# Advice



## Dogbert (18 Nov 2002)

A friend faxed me a letter to the editor from November's _Irish Broker_ magazine. It's from a Sean Cleary of Cleary Callinan Public Loss Adjustors, and is prominently featured (full page) in the magazine. In addition, the editor apparently comments on it in his editorial (haven't seen that).

The issue Mr Cleary raises is in relation to quotes for his house insurance renewal. In short, he received the renewal notice from his broker showing an increase of 100% on last year. The broker discussed ways of cutting the costs with him, and also got some comparative quotes. He then went to his bank, where he got little or no assistance, but was quoted a premium 30% less than the broker. Finally, he went online, and via that and a call centre where the staff had "no idea what I was talking about" got a quote which was only 10% higher than his last year's premium. He took the latter. Apparently the quotes in each case were on behalf of the same insurer. Mr Cleary seems perplexed at all this, and says "If I were to be cynical about this, there appears to be a move by insurers to prevent the client from access to professional advice".

Huh ? Am I missing something here ? I have no experience of or interest in the motor insurance business. However, the business model Mr Cleary encountered seems entirely rational to me - you do it self-service, you get no help but a lower price; you get help from a non-independent source, you get no choice, and pay a somewhat higher price; you get independent advice and someone who'll shop around for you, you pay a higher price (especially as the adviser will presumably be remunerated by the supplier). Mr Cleary clearly had *the ability* to get independent professional advice - he just had to be prepared to pay for it ... which he wasn't.

It would seem, given the prominence accorded this missive, that the insurance business remains completely wedded to an outmoded business model. No wonder advisers are having problems with the new regime, given that lots of them don't seen to understand what "advice" actually means.


----------



## Bindaree (18 Nov 2002)

*Advice versus Brokerage*

<!--EZCODE ITALIC START--><em>D oggie[/i], I don't know nuffin' about house insurance either but I think we should distinguish two quite distinct roles for an intermediary:

*Advice*  If advice is trully needed then this is an added value which some customers may pay extra for.

*Brokerage*  brokerage is the process by which a client's orders are matched to the cheapest supplier for a commission.  The commission is justified by the chepness of the price and the amount of effort that the client would have had to go to source that quote by herself.

It seems to me that in the case of house insurance the product is effectively a commodity and the client is therefore not looking for *Advice* but for *Brokerage* i.e. the cheapest price.


----------



## Dogbert (19 Nov 2002)

Hi Bindaree,

Agreed, but surely one of the huge benefits of the internet is that it allows the customer (if he/she wants to) to do what you've called the brokerage (ie price comparison) piece him/herself, assuming the various suppliers make the information available. Haven't a number of comparison shopping engines (for want of a better term) been made available to brokers in this respect too.

So you're backing up my point ... it's an outmoded business model. Most people are not going to pay you anything now to price shop for them. And most suppliers, if you take remuneration from them in the form of a commission, will be able to provide a cheaper product via self-service. So brokers have to change their business model and focus on the added-value (advice) they bring, and what customers are willing to pay for it. Mr Cleary started out thinking he wanted advice and discovered he really wanted a commodity. That's fine as far as it goes. But what seems bizarre to me is that he still seems to think that's somehow the fault of the suppliers ... and the _Irish Broker_ editor seems to agree with him !


----------



## Whats Up Boys (19 Nov 2002)

*Hibernian*

Example

Broker €1,000

Bank   €   700

Direct  €   510

What's the difference,from the insurers point of view, in distributing this commodity product through these different channels? A couple of Euro? €490?


----------



## Dogbert (19 Nov 2002)

Hi What's Up,

It depends on how much they pay the broker - not just as commission for that particular piece of business, but also in the sense of how much it costs to maintain that entire distribution channel (ie staff, communications, education/support, entertainment, marketing, etc etc).

I wouldn't be at all surprised to find that it cost twice as much to run a broker business as it did to run a self-service one, which is what your figures seem to suggest.


----------



## Whats Up Boys (19 Nov 2002)

Hi Dogberth,

Oops. Looks like I will not be in the running for the Fields Medal next time round. That should have been €550 Direct.

Anyway. I'd have to disagree that it costs twice as much for an insurer to offer a commodity product through a broker as opposed to over the internet. Unless of course the Insurer values the advice that a broker can add at such a ridiculous level. 

Some insurers pay brokers more commission on motor insurance if the policy is transmitted through EDI ie. Broker does the quote,creates the policy on their computer system which in turn is created on the insurers system, issues policy/certificate and disc,collects the premium and maintains a file with licences no claims bonus etc. 

