Undercutting by insurance brokers, as a means to secure contracts, is both 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, 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 thus opting for the cheapest available options, especially in [today’s] trying economic environment.
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 very 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.
When dealing with clients facing genuine financial hardship and seeking cost-saving measures, he said brokers should seek to find a compromise in order to justify reducing fees, which could potentially be done by reducing the number of formal meetings or by negotiating a multi-year appointment.
Marsh Africa’s network, which includes its own offices and correspondents, has reported that the rebating of commission or reducing of fees among brokers competing for tenders is common practice in the region, except in countries where it is illegal.
Duncan said regulators in the region, which are increasingly concerned about fee cutting, have imposed minimum fees in some countries, partly to ensure the sustainability of the industry.
He called on South Africa’s Financial Services Board and other industry bodies to urgently review the pricing of products and services in the country.
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