For a mortgage intermediary, it is almost impossible to build a profitable business based solely upon placing mortgages. To increase revenue many intermediaries have sought to develop additional income streams.
The main options open to those looking to develop extra income is to charge clients a fee for providing advice or to sell associated products, such as personal loans, general insurances and life policies, alongside their traditional mortgage business. Given that customers are often reluctant to pay for advice, many intermediaries have grown to rely upon the income generated from the sales of other products.
Intermediaries’ interest in selling general insurance and life products, for example, has helped insurers expand their sales networks at relatively little cost. In Europe, insurers still have a big high street presence and sell their products direct to the public. However, in the UK, insurers have allowed their own salesforces to run down and have increasingly relied upon agreements with banks and building societies, as well as thousands of smaller agents to market their products.
From the intermediaries’ point of view, these ancillary products are relatively simple to sell and, until recently, were subject to a light regulatory regime with agents earning commission for each policy placed.
For a household policy, for example, this will typically amount to 15% of the premium paid by the client. Unlike mortgages, general insurance products are renewed on an annual basis and offer the opportunity to earn valuable repeat commissions ‘ which can be substantial.
A troubled industry
There are signs the mutually beneficial relationship between insurers and their agents may be about to change, however. As in almost any aspect of business life, it is the smaller players which will be most affected.
The events of 11 September have thrown the insurance market into turmoil. Lloyds of London has just reported a record £3.11bn loss for 2001 ‘ the biggest deficit in its 314-year history. The World Trade Center disaster accounted for almost £2bn of the total loss.
The economics of the insurance industry were already strained due to intense competition and increased regulation before 11 September. Since then, matters have got much worse. Like any business when it gets in trouble, insurers have responded by cutting their costs to boost their incomes. Some of their actions have been predictable, others less so.
The cost of re-insurance ‘ where one company reduces its overall risks by selling on some of its exposure to other insurers ‘ has risen dramatically. Lloyds’ insurance premiums have risen by an average of 62% in the past six months with some risks commanding increases of 250% as insurers try to claw back their losses. The impact of these increased costs can be seen in the rising premiums demanded to insure our homes and cars.
In addition, insurers are looking to reduce their administration costs and commission payments in order to rebuild profitability. In the pension market, CGNU, for example, has announced a significant reduction in the amount and the way commission is paid to intermediaries for business placed.
Similar changes are beginning to emerge in the general insurance market. Companies such as AXA and Zurich have reduced the commissions they pay on commercial policies. It is therefore reasonable to assume that insurers are also looking at potential ways to reduce commissions paid on the consumer-oriented general insurance products sold by intermediaries. This would obviously have an impact on brokers’ incomes.
If insurers reduce commission fees, what would this mean for the average financial intermediary? First, it is important to recognise that the market for general insurance products is not going to disappear and intermediaries will continue to provide an efficient distribution channel for insurers. So mortgage intermediaries should not consider pulling out of the market. However, what they may need to do is change the way they source and market products.
Small, independent operators which deal directly with the big insurers are likely to be the first to lose out. If intermediaries come under pressure, they should look to join a general insurance network or a user group. The volume of business placed by these organisations means their buying power and ability to negotiate with insurers should make it much harder for insurers to make significant cuts in the commissions paid.
There are also benefits of being part of a network which will help intermediaries compete more effectively in the market. They will gain access to a wider panel of insurers which should ensure intermediaries can obtain more competitively priced products than if they are tied to a single insurer.
Help will also be provided with marketing, administration and compliance. Mortgage and general insurance products will be regulated by the Financial Services Authority (FSA) from 2004. Intermediaries which are members of a network will then be able to get significant assistance in the form of training and support to comply with the new regulatory regime, which is going to be much tighter. With networks looking after the administrative and regulatory functions, intermediaries can also get on with what they do best ‘ selling products.
If commission rates do fall, then intermediaries will need to respond by selling more policies. While the vast majority of consumers want face-to-face advice when deciding which mortgage to choose, general insurance products are far less complicated. One proven way to boost sales is to set up a website which allows customers to buy online.
Many intermediaries which have developed websites have been disappointed by the results, but others have made it work.
Some intermediaries have been put off due to the perceived cost of developing sites and their own lack of confidence in using new technology. But these are hurdles which can, and should be, overcome. It is projected that 30% of all general insurance products will be sold over the internet within the next five years.
Intermediaries which turn their back on using new technology are losing a valuable additional source of business as well as the opportunity to deliver better customer service to existing clients.
Experience suggests there are three common reasons for a website being unproductive. The first is the quality of the site itself. Some simply provide visitors with a contact name, address and telephone number, so it is not surprising such sites fail to generate business.
The second reason is that websites are not integrated effectively into other marketing activities. Many companies spend money developing well-structured sites but then forget to tell people about them. Is your web address on your letterheads, promotional literature and advertisements?
Do you use your website as a means to provide clients with further information about products or services that you are currently offering? If not, you should, because this is where the internet can start to become a powerful marketing tool.
The third reason, and perhaps the most important, is that most broker websites are not transactional ‘ clients cannot buy, they can only browse. To develop truly interactive websites which enable clients to browse, buy and complete transaction online, is expensive and technically demanding and so usually beyond the resources of most brokers.
But there are solutions at hand. Many intermediaries will be familiar with the white-label websites developed by mortgage networks such as TMO and Mortgage 2000, which members can brand with their own identity and make available to their clients. Similar free software has been developed by the general insurance sector which can be bolted on to an intermediary’s website and within two hours, clients could be obtaining quotes, reading product details, completing a proposal and paying online. Analysis of our business suggests 90% is generated outside normal office hours ‘ that is business our members would probably have lost without an internet presence.
There is no doubt the market in which mortgage intermediaries operate is changing and there are some impending threats. However, intermediaries wishing to generate incremental income from the sale of general insurance products should not lose heart.
Those that can adapt and embrace new marketing opportunities such as those provided by the internet will prosper ‘ the sale of general insurance and life products should continue to build an income for life for many years to come.
David Quick is managing director of CETA
Insurers are looking to reduce commissions to rebuild profitability.
Insurers will find it harder to cut commissions paid to network members due to the volumes of business placed by these organisations.
A website is key with 20% of general insurance products expected to be sold online within five years.