Opinion Piece: Creating transparency within the broker channel for more effective risk assessment
Insurance brokers are a traditional part of the channel for the sale of short-term and life insurance products to customers. Typically, their financial advisors develop relationships with consumers and assist them with managing their insurance requirements. However, brokerages as a whole tend to manage a book of premiums and claims against those premiums at an aggregated level. This means that they act as an intermediary between the customer and the insurer or underwriter and often, the underwriter has little to no access to the individual details of those covered by the policies. This lack of visibility makes it difficult for underwriters to accurately assess risk around each customer, with the result that premiums cannot be tailored to the individual. Creating visibility within the broker channel by driving brokers to submit claims data to a centralised database is key to helping insurers manage risk to enable them to deliver more tailored and more cost effective services to a broader general market.
Traditionally, brokers have acted as the intermediary between insurers and underwriters and the end consumer. This broker channel has been the status quo in the insurance industry for many decades. However, recently there has been an increasing move to ‘cut out the middle man’ by going direct. Insurers and underwriters are now increasingly offering their services directly to consumers without the need to deal with a broker, offering reduced premiums as a result.
One of the drivers of this move to go direct is the need to gain greater insight into the customers, the risk they present as an individual and their claims history. Within the traditional broker channel, access to this insight has been limited, and insurers are only able to gain visibility into claims against a portfolio of businesses being underwritten. There is no explicit detail about who these claims relate to, and as such, no insight that can be gained as to the risk of any client at an individual level. The upshot of this is that premiums may not reflect individual customer risk, and insurers may have to inflate pricing in order to cover the risk of the book of policies, as opposed to individual policies and history. This information can be invaluable to insurers in helping them to more accurately predict and model customer behaviour as well as manage and mitigate risk, which is vital for more accurate and appropriate pricing.
Despite a growing trend more toward direct insurance, however, there are still around a million policies in South Africa that are managed via the broker channel. This represents as much as a quarter of the entire insurance policy base, of which the underwriters have no visibility. In order to improve visibility into this data, one of the biggest current drivers is to increase the number of brokers who submit claims data via the industry-leading Insurance Data System (IDS). The IDS has been developed under the auspices of the South African Insurance Association (SAIA) and is a comprehensive database of all personal lines claims and policy information collated by participating members of the short-term insurance industry.
IDS enables participating insurance organisations to access an integrated view of policy applications and claims prior to taking on further risk. The system holds information on over nine million claim records and more than three million policies. With a significant focus not just on data density but also data quality, and the integration of data from other sources to cross-validate information and provide greater insight, IDS enables insurers and underwriters to leverage a comprehensive view of their customers.
The IDS database effectively offers an industry-wide consolidated view of claims behaviour in the local insurance industry. This view, along with access to value-added solutions, helps insurers to expedite the claims process, reduce risk, predict loss ratios and more. Essentially, it offers more insight for improved decision-making ability and reduced risk. However, the accuracy of insight is always affected by the completeness of available data, upon which the lack of visibility within the broker chain has a negative impact.
Without being able to assess risk as effectively as possible, insurers are put under strain from a loss ratio perspective, because they are unable to quantify potential loss ratios on customers they cannot see. This in turn has implications for the cost of insurance, which is then passed down to the customer. With improved insight into who exactly is being insured, their profile, and their history, amongst other details, a higher degree of certainty around risk can be determined, which in turn can lead to more accurate, individually tailored pricing. Insurers need to incentivise the broker channel to become more active participants in IDS, enabling better risk assessment, which in turn will allow for improved insurance products and a wider market of customers for both insurers and brokers to target.