How Insurance Brokers Create Value-A Functional Approach

Copyright 2010 ProQuest Information and LearningAll Rights ReservedCopyright 2010 American Risk and Insurance Association, Inc. Risk Management and Insurance Review

Spring 2010

FEATURE ARTICLES; Pg. 1 Vol. 13 No. 1 ISSN: 1098-1616

52759

6974 words

HOW INSURANCE BROKERS CREATE VALUE-A FUNCTIONAL APPROACH

Maas, Peter.

 

Peter Maas is Professor of Business Administration and Insurance Management at the Institute of Insurance Economics, University of St. Gallen, Kirchlistrasse 2, CH-9010 St. Gallen, Switzerland; phone: +41-71-243-40-43; fax: +41-71-243-40-40; e-mail: peter.maas@unisg.ch The author would like to thank Tobias Loher, Alex Blattmann, Albert Graf, and Pascal Buehler for their excellent research assistance on the project, and Holger Kraus for the outstanding cooperation and support during the study. This article was subject to double-blind peer review.

 

Abstract

 

Fundamental changes in the market make it necessary for insurance intermediaries to continuously redefine their roles. This study concentrates on a customer perspective of the future role of insurance brokers, using the theoretical foundations of the customer value approach. Findings from 20 in-depth interviews with leading managers of various types of multinational companies are supplemented with the results from interviews conducted with representatives of intermediaries and insurers. From this study it can be concluded that, depending on the customer's individual situation, brokers will assume one of four functions, the choice of which will be highly dependent on the degree of innovation and individualization desired. The investigation shows that although traditional transaction-oriented services will continue to be important, there will be a shift toward tailor-made solutions with an emphasis on consulting services, a situation that will require brokers to acquire new skills so as to be able to meet customer needs.

 

INTRODUCTION

 

Recent changes in the insurance markets are indicative of future challenges brokers will face. On the one hand, inefficiencies in insurance markets were partially defused by the global emergence of modern information and communication technology, which, at least theoretically, should have led to a smaller demand for intermediation. On the other hand, other changes in the industry, such as the deregulation and liberalization of insurance markets, have resulted in greater product differentiation and correspondingly lower market transparency, which in turn increased demand for brokerage. Hence, intermediaries still play a decisive role in facilitating the exchange between consumers and providers of financial services (see Cummins and Doherty, 2006).

 

Focusing on the relationship between brokers and insureds, we investigate the value insurance brokers can create for insureds in today's challenging environment. Following the customer-value approach, we analyze this question from a customer-oriented and functional perspective. In contrast to an institutional perspective that concentrates on the internal activities of existing institutions, such as insurance companies or brokers, the functional perspective focuses on the services provided and needs fulfilled by these institutions, for example, managing risk or transferring resources across time and space (Merton and Bodie, 1995). Thus, from the customer-value approach, the functional perspective treats the impacts of the broker's activity on the customer. According to Merton and Bodie (1995, 2004), a financial system should be analyzed in terms of a functional perspective because over long periods of time, functions have proven to be much more stable than institutions. Especially during the last few years, institutions have emerged and disappeared, evolved and changed, while functional needs have remained stable (see Allen and Santomero, 1998; Oldfield and Santomero, 1997).

 

We ask: "What functions do or should brokers fulfill for their customers in order to be successful?" In discovering the answer both current and possible future functions of brokers in the insurance market will be discussed. In accordance with the management-oriented foundation of the customer-value approach, the results are primarily based on interviews with representatives of globally operating companies that either are now or have a strong possibility of being users of broker services. These findings are supplemented by those gleaned from a number of interviews with representatives of intermediaries and insurers, thus achieving a holistic treatment of the topic.

 

The remainder of the article is organized as follows. First, an overview of the current theoretical literature about financial and, especially, insurance intermediaries is provided. Next is an explanation of the how the applied customer-value approach is integrated into the applied research method. This is followed by a presentation of the key results of the qualitative study and their implications, and we close with several suggestions for future research.

