1.0 Context

 For less than a year, I have just started my
career in a global, professional insurance service firm called Marsh, a
whole-owned subsidiary of Marsh & McLennan Companies (MMC). With the head
office located at in New York City, Marsh
has major operating companies in insurance brokerage, risk management,
reinsurance services, talent management, investment advisory, and management
consulting (Marsh &
McLennan Companies, 2017).

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For the purpose of this
assignment, I will base my answer on Marsh’s insurance brokering and risk
management (IB). Being a global leader that has 500 offices worldwide
and clients in more than 130 countries; IB target segments are Multinational
Corporations (MNCs), Middle-Market and Small Medium Enterprise (SMEs) as well
as high net worth individuals. Marsh generates revenue from fees paid for
advisory services (e.g. Claims Advocacy) and commissions paid on insurance
policies sold. Apart from profit-making objectives, Marsh also focuses on
services provided. It helps our clients to understand and better manage the
risks they face, enabling them to be resilient to withstand the unexpected
through growth, innovation and value creation.

2.0 Business Strategy

Marsh’s IB&RM leverages on its competitive
advantage – 3D framework (Define, Design and Deliver) as the global business
strategy (Figure 1.1). Strategic,
advisory and profitable relationships are forged through insurance solutions
that are based on understanding of clients’ business and risk consideration (Marsh and Mclennan Companies, 2017)

2.1 Define

Define is the discovery
phase in relationship building process with clients. IB will gain better
understanding of clients’ business and risk consideration by asking questions. With
a team of industry expertise, IB&RM is able to map out clients’ risk
profile to identify all (insurable and non-insurable) risks such as financial
and strategic threats to their business. A systematic approach is also taken to
consider the total cost of risks across clients’ balance sheet to determine the
optimal strategies to mitigate it. Through this phase, IB&RM is able
achieve costs reduction and risk & efficiency improvement.

2.2 Design

Design is the plan
formulation phase in aligning clients’ risk insurance strategies with their
business objectives over a mutually agreed time horizon. IB will conduct
a risk profile discussion with the clients and select from a variety of risk
control techniques (risk transfer, reduction and retention) to mitigate the
identified risks. At this phase, IB looks at risk management beyond
annual renewal cycle and tailors risk management strategy to clients’ risk
profile.

2.3 Deliver

Deliver is the execution
phase where solutions are put to the group to align clients’ business and risk management
objectives. Subsequent to plan implementation, IB will review the
solutions for identified risk (Figure 1.2),
costs drivers (Figure 1.3), goals set
for each line of coverage (Figure 1.4)
and services (Figure 1.5) to ensure
alignment of clients’ interests.

 This last phase ensures that IB&RM is
able to deliver efficient solutions to reduce costs, risks and volatility in
the claims aspects as well as quality service and unique performance in the
insurance industry.

Overall, to achieve company’s objectives (Figure 1.6), the 3D framework focuses
on tailored risk identification and quantification. It takes on a scalable and
client-engaging approach to ensure consistent application to all levels of
client sophistication.
3.0 Michael Porter’s 5 Forces

According to Michael Porter (E.Porter, 2008), there are five
forces (Figure 2.1) that govern the
profit structure of an industry and determine the creation of economic values. Significant
changes in the forces signals the change in the competitive landscape where the
companies need to constantly review and formulate strategies to either defend
themselves against competitive forces or place themselves in a favorable
position where the forces are weaker. This assignment will focus on bargaining
power of suppliers, bargaining power of buyers and threat of substitutes.3.1 Bargaining Power of Suppliers

For
an insurance broker, the suppliers are insurance companies (raw materials) who
provide risk transfer options (policy coverage) to clients.  

Insurance
cycle in the market can influence the insurance market. Moving forward,
suppliers are gaining more bargaining power as the insurance market gradually
changes from soft to hard. As not all insurance companies will write all lines
of coverage, the available options to place clients’ coverage are further
narrowed. In contrast, more options will indicate that the supply of capacity
is larger and overall appetite is greater; which further helps to reduce insurance
costs (Define phase) and provision of better coverage terms (Design and Deliver
phase) to the clients. Thus, the bargaining power of suppliers no doubt will
have significant influence in all aspect of IB’s 3D framework. There are
a few aspects of the suppliers that will affect IB&RM’s business strategy,
namely Capacity and Merger & Acquisition (M).