I appreciate that the existing 'business model' may be outdated but the insurers efforts at a financially viable alternative seem to be half-arsed bearing in mind that the costs of distribution and administration of insurance in Ireland, is the lowest in the European Union.


----------



## Dogbert (20 Nov 2002)

Hi What's Up,

I don't have any firm idea of the cost differential between direct and intermediated business either. Maybe some of the general insurance contributors can have a stab at that. But two thoughts do occur on reading your post:

1. Surely it's the *customer* who should be placing a value on the advice the adviser provides ... not the supplier. There you go slipping into that old business model again.
2. I thought we were agreed that this particular case didn't involve advice, but rather what Bindaree described as *brokerage*, or price shopping. So the premium anyone is willing to pay for advice in a case like this will inevitably be tiny.


----------



## Whats Up Boys (20 Nov 2002)

*Price Differentiation*



> Surely it's the customer who should be placing a value on the advice the
> adviser provides ...



Couldn't agree more. It makes no sense for the Insurer/Underwriter to be doing this but unfortunately the *untouchable* underwriters are so removed from reality that they cannot see this. These are the boys and girls that were cutting each others throats(rates) between 1996 and 2000 at a rate of 10% per annnum(liability business). Not one of them has stood up and said 'we f*cked up'.

Going back to my example. If the cost of a commodity product is €550 through a direct channel then it makes no sense whatsoever that this would be €1,000 through an intermediary channel. Allow 20% for commission and the premium should be €685. It does not cost an additional €300+ to distribute through the different channel. I accept that there may be additional costs for marketing and communications but staff, education/support and entertainment should be the same *unless* the Insurers business model is totally arseways.

Of course, if a person was suffering from any form of paranoia they might think that there are other forces at work within the insurance industry. Namely, the Insurers feeble attempt to wrench the control of the car and household market from the broker.

Unfortunately, we are not going to find any evidence of this as 'profitability' figures from both channels are lumped together at the Insurers financial year end. It probably takes a direct operator takes the best part of 5/7 years (probably more now with underwriting losses the way they are) to show a profit but when you have a profitable channel to carry the can why would you not persist with alternatives, in the best interest of the consumer. As we all know, Insurers are renowned as being the most charitable of organisations in the country (when it comes to the consumer). :rollin


----------



## Dogbert (22 Dec 2002)

Another similar missive in this month's _Irish Broker_ apparently. This time from a broker who can't understand why a client who first went direct to a motor insurer for a quote and then came to him to do the business was charged 5% more to cover the cost of his commission.

Again a full page of antediluvian views of the world. Let's see ... if I'm capable of going directly to a supplier and working out what I want to buy from them myself, but then require them to include one of my mates as a middleman to earn him an income of 5% of my expenditure, shouldn't I expect that it might cost me a bit more ... maybe 5% or so ?

Think I'll buy all my CDs in future from amazon.com but ask them to route them through the Vrigin Megastore to keep Richard Branson in hot air balloons. Damned if I'm paying for it though !

Advice me b****x.


----------



## amcloughlin (23 Dec 2002)

Hi guys,

I only just came across this topic.

I should point out I serve on the editorial board of The Broker. However my comments are my own. 

In relation to the question of home insurance I believe a number of issues are raised.

Firstly, the existence of Direct Writers is useful as it provides much needed competition.

Secondly, the existence of brokers and/or advisors are useful in that they can provide a client with guidance and support of the best options available in the market-place.

The market-place is big enough for both.

The issues that concern me about the story in question are:

1.  Has the client actually bought the same product at a cheaper price? or are their crucial differences in the policy conditions that he is unaware of?
2.  Is it right that someone could sell house insurance and not be in a position to explain in full all the relevant features of the policy? Bear in mind that a person's home is frequently their most valuable assetDamage of the home without proper insurance could be a disaster for the client.
3. Whilst direct writing should in theory be cheaper there is less evidence of this in practice. In all liklihood (and I have no specific evidence of this) the institution is running its direct business at a loss.

I am not that familiar with the rates for house insurance (or indeed with the general insurance market) but I understand that they are of the order of 10% to 15%. Whilst this is an extra overhead in relation to product distributed through intermediaries it would be matched to a greater or lesser extent by the cost of advertising and call centre support.

Recent legislation and regulatory changes require Authorised Advisors to provide their clients with Best Advice. This regime is intended to give consumers access to the best possible advice. The quality of this advice is dependent on the information available to an intermediary. If an institution is deliberately witholding information on the best rates it offers then Best Advice is dead. 

Finally, the comments expressed here are useful in opening up a debate on issues of this nature. Please also feel free to correspond directly with Irish Broker. You might be surprised to find your comments published.

Regards,

Aidan


----------