 

FINANCIAL INTERMEDIARIES IN THE EXISTING LITERATURE

 

Although most of the research in the field of financial intermediaries deals with the banking industry (e.g., Germain, 2005; Gorton and Winter, 2002; Winton, 1997; Boyd and Prescott, 1986; Gale and Hellwig, 1985; Diamond, 1984; Gurley and Shaw, 1960), a few exceptions can be found. The existing literature generally considers the intermediaries' role from an economic perspective, which pays little attention to a broker's success but focuses, instead, on analysis and description of the insurance market as a whole. From an economic point of view, the primary objective is to make insurance markets as efficient as possible and remove market imperfections (Swiss Re, 2004; Spulber, 1999; Sirri and Tufano, 1995; Dionne, 1991; Strong and Walker, 1987; Rothschild and Stiglitz, 1976).

 

In this article, we adopt the definition of insurance broker set out by Cummins and Doherty (2006, p. 360): an insurance intermediary (or broker) is "an individual or business firm, with some degree of independence1 from the insurer, which stands between the buyer and seller of insurance." Optimally, the broker acts completely autonomously and represents the interests of its customers. Hence, independent insurance brokers are described as "intermediaries who bring the parties together and match particular needs of policyholders with the products of insurers" (Curnmins and Doherty, 2006, p. 360).

 

Traditionally, market imperfections, such as asymmetric information and transaction costs, have been given as the reason for the existence of brokers in the financial services industry, what we might call financial intermediaries (Allen and Santomero, 2001; Freixas and Rochet, 1997). How central such market imperfections are to the literature of the past two decades is illustrated by two major reviews of intermediation theory by Santomero (1984) and Bhattacharya and Thakor (1993). However, during the same two decades, new developments (e.g., new technologies and globalization) significantly reduced the price of information, lowered transaction costs, and evened the playing field with regard to asymmetric information. Strangely enough, however, none of this has reduced demand for intermediation services - in fact, such demand has even increased (Allen and Santomero, 1998; Scholtens and van Wensveen, 2000). This suggests that there is something other than market imperfections driving the demand for financial intermediation (see, e.g., Schmidt et al., 1999 Allen and Gale, 1997). Other social functions, such as trustworthiness and independence, appear to play important roles (Allen and Gale, 1997) and complement the economic point of view. By taking a management approach with its corresponding focus on the customers' view of the broker performance, this article engages in the current scientific debate from an alternative perspective.

 

THE CUSTOMER-VALUE APPROACH

 

According to the customer-value approach, brokers, as well as companies in general, need to create benefit and value for their customers in order to be successful. Correspondingly, firm strategies and marketing research have become very sharply focused on the identification, creation, and delivery of value to customers. Marketing managers are encouraged to adopt customer-value strategies in order to promote profit growth and ensure long-term success (Gale, 1994; Hamel and Prahalad, 1994; Woodruff, 1997; Flint et al., 2002). To pursue these strategies, however, managers and researchers must find answers to two key questions: "What is creating value for customers?" and "How can companies create and deliver customer value?"

 

The literature contains a multitude of models for conceptualizing customer value (Graf and Maas, 2008). An great many authors support means-end models, assuming a hierarchical relationship between (1) product or service attributes; (2) effects of these attributes, which are produced through consumption; and (3) customers' personal values (e.g., Zeithaml, 1988; Holbrook, 1994; Lai, 1995; Flint et al., 1997, 2002; Woodruff, 1997; Huber et al., 2001; Van der Haar et al., 2001; Beverland and Lockshin, 2003). The main assumption of the theory is that customers choose actions that produce desired effects and rmnimize undesired effects (Peter and Olson, 1990). Woodruff (1997, p. 142) concisely defines customer value as understood by this theory: "Customer value is a customer's perceived preference for and evaluation of those product attributes, attribute performances, and consequences arising from use that facilitate (or block) achieving the customer's goals and purposes in use situations."

 

As "functions" refer to impacts on the customer, "desired value" can be viewed as the functions brokers should fulfill from a customer's point of view. We suggest that the continued existence of insurance brokers is greatly dependent on their ability to create desired customer value in comparison with direct product retailing by insurance companies. The possible future functions of insurance brokers presented in this article should therefore be evaluated in terms of their ability to create the highest possible value for customers.

 

RESEARCH METHODOLOGY

 

The purpose of this study is to identify and analyze how insurance brokers create value for industrial companies and to identify and evaluate brokers' functions in this context. A qualitative approach was deemed optimal for conducting this investigation, as proposed in Yin (1994) and Easterby-Smith et al. (1991).