Being the suppliers,
insurance companies have the power to decide the risk capacity to be undertaken.
They can restrict the supply of the policy coverage for certain business
classes, location and occurrence after reviewing their business book on the
basis of mounting losses history. In the event that they decided to reduce
their exposure to overall risks, it will transit to pulling capacity out of the
market, making it harder for IB to obtain and deliver clients’
required/desired limits of insurance. With a reduction in capacity, suppliers can
increase their bargaining
power in a transaction to take advantage of the situation where lesser insurers
are willing to take up the risk.

M&A trend
amongst insurance companies can also influence IB&RM’s 3D framework. An
increasing trend will reduce the supply available to IB to obtain
competitive quotes where post M companies become larger and more dominant
in certain markets and classes of business. As there are only a few existing
large companies, it will form an oligopoly where they are able to exercise more
bargaining power in the insurance market. Regardless of the risk control
techniques chosen in the Define phase, IB will have lesser options to
choose from to align to client’s risk profile. Also, with the lack of
bargaining power, IB&RM will not be able to achieve a cost efficient
approach to be in line with Marsh’s strategic objectives. As IB is the
largest broker globally, most of the businesses are placed with global insurers
with their offices located strategically to cater to their key markets.
IB leverages on its size and volume of business to obtain key contacts
of senior people in the insurance companies. Through forging of strong
relationship with senior executives and underwriters and amidst the current
soft insurance market, IB is able to easily place risks to cater to
clients’ profile.

However, if
IB&RM were to shift large amount of business to another insurer, it can severely
tarnish any future relationship; especially in the upcoming hard market
(suppliers will have strong bargaining power) where there are limited insurance
companies that are willing to write certain lines of coverage. As such, there
is a moderate to high bargaining power of suppliers.

3.2 Bargaining Power of Buyers

Clients
are individuals and corporate companies purchasing different lines of insurance
products. It ranges from Construction, Property and Commercial General
Liability insurance to complicated placement of Specific Lines products such as
Trade Credit and Professional Indemnity insurance and various risk transfer
mechanisms.

Clients
play an important role in terms of sophistication and general knowledge and
understanding of the insurance business. Most of the clients account for
limited resources and time and view insurance purchase as a necessary evil;
where price is the determinant factor. As such, they will not value the true
benefit of having a broker to assist in understanding, analyzing and
recommending the various risk mechanisms available to suit their business
needs. The bargaining power of the client becomes lower due to the hardening of
the insurance market and the need to buy insurance coverage. This further
necessitates the importance of having the 3D framework to provide service
quality to our client at a reasonable price. There are a few aspects of the
clients that will affect IB&RM’s business strategy, namely Customer
concentration and Product knowledge.

In a
fragmented and competitive environment, clients are unable to achieve economies
of scale with their insurance purchasing decision as they are unwilling to
share detailed company information for fear of giving up their competitive
advantage. As the risks are unique to each company and must be analyzed
independently to derive at the overall risk and premium rating, it is important
that IB is able to identify individual clients’ business operation at
the Define phase. At the hardening stage, insurers are reluctant to offer the
same level of insurance as they once did. This in turn affects IB&RM’s
ability to source out for suitable insurers at the Design phase, thereby
reducing clients’ options to purchase the required business coverage. Subsequently,
notwithstanding the fact that the client is willing to pay a premium, it will
still be difficult to place excess layer of coverage with the insurers.

Generally,
IB&RM’s clients have no product knowledge and their main purpose of making
insurance purchases is to meet the banks, customers, shareholders or statutory
requirements to protect against possibility of large losses. Furthermore,
clients that place operation internationally will need to carefully select
brokers that have access to and knowledge of the international market. Being
the largest broker globally, IB will have the expertise, market
knowledge and ability to place coverage in the jurisdiction and decide on the
market to place the risk for their clients to meet their risk profile.

