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Brokers’ cost model is not sustainable, says Ed CEO Steve Hearn

7th November 2018 - Author: Matt Sheehan

Brokers have an essential role in the value chain and there are huge opportunities for intermediaries going forward, but seizing them will require companies to rethink unsustainable cost models and commission fees, according to Steve Hearn, CEO of global re/insurance broker Ed.

Steve-HearnSpeaking during a presentation at Lloyd’s of London, Hearn addressed the topic of disintermediation in the re/insurance industry and the claim that the role of brokers is shrinking.

“The biggest businesses in the world … are intermediaries,” he noted, adding: “Uber doesn’t own a motor car, it doesn’t employ a driver, it doesn’t even finance them. They’re an intermediary. Amazon is also an intermediary, they don’t make the stuff that turns up on your doorstep every day.”

“These are all intermediaries to my mind, and they show that intermediaries are a sustainable proposition,” he continued. “Wandering up and down Lime Street with a leather case and a piece of paper is not.”

Intermediaries continue to exist, but the way they operate has completely transformed, Hearn claimed, suggesting that brokers should look to these tech giants for guidance on how to reconfigure their business models.

“We need to be data-driven, we need to recognise that the value chain is no longer linear, and that the client has changed,” he said. “Our offering is less about transactional placement, and we need to continue to evidence that we can be a trusted advisor … Those are the factors that will drive, in my opinion, the success of the intermediary model moving forward.”

Part of this transformation will also involve addressing what Hearn deemed to be the “unsustainable” nature of costs in the re/insurance industry, including brokers’ commission fees.

Looking again at examples of intermediary giants from other sectors, Hearn noted that companies like Mastercard charge just 1.3% for every transaction they are involved in, while hotel companies charge around 3%, Amazon 12-15%, ebay 9%, and services like Apple Pay charge nothing at all.

In contrast, insurance brokers charge an average of 30% for every transaction, which is a model that Hearn believes needs to be challenged.

“For every customer’s dollar a huge proportion goes into costs, not claims,” he said. “The model changes over time … The cost model will be challenged and it will change.”

He added that “for commission to come down, costs need to come down,” and said that Ed aims to realise this cost reduction through the implementation of new technological capabilities, for example using its new global broking system, TradEd.

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