1.0 Context For less than a year, I have just started mycareer in a global, professional insurance service firm called Marsh, awhole-owned subsidiary of Marsh & McLennan Companies (MMC). With the headoffice located at in New York City, Marshhas major operating companies in insurance brokerage, risk management,reinsurance services, talent management, investment advisory, and managementconsulting (Marsh & McLennan Companies, 2017). For the purpose of thisassignment, I will base my answer on Marsh’s insurance brokering and riskmanagement (IB). Being a global leader that has 500 offices worldwideand clients in more than 130 countries; IB target segments are MultinationalCorporations (MNCs), Middle-Market and Small Medium Enterprise (SMEs) as wellas high net worth individuals. Marsh generates revenue from fees paid foradvisory services (e.g.
Claims Advocacy) and commissions paid on insurancepolicies sold. Apart from profit-making objectives, Marsh also focuses onservices provided. It helps our clients to understand and better manage therisks they face, enabling them to be resilient to withstand the unexpectedthrough growth, innovation and value creation.
2.0 Business Strategy Marsh’s IB&RM leverages on its competitiveadvantage – 3D framework (Define, Design and Deliver) as the global businessstrategy (Figure 1.1). Strategic,advisory and profitable relationships are forged through insurance solutionsthat are based on understanding of clients’ business and risk consideration (Marsh and Mclennan Companies, 2017)2.1 Define Define is the discoveryphase in relationship building process with clients. IB will gain betterunderstanding of clients’ business and risk consideration by asking questions.
Witha team of industry expertise, IB&RM is able to map out clients’ riskprofile to identify all (insurable and non-insurable) risks such as financialand strategic threats to their business. A systematic approach is also taken toconsider the total cost of risks across clients’ balance sheet to determine theoptimal strategies to mitigate it. Through this phase, IB&RM is ableachieve costs reduction and risk & efficiency improvement.
2.2 DesignDesign is the planformulation phase in aligning clients’ risk insurance strategies with theirbusiness objectives over a mutually agreed time horizon. IB will conducta risk profile discussion with the clients and select from a variety of riskcontrol techniques (risk transfer, reduction and retention) to mitigate theidentified risks. At this phase, IB looks at risk management beyondannual renewal cycle and tailors risk management strategy to clients’ riskprofile.2.3 DeliverDeliver is the executionphase where solutions are put to the group to align clients’ business and risk managementobjectives.
Subsequent to plan implementation, IB will review thesolutions for identified risk (Figure 1.2),costs drivers (Figure 1.3), goals setfor each line of coverage (Figure 1.
4)and services (Figure 1.5) to ensurealignment of clients’ interests. This last phase ensures that IB&RM isable to deliver efficient solutions to reduce costs, risks and volatility inthe claims aspects as well as quality service and unique performance in theinsurance industry.
Overall, to achieve company’s objectives (Figure 1.6), the 3D framework focuseson tailored risk identification and quantification. It takes on a scalable andclient-engaging approach to ensure consistent application to all levels ofclient sophistication.3.0 Michael Porter’s 5 ForcesAccording to Michael Porter (E.Porter, 2008), there are fiveforces (Figure 2.
1) that govern theprofit structure of an industry and determine the creation of economic values. Significantchanges in the forces signals the change in the competitive landscape where thecompanies need to constantly review and formulate strategies to either defendthemselves against competitive forces or place themselves in a favorableposition where the forces are weaker. This assignment will focus on bargainingpower of suppliers, bargaining power of buyers and threat of substitutes.3.
1 Bargaining Power of SuppliersForan insurance broker, the suppliers are insurance companies (raw materials) whoprovide risk transfer options (policy coverage) to clients. Insurancecycle in the market can influence the insurance market. Moving forward,suppliers are gaining more bargaining power as the insurance market graduallychanges from soft to hard. As not all insurance companies will write all linesof coverage, the available options to place clients’ coverage are furthernarrowed. In contrast, more options will indicate that the supply of capacityis larger and overall appetite is greater; which further helps to reduce insurancecosts (Define phase) and provision of better coverage terms (Design and Deliverphase) to the clients.
