Direct model better than broker model on transactional, commercial lines

Small, transactional, commercial lines business in the US will increasingly adopt a direct-to-insurer business model, cutting brokers out of the loop, in the same way personal lines business has evolved.

That is the view of David Bell, president and chief executive officer of ALPS Corporation, the largest direct writer of lawyers’ professional liability (LPL) business in the US, which specialises in insuring solo and small firms.

Bell, who sits on the board of the APCIA, told this publication that the reality on accounts of this small size is that brokers add very little value—but they do add significant annual non-risk-bearing costs. He also accuses them of stimulating and prolonging a soft market.

“Where you have a non-risk-taking party adding between 12 and 20 percent to the annual cost of a deal, but adding little value on what is essentially a transactional agreement, it makes less sense for them to be involved compared to mid and large-size accounts; the economics are pretty simple,” Bell said.

“They are only connecting a buyer and a seller—it is a match-making exercise that can be done directly. It means the insurer gets a better margin and the insured a better deal.

“I would submit that, for smaller business, the direct model is superior to the more traditional broker distribution model, as respects these small placements—and the same is true on many types of commercial products for smaller businesses.

“On larger and mid-tier accounts, it’s entirely different and brokers do add value; at the smallest end of the market, they do not.”

He said that the evolution to a direct model seen in personal lines, originally driven by the likes of Geico, Progressive and USAA, is eventually inevitable in smaller commercial lines.

“These companies successfully circumnavigated brokers and I believe the same disruptive tide is coming to the commercial market.”

He believes the dynamics of a broker market, where participants are protecting their own market share and trying to get the best deal for their clients, is conducive to the creation of a soft market.

“Even when the insured is pleased with its current price and coverage, in order to prevent a competing broker from moving in on the client the incumbent broker will pepper the market each year to ‘block’ competing brokers.

“When you send a deal to a dozen markets every year there is always at least one market trying to grow, often pricing irresponsibly to do so. At that point the race to the bottom begins, and it wasn’t started by an insured paying too much or coverage being too limited.

“It was started because a broker was trying to protect against BOR risk.” Bell said.

“I am not saying their motivations are bad or that this result is intentional, but in the spirit of intellectual honesty, this is what happens.”

Bell is attending APCIA in Boston primarily to negotiate with the 20 or so reinsurers ALPS uses ahead of the company’s year-end renewal. Such is the quality and performance of the insurer’s book, he is confident he will get a good deal from the panel and avoid rate hikes. But he does believe that reinsurers are showing more discipline than they have in a long time.

“We have noted that reinsurers are a lot more diligent than they have been for a long time, which is a sign of discipline returning to the market,” he said.

“There has been a lot of loss activity in the market and this is a consequence. We should be sheltered from increases since most of that loss activity is not within our profile of accounts.

“We are getting better rates and our reinsurers follow our fortunes. It is a healthy relationship, but for the first time in many years, we are seeing sustained discipline returning.

“If the portfolio hasn’t performed well or shows signs of loss pressure on the horizon, you’re going to see increases. There’s no ‘spinning’ your way into a great reinsurance renewal if you don’t have the fundamentals to back it up.

“A combination of poor investment returns, increasing loss costs and recent cat activity has finally started to turn the market.”

Bell added that the other present concern in the market is the possibility of a recession. “Whether someone thinks it will be in six months or 18 months, it is coming. Not many people are arguing it is not, it is just a question of when.

“That too will put significant pressure on various types of policies and parts of re/insurers’ portfolios,” he concluded.