Any broker who has seen premium growth stall or even shrink knows all-too-well the challenges of a soft insurance market.

But a new review from Finity Consulting and Deutsche Bank has provided little comfort, predicting the downturn to continue and make itself even more keenly felt on margins.

According to APRA statistics, overall growth in the premium pool was just 2% last year, with growth in the intermediated space even lower, says Finity Principal and report author Andy Cohen.

“Arguably, in real terms, the premium pool in 2014 may have even contracted, given consumer price inflation of 1.7% and GDP growth of 2.5%,” he says.

The challenge for brokers will be to make use of lower premiums to suggest better, more comprehensive cover for their clients.

“Going forward, we believe all insurers – not just the majors – will struggle to achieve sustainable and meaningful growth. Headwinds in the shape of lower premium growth are here already and there are a number of reasons why we believe they are here to stay.”

Cohen says the winners in this market will be those who focus on their customers, manage their expenses, use appropriate technologies and use good analytics to drive better claims outcomes.

“Achieving success simultaneously across the three apparently competing dimensions of good customer experience, tight expense management and lower claims costs might seem a difficult, perhaps impossible, challenge.

“However, with the right approach, we believe success is achievable.”

Claim pain

With scant growth likely to be available on premiums, expense management will continue to be a big focus. But, Cohen says, “the expense lever can only be pulled so far, given expenses are typically less than 30% of premium.

On the other hand, claims indemnity costs represent the largest component of insurance spend – say, 60% of premium in a good year and over 80% in a bad year.

Therefore, there are clearly opportunities to improve margins through reduction and improved management of indemnity cost, where possible”.

Cohen says boards and executives everywhere are realizing that claims efficiency has been neglected and a renewed focus on customers is overdue. “In our experience, successfully transforming claims operations can realistically reduce indemnity spend by 5 to 15%,” he says.

According to Cohen, this focus on claims doesn’t have to mean fighting harder against customer claims.

“Improving the customer experience while reducing claims costs would seem, at first glance, to be a difficult and perhaps impossible combination. However, the two are not necessarily mutually exclusive,” he says.

“Anecdotally, claims departments face skills shortages with many staff lacking the technical expertise and experience, coupled with high turnover in some product lines.

“Training expenditure and staff development are often casualties of lean times – insurers are finding that their capability can deteriorate so some have changed their operating models and re-structured the claims function towards the concept of a ‘service’ centre as opposed to a cost centre.

“Heads of claims now typically report to the CEO – this is a change from the older style claims managers sitting across siloed product lines and has arguably elevated the claims function within insurers.”

Broker strength

The Finity report also found encouraging signs in how well brokers have been protecting their territory from direct market incursions.

“The proportion of direct policies has increased only slightly in the last four years to around 13% currently,” Cohen says.

“These policies would represent much less than 13% of premium, noting that they are biased towards the smaller policies. Clearly, intermediaries have been defending their patch well over the last four years.”