Thus, the bargaining power of suppliers no doubt willhave significant influence in all aspect of IB’s 3D framework. There area 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 businessclasses, location and occurrence after reviewing their business book on thebasis of mounting losses history. In the event that they decided to reducetheir exposure to overall risks, it will transit to pulling capacity out of themarket, making it harder for IB to obtain and deliver clients’required/desired limits of insurance.
With a reduction in capacity, suppliers canincrease their bargainingpower in a transaction to take advantage of the situation where lesser insurersare willing to take up the risk. M&A trendamongst insurance companies can also influence IB&RM’s 3D framework. Anincreasing trend will reduce the supply available to IB to obtaincompetitive quotes where post M companies become larger and more dominantin certain markets and classes of business. As there are only a few existinglarge companies, it will form an oligopoly where they are able to exercise morebargaining power in the insurance market. Regardless of the risk controltechniques chosen in the Define phase, IB will have lesser options tochoose from to align to client’s risk profile. Also, with the lack ofbargaining power, IB&RM will not be able to achieve a cost efficientapproach to be in line with Marsh’s strategic objectives. As IB is thelargest broker globally, most of the businesses are placed with global insurerswith their offices located strategically to cater to their key markets.
IB leverages on its size and volume of business to obtain key contactsof senior people in the insurance companies. Through forging of strongrelationship with senior executives and underwriters and amidst the currentsoft insurance market, IB is able to easily place risks to cater toclients’ profile. However, ifIB&RM were to shift large amount of business to another insurer, it can severelytarnish any future relationship; especially in the upcoming hard market(suppliers will have strong bargaining power) where there are limited insurancecompanies that are willing to write certain lines of coverage. As such, thereis a moderate to high bargaining power of suppliers.
3.2 Bargaining Power of BuyersClientsare individuals and corporate companies purchasing different lines of insuranceproducts. It ranges from Construction, Property and Commercial GeneralLiability insurance to complicated placement of Specific Lines products such asTrade Credit and Professional Indemnity insurance and various risk transfermechanisms. Clientsplay an important role in terms of sophistication and general knowledge andunderstanding of the insurance business. Most of the clients account forlimited resources and time and view insurance purchase as a necessary evil;where price is the determinant factor.
As such, they will not value the truebenefit of having a broker to assist in understanding, analyzing andrecommending the various risk mechanisms available to suit their businessneeds. The bargaining power of the client becomes lower due to the hardening ofthe insurance market and the need to buy insurance coverage. This furthernecessitates the importance of having the 3D framework to provide servicequality to our client at a reasonable price. There are a few aspects of theclients that will affect IB&RM’s business strategy, namely Customerconcentration and Product knowledge.In afragmented and competitive environment, clients are unable to achieve economiesof scale with their insurance purchasing decision as they are unwilling toshare detailed company information for fear of giving up their competitiveadvantage. As the risks are unique to each company and must be analyzedindependently to derive at the overall risk and premium rating, it is importantthat IB is able to identify individual clients’ business operation atthe Define phase. At the hardening stage, insurers are reluctant to offer thesame level of insurance as they once did.
This in turn affects IB&RM’sability to source out for suitable insurers at the Design phase, therebyreducing clients’ options to purchase the required business coverage. Subsequently,notwithstanding the fact that the client is willing to pay a premium, it willstill 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 makinginsurance purchases is to meet the banks, customers, shareholders or statutoryrequirements to protect against possibility of large losses. Furthermore,clients that place operation internationally will need to carefully selectbrokers that have access to and knowledge of the international market. Beingthe largest broker globally, IB will have the expertise, marketknowledge and ability to place coverage in the jurisdiction and decide on themarket to place the risk for their clients to meet their risk profile.AlthoughIB is able to reach out globally to insurance coverage around the worldthrough affiliated companies and market connections, clients can easily switchfrom one broker to another.
