value-partners-insurance distribution in italy
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In Italy, the debate on the insurance business is generally limited to the only widespread mandatory insurance
the motor class with tedious, endless disputes on whether the high cost o motor policies is either air or unair.But is this really the central issue hampering the insurance business in Italy? And how much o it has to do with
the distribution structure? The ban on exclusive agency clauses was expected to x the problem. Why has it now
virtually turned into a asco, with costs rising by the hour?
The Italian insurance business is a long-established system, based on agent networks, and has experienced only
minimal changes over time. Non-lie insurance seems particularly stagnant. Rightly or not, banks have been
considering the lie class (worth over 54 billion in 2008) as an alternative to asset management and other orms
o short/medium-run investments. Their presence has consequently become signicant. With a 58% market share,
banks represent a concrete alternative to agent networks which, in 2008, accounted or a 20% market share.
In non-lie business (worth over 38 billion in 2008), on the contrary, things are much more crystallised. Over 84% o
the market is occupied by insurance agents. The much-hyped direct (telephone- and Web-based) insurance achieveda share o less than 4%. Considering that the broker channel the second distribution orce in Italy, with a share o
approximately 8% is primarily ocused on the corporate segment, it is evident how the agency channel plays a clear-
cut leading role in amily-oriented insurance distribution.
Over 28,000 individual agents are currently active on the Italian market, collected into some 10,000 distribution rms.
This means that in 2008, each o them dealt with an average 3.3 million in non-lie business and 1.5 million in the lie
class. To put these gures in perspective, lets keep in mind that big Italian banks operating at a national level manage
7 to 22 million per branch that is 50 to 450% more. Such ragmentation prevents the Italian insurance distribution
structure rom achieving scale economies. Not by chance, distribution and general expenses account or 25% o
the total amount o premiums. In other words, some 38 billion in non-lie premiums were collected in 2008. This
represents approximately 10 billion in unded operating and distribution processes, rather than product as such.
Undoubtedly, an inecient distribution structure contributes to the high cost o motor insurance. Evidently,
however, this is not the only cause. Among other signicant actors, the raud system is particularly prominent.
In certain areas o the country, this is a veritable proessional activity. We should ask, however, i any changes
will occur in the wake o the current downturn phase, which is making amilies more aware o costs and savings
opportunities than beore.
Past, present and uture o the Italian insurance distribution system
In Italy, the development o insurance agent rms has been uelled by a strong synergy between companies and
their agent networks, especially with exclusive agency agreements maximising customer loyalty. Compared to
other integrated distribution systems the banking sector, or instance it is critical that agencies are individual
rms, entitled to independent and autonomous business decisions. This extremely integrated system is, thereore,paradoxically made up o sel-governing components. For a bank, decisions translate immediately into actions say,
merging three branches into one, or redesigning end-to-end (rom headquarters to branch) operating processes.
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Insurance Distribution in Italy: post-downturn scenarios
Alessandro Scaro
Director
The existing insurance distribution structure in Italy, like that in continental Western
Europe, is becoming outdated. This is a major obstacle or the various countries
insurance systems, now struggling towards increased efciency. What kind o
transormation is possible or agent networks, currently intermediating the largest
part o amilies nonlie insurance coverage?
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For an insurance company, decisions are not so easily implemented. Negotiations with the agencies involved
are needed, and this oten involves interacting with their respective labour unions. The resulting unbalanced
development has led to a structurally inecient system the result o too many compromises.
Ironically, the many mergers o the past 20 years havent helped, either. A merger is supposed to achieve greater
economies o scale, with all o the economic parties involved beneting rom the resulting higher eciency levels.
Managing a merger, however, would require a redesign o the entire operating context, rom the company itsel
to agencies (local presence, product mix, agency-specic IT systems, and so on). This has always been impossible,
due to the absence o a common vision o development. Mergers might have been great opportunities to better
serve the market and achieve higher returns. Instead, individual parties interests and advantages have been
saeguarded and the transer o signicant amounts o activity rom company to agency has oten been the only
tangible result. While companies were allowed to submit reasonable levels o post-merger synergies to business
analysts, agencies were being saddled with extra workloads, increasingly turning rom sales-oriented structures to
plodding managing entities. Any complaints were hushed by increased commissions. All o this has burdened the
whole insurance system. In times o low sensitivity to price levels, periodic and systematic increases o distribution
costs were being transerred to premiums, against a backdrop o a huge range o actors working to inate costs.
Lastly, over time, a series o regulatory requirements has been imposed on agencies. Although these were
intended to control the quality o sales processes and secondary intermediaries (subagents, producers, and so
on), they ended up urther burdening agencies administrative/management requirements, depressing their sales
potential and growth prospects.
The reezing o such a ragmented distribution landscape led to the ailure o the ban on exclusive agency
agreements: the agencies were too small to really able to manage two or more product mixes, or two or more
accounts to principal companies, without being buried under the weight o management duties and the
associated xed costs.