Although
IB is able to reach out globally to insurance coverage around the world
through affiliated companies and market connections, clients can easily switch
from one broker to another. Furthermore, if any of the account managers for
IB were to leave the company to work for a competitor, with the amount
of knowledge possessed by them, it will be very easy for existing clients to
switch to a competitor even in a hard insurance market. However, upon switching
to a new carrier, from the client’s point of view, there are risks of uninsured
losses and gaps in coverage. As such, the bargaining power of client is low to
moderate and there is still a need for IB&RM to constantly monitor its 3D
framework to ensure consistency in retaining of existing and attracting new
clients.

3.3 Threat of Substitutes

Substitutes
can be viewed as the insurance products offered as well as the medium that
provides the coverage. For the former, the products offered throughout the
insurance brokerage business are homogeneous and only varies slightly in terms
of coverage available. For the latter, there are currently no real alternatives
available to replace a broker. For simple personal line coverage such as Travel
and Motor insurance, a broker can be easily replaced by an internet transaction
or direct insurer; rendering the broker’s existence redundant. The broker’s
value will only become apparent for complex products or when dealing with
difficult placements involving many insurers; where the broker’s existence is
an essential element for the execution of the 3D framework.

One of the key aspects will be technology. In 2016, some
of the insurers and reinsurers have launched blockchain initiatives B3i (Munich Reinsurance, 2016) , a platform to gain
insights on case experiments and research information. Apart from its
applicability in the insurance industry, B3i initiative focuses on “data-driven
fourth industrial evolution” to deliver automation, connectivity and
collaboration with other products or services (Figure 2.2).
With technology that is able to provide similar services as a broker, no
doubt it poses a threat to insurance brokerage companies like Marsh.

The other key aspects will be direct insurers where they
provide general insurance coverage directly to the client, thereby leading to
disintermediation. This is closely related to bargaining power of suppliers
whereby these insurers move along the value chain and integrate their operation
to take more control of the process. Taking Singapore market as an example,
there are no new players except for the existing direct insurers (Allianz
Global, Ironshore Insurance and QBE etc.) that also engage with Marsh to
provide insurance coverage to their clients indirectly. Brokers will need to be
aware that the threat is always present and their roles can be eliminated if
the mass insurance companies decide to write directly.

As the world becomes more globalized, technology changes
and differences in these changes are evident amongst the brokers and the
insurers. It can be seen as a competitive advantage where the brokers’ value to
the company will be diminished. It will then defeat the purpose of having a 3D
framework where the broker facilitates in bringing the process to the clients
from defining to delivering the insurance coverage to them.

However, it is unlikely that there will be a change in
the insurance industry approach through the direct insurers as
disintermediation will lead to the need of hiring more staff and eventually not
bear any positive result on the financial position. As such, threat of
substitutes is low to moderate.

4.0 Recommendation

Marsh currently faces moderate risk (Figure 3) which affects brokers’ ability to execute the 3D
framework. Therefore, it is important that IB understands these
implications, anticipate the challenges and respond to these issue effectively
and efficiently. 

4.1 Long-Term Agreement

As mentioned earlier, the insurance cycle can have a
detrimental effect on Marsh’s business efficiency and revenue due to the
capacity in the insurance market. In view that the insurance market are turning
hard where the risk appetite and capacity will be lowered, IB&RM can arrange
policies with long term agreements. Similar to the purchase of futures,
IB&RM will be able to lock in the insurer on the policy with a fixed rate (during
soft market) over a longer duration of two to three years. This will eliminate
the uncertainty that the insurance market turn soft where premium ratings will decrease.

