long.
To succeed at the most demanding end of the market, brokers, carriers, reinsurers and all other industry participants need to differentiate their service offerings and cut costs. Risk managers will refuse to bear the cost of our frictional inefficiencies. Global coordination via e-mail alone is no longer enough. Participants in the multinational risk arena must look to technology to surround the insurance buyer with sophisticated, interactive client portals, and to adopt strategies that promote cross-enterprise collaboration with other market participants. Doing so will enable multinational risk managers to enjoy better client service and reap the benefits of lower costs.
Jacques Verlingue is the third-generation owner of Verlingue Courtier en Assurances, a property/casualty and employee benefits broker in the French market. The Worldwide Broker Network is an organization of privately held insurance, risk management and employee benefits consultants with estimated total premium income of about $9 billion in 2002.