Brokers now have access to the tools needed to compete in the digital marketplace

Affordable, accessible end-to-end technology is critical for smaller brokers to compete in a rapidly digitising and increasingly data-driven marketplace.

With a market-wide expense ratio in excess of 40% and profitability and market share under ongoing pressure, Lloyd’s desperately needs to do business more efficiently. It is therefore driving changes aimed at removing inefficient and expensive processes such as traditional bordereaux from the market and ushering in a new era of real-time data exchange enabled by technology adoption, making London a more accessible and agile marketplace in which to do business. It also targeted a 3% or $800m reduction in operating expense within two years. 

Many see the distribution chain as an area ripe for cost-cutting, putting many small and medium-sized brokers under pressure to justify their value propositions and keep pace with the technological changes sweeping the market. Going forward there will be no place for digital laggards adding layers of expense and inefficiency to the market. The threat of disintermediation is exacerbated by growing competition from Insurtechs and disruptors like Google, which is moving into the broking space in partnership with Applied Systems. 

At the same time, double-digit commercial insurance rate hardening means clients increasingly want to work with brokers that can offer value-added services while keeping cost inflation under control. Today’s leading brokers are increasingly data-led and are investing in tools to take advantage of automation and integration opportunities to accelerate their ability to provide capital solutions cost-effectively to customers.

The move to remote working during Covid-19 resulted in a rapid increase in e-trading, demonstrated by increased usage of platforms like Whitespace, as well as the creation and adoption of many digital tools – effectively ushering in potentially years’ worth of technological change in a short space of time as firms were forced to adapt so quickly.

Small brokers must digitise their internal systems at a similar pace or face being left behind. A 2019 study of the wholesale broker market by the FCA found that smaller firms (placing GWP below £250m annually) are already operating on the lowest profit margins in the market (9% compared to 19% for mid-sized brokers and 25% for those placing more than £1.5bn GWP annually).  While smaller brokers earned the highest revenue per pound of GWP, they also incurred the greatest costs. Digitising manual processes, eliminating rekeying, and automating repetitive tasks where possible is a no-brainer if they are to reduce that administrative burden and lower the cost of business.

Small does not necessarily mean simple, especially in the London market. Smaller brokers still need technology that enables them to handle the complexities of London Market processes, messaging, placements, financial arrangements, and reinsurance all within a single system, since smaller brokers often service risks that are just as complex as those managed by the larger players. With smaller budgets and finer margins, they need to find a way to act faster and more flexibly than their larger rivals.

Unlike larger players who may have a whole team for each specific function, small brokers need each of their users to be able to perform a suite of functions. Having an end-to-end system in which multiple tasks can be completed using a single login is therefore very beneficial as it removes the need to switch between multiple internal and external front and back-end systems.

In order to be efficient and competitive they also need to be dealing with ‘one version of truth’ when it comes to client and risk data. Using data to deliver a seamless, automated broking process flow allows smaller brokers to compete with more speed, agility, and consistency. It gives them deeper visibility across their portfolios in real-time, highlighting cross-selling opportunities and making it far easier to meet their reporting and compliance requirements. Crucially, it also helps maximize revenues by easing the strain on human resources, enabling the talent at these firms to spend more time on serving customers and scaling their business.

Effective integration with the wider market is also key going forward, including individual counterparties, third-party data providers, market distribution solutions like Whitespace or central market platforms like Delegated Data Manager and Placing Platform Limited (PPL). The proliferation of APIs, portals and other point-to-point solutions may have made today’s digital market burdensome and complex to navigate, but data standardisation and open ecosystems like Sequel Hub are bringing seamless real-time data exchange to reality and making it easier for brokers and their clients to access the products and capacity they need.

Verisk's solutions are compatible with legacy systems, however, the performance gap between those using legacy technology and those able to capitalise on the increasing array of elective services now available will widen significantly over time.

Many smaller brokers recognise these benefits but find the up-front expenditure to implement a new system and migrate their data prohibitive. This, coupled with the ongoing cost of maintaining and upgrading systems can be daunting. These firms, after all, have limited IT resources and budgets and when margins are under pressure it is sometimes difficult to look beyond the next quarter or year’s bottom line.

Verisk aims to remove some of these barriers to entry and has developed a solution to make its market-leading broking, MGA and claims solutions more accessible for smaller firms. Moving away from heavily customised systems, smaller players can access standardised solutions ‘out-of-the-box’, enabling swift deployment, upgrades and configuration, and the upfront implementation costs can be reduced and rolled into longer-term license agreements to ease budget management.

Small brokers cannot afford to ignore the digital revolution going on around them. Thankfully, the tools they need to compete in 2022 and beyond are no longer out of reach.

Published: Insider Engage 17 February 2022