Advice is the new competitive advantage

Part One of a conversation with Andrew Coutts, Executive Head, Intermediated Business at Santam. Advice is the new competitive landscape and how to monetise risk management is the holy grail.

Tony: It has been very clear over the last few years that clients of the industry have been looking for guidance and advice. It has been a top-of-mind issue for clients as well as brokers. When we talk about advice, what do you see this entails?

Andrew: There is a very clear regulatory framework around what advice means. The expectations are documented in detail in the FAIS Act and the policyholder protection rules (PPR). It is always useful if this is something you are looking at in your practice, to go back to FAIS and the PPR. There are detailed checks, in fact, it is quite scary to do that as they are quite onerous.

In the past we have tried to discharge that duty of advice through our record of advice process, in our engagements with our clients. The challenge for me in this, is that it has become very difficult to envisage all the possible scenarios, through the record advice process, it is just too complex. Another challenge that we have seen in this whole advice thing is that, because we are driven by sales pressure and costs, many have turned the record of advice process itself, which is a mechanism to discharge that advice responsibility, a bit too much into a tick the box exercise.

Many might have made it a process, not an opportunity to engage, as it should be. I also think that, when we look at advice, the growth of systemic risk has fundamentally shifted the bar. Now, systemic risk is a reality. The impact of weather events, global warming, sea rise and sea surge, the kind of things we see now; flooding and drought, etc. These things are fundamentally changing the nature of risk. Then you add to that mix the risk of really big cyber events, grid failures, water supply shortages, water outages, riot and strike, infrastructure degradation and systemic risk, particularly in a South African environment, gets difficult to wrap your head around.

Through COVID now, we have experienced the non-damage extension, that impact of accumulation exposure. You might have a building or two burn down but the whole of South Africa will hardly burn down in one go. This is what non damage extensions are doing. That’s what a grid failure or a cyber event could do, create an accumulation exposure. So, because of the extent of the losses that can come through this accumulation exposure, reinsures have come down very hard on us. In fact, we’re seeing non damage extensions being trimmed and taken out of the market going forward with all of us sort of being phased out of this.

So, there’s a real knock-on to insurers around how we manage this risk, what it means, how big it’s become, how we can position ourselves for relevance. This is for insurers and reinsurers. So, how do we even sustain the balance sheet with the risk of accumulation exposure for non-damage extensions with growth or systemic risk, and then how does that knock-on to broker? So, there’s a framework in terms of FAIS and PPR, but it is being challenged because it is exponentially growing and growing.

Tony: How do you see, in relation to what you’ve just said, the role of the broker having changed over, let’s say, the last decade?

Andrew:  Again, I share a view and it is not the same for everybody, so please just see it in that context. I think a lot of what we’ve done in our intermediated model is that the brokers operate it as a sales and administration hub. It’s been a process orientated initiative, just facilitating the sales and distribution and sometimes service in general for an insurer. But not only is it about advice, but it is also about technology that has changed the last ten years and that distribution capability has really been challenged by the cheaper offerings, the digital solutions and direct value propositions that have come in.

Now you’ve got this real shift of how I do that job of just being the process enabler, against cheaper channel solutions that are direct and technology enabled, that are digital with no human interface. And how do I manage my costs and sustainability. So the broker, in terms of the sales and admin process against new channels, there’s a real pressure point that’s coming across, I think what we have also seen, is a different product approach. As Santam, we went to the market with an intermediate value proposition, we talked about building a solution just for a client, and we have a perils-based product structure.

We go to the client, and we say, “how’s your business going to be affected by various perils; fire, theft, loss of profits etc.?” And so we built this up on a client by client basis, building these web solutions, then along comes the direct marketplace, and they are offering new pre-packaged solutions for doctors and dentists, in-hospitality and leisure & tourism or Agri. They are creating this perception, through big marketing spends, that this prepackaged product, which is in many cases far more limited than what you might have built for a client, is better, because they’re designed just for you, tailored for a business with your specific requirements.

We’re dealing with the fact that we’ve got to manage the real strength and value of what we bring against the perceived product structures that are being introduced with big marketing spend by direct players. So, the cost of distribution is under pressure through technology, the offerings we take to market and the value proposition is being pressurised by big market expanded direct players and a new way of doing it.

In my mind, what this is really doing, is forcing us to say, okay, we’ve got to shift where we add value in the value chain. We’ve been talking about this quite a lot. In my mind the risk cycle is; risk prevention, risk management and risk transfer. When you focus on the risk transfer product of the insurance policy itself, we have got to move that inflection point earlier, to risk prevention and risk management, because that’s where a simple product cannot solve the solution for a client.

We all know that the best way to manage risk is not to have the claim, to avoid the claim up front. It’s a bad experience, it costs money. So, how do you do that? In my mind, you become a risk practice. You become actively involved in preventing the risk from happening, not just in transferring the risk. Because if we can become, as a brokerage, a risk management practice, then the future in a risk world is huge. If we are about product pushing and product selling, then unfortunately we’re in a space where there are others who can do it cheaper and faster and, in a mechanism, that perhaps could be argued that a new client wants to work with.

But then, of course, the solution that I don’t have, and I think the challenge we are all faced with, is that it is all good and well to say yes, let’s move to risk prevention and risk management, but our big challenge is how do brokers monetise the value of risk?

And so, we don’t have all the answers yet. But I think that’s the long-term theory.