Insurance – Who’s who?

Agents and Brokers

The first and most crucial step as the CEO (or designated risk manager) is to get an understanding of what’s in place already and who is performing what role on behalf of the corporation.?

Though not an absolute separation, an insurance agent is an insurance company's representative by way of agent-principal legal custom. The agent's primary alliance is with the insurance carrier, not the insurance buyer.

In contrast, an insurance broker represents the insured, generally has fewer contractual agreements with insurance carriers, and relies mostly on direct methods of perfecting business transactions with insurance carriers. This should have a significant beneficial impact on insurance negotiations obtained through a broker and the choice, independence and diverse expertise they can bring. The difference between the two leads to unclear criticisms of contingent commissions as encouraging conflicts of interest, and this is tackled below. The potential conflict is relevant for brokers. There is no conflict for agents. They only work for insurers and themselves.?

Some Asian corporations are highly dependent on the advice of their broker. It is still quite common for the CEO and his team to have very little information on the details of the placement other than the lead market. They have perhaps never met anyone in the insurance chain other than the broker. It is difficult to conceive how this lack of visibility on such an important topic is a good thing. It would be extremely unusual for any other major aspect of the corporate supply chain to be left entirely to a third party company.

So the first objective, if not already achieved, should be to build a relationship not only with the broker but with representatives of the companies that are going to provide the cash should any claims arise. Until this first aspect is properly addressed the corporation cannot be said to be actively managing the insurance program. Furthermore unless this dialogue begins, the issues in the remainder of this chapter are unlikely to be addressed effectively.

Best practice use of a broker

In Asia it is very common for the corporate or commercial buyer to use a broker. A broker will add value to the buying process if used correctly. However, there are other ways. Some companies who are confident in their internal risk management capabilities and expertise will buy directly from the markets. Others essentially have their own insurance companies – a captive is one form of this and discussed in detail in the next chapter. In some parts of the region large companies have internal insurance broking subsidiaries. This is common in South Korea and Japan but can also be occasionally seen in other countries in the region.

Disintermediation

Removal of the traditional broker from the insurance purchasing process is called disintermediation. The term was originally applied to the banking industry in the 60s. Disintermediation occurred when consumers avoided the intermediation of banks by investing directly in securities (government and private bonds, and stocks) rather than leaving their money in savings accounts in the US.

The term was later applied more generally to "cutting out the middleman" in commerce, though the financial meaning remained predominant. Disintermediation has had a strong impact in several sectors mostly due to technological advances: Computer hardware and software, travel agencies, bookstores and music stores to name a few. The process is still in process in several others: real estate (Zillow, Rightmove, Trulia etc), education (Udemy), banking (Challenger banks and cryptocurrencies), taxicab driving (Uber, Grab, Gojek, etc.), hotels (Airbnb). This is all discussed in more detail along with the likely impact on the insurance sector in later chapters. However, it’s not a one way street. There are successful cases of reintermediation, the advent of online consolidators and marketplaces being excellent examples: Amazon, Ebay, etc.

A corporation that removes the insurance broker may end up dependent on a single lead insurer. This can also be problematic over the long term. Asian insurance markets have been soft for a long time. But that all changed in the last few years. Insurance markets have been on a roller coaster since Covid and it looks like that is not going to change anytime soon.?

In the next newsletter, we will consider some ideas on the best practice use of insurance broking services.?

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