The challenge awaiting the insurance distribution system
The economic market is evolving, especially now that economies worldwide are going through a downturn
phase. There is a need to nd easible alternatives or companies, allowing them to acquire quality products
and services while maximising savings. Is it reasonable to assume that insurance companies alone will escape
this trend and keep burdening premiums with general and distribution expenses (25% o what policyholders
pay)? Obviously, the current scenario is not sustainable in the medium term. The opposition it creates between
companies and distributors economics can no longer be resolved by transerring the systems ineciencies to
product prices. Moreover, regulatory commissions are intensiying their scrutiny.
Which concrete, viable alternatives can we imagine at the moment? There are three possible scenarios:
The company-agency supply chain is redesigned An aggregation model brings agencies together
An entirely new distribution model is introduced
The company-agency supply chain is redesigned
Each company identies an ecient distribution model, in which a ew basic paradigms are respected:
Simple, measurable, and ecient end-to-end processes;
Management and back oce activities are minimised by automation and centralised outside of agencies;
Agencies become much smaller and focus on sales/customer service activities
and proposes such a model to its own agencies (potentially, to others as well) as a New Deal to help overcome
the current impasse and shape a new role or insurance agents. A newly acquired awareness and agents concerns
or their uture leads them to weigh the proposal, this time with a view to long-term sustainability, rather than
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to the saeguarding o consolidated advantages. A signicant number o agencies accept that this is a concrete
possibility. Obviously, the scenario requires that companies have large investment potential, now that investments
are less easily sustained due to signicantly reduced returns. The ideal moment to turn this corner would probably
have been a ew years ago, but bold, innovative decisions are oten prompted by dicult times.
An aggregation model brings agencies together
Agencies nd a way to organise themselves, independently rom their principal companies, starting partnerships
(either geographically based or within the various agent groups) and sharing back oce activities, so as to relieve
their respective workloads and concentrate all eforts on sales. These structures operate as purchase centres as
well, selecting the product mix ofered to customers and competitively urging companies to improve products
and services and reduce costs.
This kind o aggregation, which could generate a model comparable to that o the US market (big independent
agencies, minute and articulated networks, and extremely ecient operations), will necessarily incorporate a
number o eatures, such as:
The presence of a recognised leader among agencies willing to band together;
The market availability of operating/IT platforms suitable to manage this kind of organisation and to grant
customers access to ecient and low-cost services;
The capability to execute larger-scale projects than the vast majority of insurance agents has ever had to deal
with.
This aggregation model would signicantly reduce the number o insurance distribution companies operating on the
market, increasing their average size and clearly afecting the ban on exclusive agency clauses. A more balanced (i
not equal-to-equal) relationship between company and agency would emerge, as well.
An entirely new distribution model is introduced
Given a backdrop with deep-rooted aws and no real will to change, the solution could come rom an external
catalyst, be it a foreign player not yet active (or marginally active) on the Italian market or a project/nancial entity
capable o organising a number o distribution players around a shared vision.
The aggregation o these parties could give intermediaries a large enough average size to create a proessional
entity to manage back oce activities, an ecient and customer-oriented operating/IT system, and a distribution
structure (retail locations, light oces, producers) ocused on selling a ew, simple products or amily needs. This will
represent some orm o direct insurance, but with actual retail locations, so as to remove the real critical issue o that
business model: the absence o a human interace in key moments such as the underwriting o policies and, more
importantly, claim processes.
The new player would have a huge advantage in establishing this aggregation on novel principles completely
diferent rom those currently regulating the Italian insurance distribution system. The risk, on the other hand, is that
in such a closed and sel-centred world an external entity could be associated solely with oreign experiences,
unsuited to the specic reality o the country.
Conclusions
It is not easy to divine which one o the aorementioned scenarios will unold. Will one o those solutions prevail on
the Italian market, or will it be a combination o the three? It is likely that the push or change will come rom a number
o companies willing to herald a distinctive value proposition or customers and insurance intermediaries. The entry
o new and determined players, carrying a diferent ramework with them, would obviously speed up any changes inthe insurance business. Current players would read that as a threat and eel pressed to adopt unconventional models
themselves.
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In any case, in the medium, i not the short term, we will witness change in the distribution system. The demands rom
customers struggling with amily budget cuts and more pressing needs or insurance products due to a reduced
social expenditure will denitely push in that direction. The answer this time will necessarily be a sea change,
driven rom the perspective o long-term sustainability. It will also represent a contribution to the modernisation
o the country. An ecient insurance sector is crucial or the entire Italian economic system. People should not be
turned away by it, but rather educated and helped in managing the risks inherent in their jobs and lives.
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About Value Partners
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high-potential entrepreneurial
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For more inormation on the issues
raised in this note, please contact
alessandro.scaro@valuepartners.
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