Opportunity knocks for brokers but mind those conflicts

Corporate and personal insurance brokers in Malaysia and the wider Asia-Pacific region face potentially fantastic growth opportunities on the back of regional economic development measures introduced to tackle the effects of ageing populations and climate change and, not least, the huge infrastructure investment in the region. The liberalisation process currently underway in Malaysia and other Association of Southeast Asian Nations (ASEAN) economies is designed to free up the badly needed risk capital and risk management skills that will help realise the region’s potential. Puan Jessica Chew Cheng Lian, assistant governor at Bank Negara Malaysia, the Malaysian insurance market’s regulator, said during last year’s third Asia Insurance Brokers’ Summit in Kuala Lumpur that she believes the broking sector is well placed to help insurers and their corporate customers in particular take advantage of these opportunities. But Ms Chew also warned brokers that trust among consumers in particular in financial intermediaries remains at a low level since the credit crisis of 2007 and 2008. She also advised brokers to look very carefully at how they tap these growth opportunities and in particular avoid conflicts of interest and steering of premiums in the corporate and commercial sector. “[The] general shake-up of the industry that followed the crisis has meant that insurance brokers, swept up in the tide, must confront the very basic ethos of their business. They must make serving the real economic interests of businesses and helping individuals secure their financial futures the heart of their business,” said Ms Chew.hideBigger picture “They need to be concerned about the social and environmental impact of the business decisions that they make. And they must commit to providing a fair deal to their customers and building enduring long-term relationships. The environment has become far more unforgiving of anything less,” warned the regulator. Ms Chew said brokers need to take a long hard look at how they carry on business and their strategic plans as the insurance broking business finds itself at a “critical crossroad”. This, she said, is driven by the accelerated pace of change that is occurring in Asia and the business implications this will have for the region and the risk capital providers that support the growth. Ms Chew pointed out that Asia accounted for approximately 28% of the world’s premiums in 2014, after Europe (35%) and North America (30%). And Asia’s share can only rise, she said. “Coupled with a high population growth rate, there are projections that Asia will overtake North America as the second largest contributor to world insurance premiums in several years,” she said. One driver of this process will be the ASEAN Economic Community, created at the end of last year. This theoretically formed a single large market and production base with freer flow of goods, services, investment, skilled labour and capital, which should open up a combined GDP of more than $2trn and a population of 600 million people. Ms Chew pointed out that services have also become a more important component of trade across the region. This, she said, has obvious strategic implications for the insurance broking sector, to capture the significant growth opportunities that will emerge. “It is therefore not surprising to find that more companies already have, or are developing, ASEAN-oriented strategies to position themselves for an integrated ASEAN environment,” said Ms Chew. “These companies are quickly internalising new economic realities, which call for a fundamental reorientation of business and operating models. A clearly defined and well-executed strategy for capturing new growth opportunities in the region is more than likely at this critical juncture to reap significant payoffs during the next few decades,” she added. Climate change is another driver of business opportunity for the insurance brokers, according to Ms Chew. She pointed out that the cost of catastrophes is estimated to have risen by $870bn in real terms between 1980 and 2011. In 2013 alone, global economic losses caused by natural catastrophes reached $131bn and only about a quarter of this was insured. A recent report published by the United Nations Economic and Social Commission for Asia and Pacific found that more than half of the world’s 226 natural catastrophes in 2014 occurred in the Asia-Pacific region. Ms Chew reported that floods account for about 40% of the natural hazards that affect the region at a largely uninsured cost of about $60bn. “The region was found to be largely unprepared in its response to widespread floods and landslides. Despite the recurring nature of these events, only a fraction of properties and assets are fully protected against risks,” said Ms Chew. The stark contrast between the fast-growing sophistication and maturity of the Asia-Pacific regional economy and its woefully underinsured and unprepared state in the face of natural catastrophes, clearly demands a response. Unsurprisingly therefore, there has been a growing call for the financial sector to do more to reduce vulnerabilities to climate and disaster risks through such tools as improved analytics, professional advice, effective risk mitigation solutions and by conducting business in a socially and environmentally responsible manner. “Going forward, society will be more demanding of financial service providers, including brokers, to discharge these responsibilities with much greater diligence, and those that do not are likely to bear more severe consequences,” said Ms Chew. IT revolution demands response The technology revolution is another force that means the insurance broking sector in Malaysia and the wider region finds itself at a crossroads. Ms Chew said that, in her view, the challenge is to understand and anticipate how evolutions such as aggregator capabilities, internet-based insurance and Big Data are impacting insurance broking business models. “So far, brokers appear to be taking some comfort in views expressed that technology is having the biggest impact on the more commoditised market for personal insurance lines, while brokers will continue to retain their share in the corporate insurance placements,” said Ms Chew. But she is not so sure. “While this may be a legitimate view, technology will nevertheless have an important impact on the kind of services that brokers are offering their corporate clients and what clients are prepared to pay for such services,” she added. This view concurs with what Commercial Risk Asia and its sister papers Commercial Risk Europe and Commercial Risk Africa are hearing from the corporate risk management community. We are told time and again that a soft corporate insurance market is fine but really what they want is top-class service for the cross-border exposures. What this means is that they demand rapid and accurate delivery of information and data to enable the risk manager to be certain that he or she, and their insurers and brokers, are on top of their increasingly international portfolio of risks. Ms Chew clearly sees this evolution too. “Brokers need to strategically review the strength of their value propositions in this changing environment and actively seek to lift their own services by leveraging on