Furthermore, if any of the account managers forIB were to leave the company to work for a competitor, with the amountof knowledge possessed by them, it will be very easy for existing clients toswitch to a competitor even in a hard insurance market. However, upon switchingto a new carrier, from the client’s point of view, there are risks of uninsuredlosses and gaps in coverage. As such, the bargaining power of client is low tomoderate and there is still a need for IB&RM to constantly monitor its 3Dframework to ensure consistency in retaining of existing and attracting newclients.3.3 Threat of SubstitutesSubstitutescan be viewed as the insurance products offered as well as the medium thatprovides the coverage. For the former, the products offered throughout theinsurance brokerage business are homogeneous and only varies slightly in termsof coverage available. For the latter, there are currently no real alternativesavailable to replace a broker.
For simple personal line coverage such as Traveland Motor insurance, a broker can be easily replaced by an internet transactionor direct insurer; rendering the broker’s existence redundant. The broker’svalue will only become apparent for complex products or when dealing withdifficult placements involving many insurers; where the broker’s existence isan essential element for the execution of the 3D framework. One of the key aspects will be technology. In 2016, someof the insurers and reinsurers have launched blockchain initiatives B3i (Munich Reinsurance, 2016) , a platform to gaininsights on case experiments and research information. Apart from itsapplicability in the insurance industry, B3i initiative focuses on “data-drivenfourth industrial evolution” to deliver automation, connectivity andcollaboration with other products or services (Figure 2.2). With technology that is able to provide similar services as a broker, nodoubt it poses a threat to insurance brokerage companies like Marsh.
The other key aspects will be direct insurers where theyprovide general insurance coverage directly to the client, thereby leading todisintermediation. This is closely related to bargaining power of supplierswhereby these insurers move along the value chain and integrate their operationto take more control of the process. Taking Singapore market as an example,there are no new players except for the existing direct insurers (AllianzGlobal, Ironshore Insurance and QBE etc.) that also engage with Marsh toprovide insurance coverage to their clients indirectly. Brokers will need to beaware that the threat is always present and their roles can be eliminated ifthe mass insurance companies decide to write directly.As the world becomes more globalized, technology changesand differences in these changes are evident amongst the brokers and theinsurers.
It can be seen as a competitive advantage where the brokers’ value tothe company will be diminished. It will then defeat the purpose of having a 3Dframework where the broker facilitates in bringing the process to the clientsfrom defining to delivering the insurance coverage to them.However, it is unlikely that there will be a change inthe insurance industry approach through the direct insurers asdisintermediation will lead to the need of hiring more staff and eventually notbear any positive result on the financial position. As such, threat ofsubstitutes is low to moderate. 4.0 RecommendationMarsh currently faces moderate risk (Figure 3) which affects brokers’ ability to execute the 3Dframework. Therefore, it is important that IB understands theseimplications, anticipate the challenges and respond to these issue effectivelyand efficiently. 4.
1 Long-Term AgreementAs mentioned earlier, the insurance cycle can have adetrimental effect on Marsh’s business efficiency and revenue due to thecapacity in the insurance market. In view that the insurance market are turninghard where the risk appetite and capacity will be lowered, IB&RM can arrangepolicies 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 (duringsoft market) over a longer duration of two to three years. This will eliminatethe uncertainty that the insurance market turn soft where premium ratings will decrease.Regardless of the change in insurance market, IB&RM willnot be put in a tough spot and worry about risk placement whenever the capacitychanges. Furthermore, in the event where some insurers decided to reduce theirrisk exposure by pulling out the capacity, such long-term agreement willcripple insurer’s ability to take advantage of the market situation.