Regardless of the change in insurance market, IB&RM will
not be put in a tough spot and worry about risk placement whenever the capacity
changes. Furthermore, in the event where some insurers decided to reduce their
risk exposure by pulling out the capacity, such long-term agreement will
cripple insurer’s ability to take advantage of the market situation. IB
will also be able to solve the issue of revenue being hit by the premium
thinning due to increase capacity in the soft market.                                                                                                           
             One possible drawback will be that IB
will be unable to take advantage of any favorable rates offered by the insurers
in the period of the long term agreement where the insurance market turns for
the better as Marsh has already fixed the rate with its existing insurer. Marsh
will then miss out the opportunities it can tap on to better maximize its
business performance.

4.2 Customer Relationship Management

Although the bargaining power of customers is low to
moderate, customers are becoming more discriminating and comparing to see what
value-added services can be brought to the table. Therefore, it will be of
importance to inform them of the additional services that Marsh can offer. The
3D framework that IB adopted forms the basis for Customer Relationship
Management (CRM). Being a global leader in insurance brokering, Marsh has an
abundance of local and global client data under its portfolio. Marsh can make
use of data analytics team to collate the clients’ purchasing trends and better
understanding their needs and expectation. From there, we will be able to
formulate a better solution and bring about a better customer experience. These
data generated will allow Marsh to form an insight of the necessary business
needs, clauses and limit of liability required by the various industries.

Additionally, customer data such as feedbacks can be
retrieved from the system to educate various internal functions of their
importance towards CRM. For example, the claims team can use these data to
compare and identify similar incidents of different customers. Ultimately, it
aids in settling the claims effectively and efficiently. Therefore, other than
the 3D framework which the IB&RM can bring to the clients, CRM can be seen
as a value-added service that Marsh as a whole can bring to improve customer
experience and leads to better retention and reduction of claims costs. Through
word of mouth and social media, new clients will be aware of the quality of
service that Marsh is able to provide and this in turn will attract them to
engage Marsh for insurance coverage service.

However, one potential drawback will be the varying
expectation of the customer groups. For example, CRM will be more applicable to
MNCs and Government Entities as compared to SMEs where the former are looking
for services such as consultancy advice and the expertise of Marsh to arrange
clauses and extensions that addressed the business and industry’s needs.

4.3 Embracing technology changes

As the brokerage industry is dynamic, the future outlook
for insurers will be different from today’s incumbent model where the latter
will not be able to survive in the future digital landscape. As mentioned
earlier, technology is one aspect that can change clients’ perception and
interaction between the brokers and clients. To keep up with technology
changes, IB can leverage on its existing Clearsight Star Enterprise
System via disruptive innovation.

Currently, IB uses this system to track and
collect various claims information (Workers Compensation, Directors and
Officers, Marine and Aviation etc.), analyze data and workflow management, and
have a comprehensive collection of report templates. However, these features
are only beneficial to Marsh’s authorized personnel. IB&RM can consider
extending such platform to their clients, allowing them to assess certain
portion such as their insurance policies, claims or rates in a real time environment.
With this platform, client can now disseminate real time information across
multiple locations, save time and costs and provide more autonomy over the
insurance program.

Disintermediation will not be of concern as the purpose
of such extension is to enhance the operation process flow for the insurance
brokers in executing the 3D framework from Defining the risk to Delivering
insurance coverage with an additional step to deal with a post transaction. One
possible drawback will be additional costs and staffing. There is a need for
IB&RM to constantly re-engineer their backend processes to match their
products and to remove any inefficiencies or risks for error of the platform
for the benefits of their clients. There is also a need to provide a round-the-clock
customer service to address any issues that the client might face along the
way.

However, in the long run, such extension will support
insurance brokers to achieve the vision of the business at the front end of the
clients’ transactions, elevating the importance of both technology and the
needs of insurance broker in the execution of the 3D framework.

5.0 Conclusion

No business operates in a vacuum and even a monopoly
needs to pay attention to these external factors as they have different implications
on the industry and the business which are beyond their control.

Being a global leader in the insurance brokering
industry, it is even important for Marsh
to understand these external factors and strike a balance with the internal
factors when formulating its business strategy. Constant review of these factors
will also help Marsh to ensure that its priorities remain sound so it can adapt
the business strategy towards their corporate objectives and maintain its competitive
position in the insurance market.