technology,” she said at the broking conference in Kuala Lumpur last year. “These four reasons are just a few that should prompt the insurance broking community to re-evaluate their business and operating strategies going forward. All of them… are converging to redefine expectations, possibilities and risks in the insurance broking sector in a profound way that will determine if a firm will thrive or be marginalised in the coming decade,” she said. The broker of the near future will also need to be capable of delivering true innovation and this will need a combination of deep expert knowledge and cutting-edge use of technology, said Ms Chew. “Going forward, brokers will be expected to play a far more significant role in delivering innovation and choice by developing deep knowledge of the industries that their clients operate in and working with insurance providers to bring new products into the market that are meeting the changing needs of businesses,” she said. “Brokers will be called on to provide expertise and advice in managing a more complex set of risks that will include environmental, geopolitical, supply chain and cyber risks in a more interconnected global and regional economy. In other words, the traditional information function of brokers will expand significantly,” she added. SME focus needed Ms Chew also called on the broking sector to spend more time developing the small to medium-sized enterprise (SME) sector. This is happening in Europe and North America to an extent, as the big brokers seek growth in sluggish domestic core markets and find it hard to come by in the top-end corporate sector. This is not an easy step to make because, by definition, it demands a different approach in what is clearly a bigger market by numbers of customers and one that does not necessarily demand the same level of sophistication as the big corporate sector. But for those brokers that crack the SME sector, the rewards are obvious. In Malaysia, SMEs account for about one third of GDP and 59% of employment. Within five years, the contribution of SMEs to GDP is targeted to increase to 41%. But this huge and growing sector remains woefully underinsured and ignorant of the value of risk management, said Ms Chew. “Their importance to the economy however, remains disconnected with the extent to which these businesses are effectively managing their risks through insurance solutions. A significant majority of small businesses continue to be either not insured, or have inadequate insurance to secure the prospects of survival following business disruptions due to a natural disaster or other event,” she explained. One key barrier, according to the regulator, is that the cost and products offered by insurance providers simply fail to reflect the specific risks that SMEs face. Ms Chew said this is more acute for businesses at the lower end of the spectrum that operate with tight margins, have limited resources dedicated to formal risk management programs and are more vulnerable to business disruptions. “There is substantial scope in the region for brokers to better understand the risk profiles of SMEs—specifically how they are affected by loss events and what it would take for them to recover—and to work with insurance providers to lower the costs of insurance through innovative solutions and better data,” said Ms Chew. Thus, the regulator made a commitment to help the broking sector rise to these challenges in future. “A key focus of Bank Negara Malaysia in the coming years will be to provide an enabling environment for insurance brokers in Malaysia to develop the technical, financial and operational capacity that will enable them to effectively support businesses in both mainstream and niche areas under the new economic landscape,” she said. Ms Chew said the Bank will introduce new measures to foster greater competition and expand opportunities for brokers to forge strategic partnerships for long-term growth. The removal of tariffs for motor and fire business this year is surely an example of this. Ms Chew said specific measures on foreign participation in the insurance and takaful broking industry, in line with the recommendation of the Bank’s Financial Sector Blueprint 2011–2020, would also occur. Conflict of Interest But, the evolution of the insurance broking sector also raises important questions for the management of conflicts of interest, said Ms Chew. Insurance brokers are clearly well placed to offer a range of services that go beyond the transaction placement of insurance solutions. Such services include an expanded role in risk consulting and management, the administration of employee benefit schemes and claims handling services provided for a fee. This natural evolution, however, brings with it potential conflicts. “The diversification into a broader range of activities, however, increases the potential for conflicts to arise between the interests of clients in a traditional broking context and that of the broker that may seek to protect relationships with insurers that it has dealings with in a different context,” explained Ms Chew. “Brokers engaged in risk consulting activities may also have strong incentives to increase commission revenue by inappropriately influencing clients to purchase more insurance than they need or which do little to provide meaningful protection. In Malaysia, these issues are coming into greater focus with growing demand for value-added services that brokers can provide,” she added. The regulator said the Bank does not believe that disclosures alone are sufficient to mitigate the risk of conflicts. Currently, brokers are required to limit the revenue earned from these activities to 20% of total revenue in the previous financial year. It has also insisted on strengthened procedures and controls within brokers to help manage potential conflicts. The Bank has also asked brokers that engage in additional activities to demonstrate that their core broking responsibilities have not been compromised. This includes the adequacy of competent resources used to perform core broking functions, the quality of infrastructure that supports core broking activities and the outcomes produced for broking clients. Raising the bar Ms Chew said now is the time for the industry to come together collectively to “raise the bar” on standards of professional ethics and conduct that must be demonstrated towards clients. The code needs to clearly address new business realities and changing expectations of the industry, she said. It should build credibility by ensuring swift and effective mechanisms for dealing with complaints on breaches and the ability of the profession to act against “errant” members. In Malaysia, avenues for customers to address disputes with insurance brokers were enhanced through the creation of a Financial Ombudsman Scheme at the end of last year that includes insurance and takaful brokers. Ms Chew concluded: “The insurance broking sector finds itself today at the threshold of an exciting but also challenging new era in which solutions of the past are unlikely to be adequate for the demands of the future. The stakes are higher and the time is ripe for insurance broking in this region to do its part to contribute to sustainable growth.”

Opportunity knocks for brokers but mind those conflicts

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