IBwill also be able to solve the issue of revenue being hit by the premiumthinning due to increase capacity in the soft market. One possible drawback will be that IBwill be unable to take advantage of any favorable rates offered by the insurersin the period of the long term agreement where the insurance market turns forthe better as Marsh has already fixed the rate with its existing insurer. Marshwill then miss out the opportunities it can tap on to better maximize itsbusiness performance. 4.
2 Customer Relationship Management Although the bargaining power of customers is low tomoderate, customers are becoming more discriminating and comparing to see whatvalue-added services can be brought to the table. Therefore, it will be ofimportance to inform them of the additional services that Marsh can offer. The3D framework that IB adopted forms the basis for Customer RelationshipManagement (CRM). Being a global leader in insurance brokering, Marsh has anabundance of local and global client data under its portfolio. Marsh can makeuse of data analytics team to collate the clients’ purchasing trends and betterunderstanding their needs and expectation. From there, we will be able toformulate a better solution and bring about a better customer experience. Thesedata generated will allow Marsh to form an insight of the necessary businessneeds, clauses and limit of liability required by the various industries.
Additionally, customer data such as feedbacks can beretrieved from the system to educate various internal functions of theirimportance towards CRM. For example, the claims team can use these data tocompare and identify similar incidents of different customers. Ultimately, itaids in settling the claims effectively and efficiently. Therefore, other thanthe 3D framework which the IB&RM can bring to the clients, CRM can be seenas a value-added service that Marsh as a whole can bring to improve customerexperience and leads to better retention and reduction of claims costs.
Throughword of mouth and social media, new clients will be aware of the quality ofservice that Marsh is able to provide and this in turn will attract them toengage Marsh for insurance coverage service.However, one potential drawback will be the varyingexpectation of the customer groups. For example, CRM will be more applicable toMNCs and Government Entities as compared to SMEs where the former are lookingfor services such as consultancy advice and the expertise of Marsh to arrangeclauses and extensions that addressed the business and industry’s needs.4.3 Embracing technology changesAs the brokerage industry is dynamic, the future outlookfor insurers will be different from today’s incumbent model where the latterwill not be able to survive in the future digital landscape.
As mentionedearlier, technology is one aspect that can change clients’ perception andinteraction between the brokers and clients. To keep up with technologychanges, IB can leverage on its existing Clearsight Star EnterpriseSystem via disruptive innovation.Currently, IB uses this system to track andcollect various claims information (Workers Compensation, Directors andOfficers, Marine and Aviation etc.), analyze data and workflow management, andhave a comprehensive collection of report templates. However, these featuresare only beneficial to Marsh’s authorized personnel. IB&RM can considerextending such platform to their clients, allowing them to assess certainportion such as their insurance policies, claims or rates in a real time environment.
With this platform, client can now disseminate real time information acrossmultiple locations, save time and costs and provide more autonomy over theinsurance program. Disintermediation will not be of concern as the purposeof such extension is to enhance the operation process flow for the insurancebrokers in executing the 3D framework from Defining the risk to Deliveringinsurance coverage with an additional step to deal with a post transaction. Onepossible drawback will be additional costs and staffing. There is a need forIB&RM to constantly re-engineer their backend processes to match theirproducts and to remove any inefficiencies or risks for error of the platformfor the benefits of their clients.
There is also a need to provide a round-the-clockcustomer service to address any issues that the client might face along theway. However, in the long run, such extension will supportinsurance brokers to achieve the vision of the business at the front end of theclients’ transactions, elevating the importance of both technology and theneeds of insurance broker in the execution of the 3D framework.5.0 ConclusionNo business operates in a vacuum and even a monopolyneeds to pay attention to these external factors as they have different implicationson the industry and the business which are beyond their control. Being a global leader in the insurance brokeringindustry, it is even important for Marshto understand these external factors and strike a balance with the internalfactors when formulating its business strategy.
Constant review of these factorswill also help Marsh to ensure that its priorities remain sound so it can adaptthe business strategy towards their corporate objectives and maintain its competitiveposition in the insurance market.