At a glance
- Zurich’s managing director of Commercial Broker explains the reasons behind why he has launched the Insurance Explained document
David W Smith, Zurich’s Managing Director of Commercial Broker, explains the reasons behind why he is launching ‘Insurance Explained’, part of the drive for greater transparency in the industry.
Q: David, please tell us why Zurich is launching the ‘Insurance Explained’ document for brokers?
A: The concept of insurance is easy to understand; transfer of risk in exchange for payment of a premium, pooling of the cash and payment when accidents or disaster strike. What isn’t so easily understood, and is shrouded in jargon and complexity, is how an insurer makes or loses money from offering this service. Unless a broker has an understanding of this, it’s very difficult to stand in front of a customer and justify why their premium is moving.
Q: Especially in this current climate…
A: Exactly. We all know that most customers are currently going through a period of austerity and are feeling the pinch. So they are looking to squeeze down their costs, and many customers will see insurance as a commodity purchase. There is an unhealthy suspicion that the insurance industry is making bundles of money in the process.
Q: So, how will ‘Insurance Explained’ make it easier for a broker to explain to a customer how an insurance premium is priced?
With this document, brokers will have the base knowledge to understand an insurer’s P&L and a greater insight into our pricing.
A: Yes, what we are trying to do is explain the elements of an insurer P&L, to make it easier for a broker to explain to a customer where their premiums go and how the money is pooled and spent.
It details the expenses for underwriting and handling claims and all the other things that make an insurance company work. The remuneration paid to the broker for their expert advice. And the biggest element of the outgoings, the payment of claims, including a breakdown of all the different definitions (e.g. attritional, large loss, weather, catastrophe). Then the key factors by each of the main lines of business, such as property, casualty and motor.
Q: And claims are difficult to predict? Surely you just tot up at the end of the year what you’ve paid out and you can tell if a customer has produced a profit for you?
A: I wish. Let’s take an example. A manufacturer of pallets pays £10,000 premium to protect his buildings, plant and any business interruption costs. He has a few claims in the year totaling £4,000. The broker receives £2,000 for his advice, and the insurer needs £2,000 for his underwriting, claims handling, provision of capital etc. Looks like a nice £2000 profit for the insurer.
But the principle of insurance is based around paying out when disaster really strikes. Say a fire that would destroy his buildings, his plant and put his business out of action for six months. That may cost £1million. Or if a flood or storm were to strike.
An element of the premium has to be ‘put away’ into a pool to fund these large loss, weather or catastrophe events. Say 20% or £2,000. Suddenly there is no profit left at all for the insurer.
Q: But don’t you invest the premiums and earn from this as well?
A: Yes, but with interest rates having fallen, we aren’t immune from this either. And don’t start me on increases in the reserves we have put away to fund potential claims from liability polices written 20 years ago. You need to read the document!
Q: So the document will be invaluable for brokers when they’re in negotiations with their customers?
A: We think and hope so. It will allow brokers to feel more confident to explain why premiums are rising, even in some cases when a customer’s claims incurred in the year seem relatively low. And to have a more professional dialogue with our underwriters so that we can all understand the risk and its pricing better.
Q: Will this all be new information for brokers?
A: I’d say that 90% of brokers currently feel they haven’t got sufficient information to do this. So, with this document, our brokers will have the base knowledge to understand an insurer’s P&L and a greater insight into our pricing. And negotiation becomes a whole lot easier when you understand why the price is where it is.
Q: And why have you published it now?
A: We’ll see the Financial Services Authority returns detailing insurer’s profitability for 2012 in a few weeks time. It’s not going to be pretty. Combined operating ratios for the commercial lines market will be well over 100% and returns on equity will be meagre even when they are positive. Rates have started to move up over the last two to three years and this will continue and intensify. The timing of the quantum of rate increase is the only difficult thing to predict. Brokers will be at the forefront of the dialogue with customers and we see it as our duty to support these tough talks.
Our brokers can use this document with any customer, free of charge, whether it is a Zurich customer or not. Hopefully, the document will help brokers become more confident and professional in front of the customer.
Q: And what’s in it for Zurich?
A: Our job is to provide a great product to protect customers’ businesses at a sustainable price, and be there to pay when a customer needs us. Then help our brokers to feel confident, professional and expert in front of the customer when they are recommending Zurich. This requires honesty and transparency as well as expertise. Our belief is that if we deal with our brokers in this way, and provide the tools to help this, our long-term relationship will continue to grow.
You can pick up a copy of Zurich’s Insurance Explained document by visiting their stand at BIBA or view it here.
Dave Smith has been Managing Director of Zurich’s Commercial Broker business since 2006, and worked in the UK broker market with Zurich for over 20 years.