 

Sampling

 

To cover a broad range of possible broker functions and added values from a customer perspective, we interviewed, and evaluated the responses of, insurance customers in various industries. We focused on internationally operating industrial companies that employ external insurance brokers. Selecting appropriate companies and representatives was an important part of the research process, and was based on the following criteria.

 

1. The company has a turnover of more than euro1.5 billion.

 

2. The company has an international orientation and owns overseas branches.

 

3. The company buys risk-related services from an insurance broker.

 

4. The company's representative is an influential decision maker involved in purchasing "risk" services or products from insurance brokers.

 

The interviewees consisted of 20 managers from 20 globally operating and stock-listed (DAXlOO or SMI2) companies (see the Appendix) in the following industries: automotive, chemical, building materials, LT-technology, construction technology, high technology (hardware and equipment), software, energy, logistics, metal processing, mechanical engineering, sports equipment, and textiles. All interviewees occupied leading positions within corporate risk management.

 

To complement the customer sample, two CEOs from global top-five brokers as well as four leading managers from renowned insurance and reinsurance companies were interviewed. The purpose of these interviews was to broaden the focus and to compare the results of the customer interviews with perspectives from the suppliers and the intermediaries so as to ensure holistic answers to the research question.

 

Data Collection

 

The data were gathered in the German-speaking areas of Europe (i.e., Germany, Switzerland, and Austria) by way of individual in-depth interviews. A list of research questions based on the research objectives was drawn up and used as an interview guide. The interviews were conducted at the representatives' workplace to preserve the context. Each interview lasted approximately 1.5 hours and was audiotaped and transcribed verbatim.

 

The customer questionnaire was designed to probe four main areas of interest. First, participants were requested to describe what functions insurance brokers should undertake in the near future. They were next asked, generally, what values, from their perspective, insurance brokers provided and which criteria are used in choosing a broker. The third section of the interview asked questions designed to discover concrete risk management and risk finance services companies expected from brokers. Furthermore, the current strengths and weaknesses of insurance broker services were inquired into and compared to previously identified customer expectations. Using our own discretion, the statements were transferred into continua of two aspects each, an approach that provides a plausible visualization of the results.

 

To better analyze the responses and keep them in context, the interviews also covered the individual situation of the companies, as well as their current risk management issues the company currently has to deal with. The interviews with the brokers' representatives, in turn, tended to confront the customers' view with the intermediaries' perspective. Accordingly, a slightly modified version of the customer questionnaire was adopted for these interviews. The functions, tasks, and services of the insurance broker, as well as the question of appropriate payment systems, were the key topics of discussion.

 

In the interviews with the insurance and reinsurance representatives, we mainly focused on three subjects: future development of supply and demand within risk and insurance markets; competencies, services, and products needed to be successful in this market; and roles and functions of insurance brokers.

 

RESULTS

 

The customer interviews led to a number of results that were verified through a complementary analysis of the brokers' perspective, as well as the insurance companies' views on intermediaries. This section presents a condensed summary of the insights gained. Four key issues concerning the customers' desired future functions of brokers were discovered. Customers expect brokers to offer professional consulting services, risk management support, international relationship networks, and innovative solutions. To better illustrate these concepts, quotes from the interviewees are used in the following discussion.3

 

Consulting

 

"The future of the broker lies in consulting!"

 

Statement of a customer representative

 

As the interviewees affirm, the complexity and importance of risk management for multinationals has been increased by terrorism, new technologies, globalization, deregulation, liberalization, and frequent lawsuits. Correspondingly, the customer interviews highlight a rising demand for consulting with regard to risk exposure in specific areas. According to several firms, consultation will probably be the most important component of a broker's future services. The discussion with leading insurance companies, as well as with the brokers' representatives, resulted in similar findings, thus confirming the increasing importance of consulting services offered by brokers. This fact is pointed out by the following statement.

 

"Nowadays, insurance brokers and business consultants are alike!"

 

Statement of a broker representative

 

Figure 1 provides a more detailed look at the results. The diagram shows the variation in the answers concerning the current importance of consulting services as compared to transaction services. Each point or triangle represents an interviewee or a company (point: company without in-house broker; triangle: company with in-house broker). The diagram illustrates the current focus on consulting as well as the enduring relevance of transaction services. While no customer completely dismisses the importance of conventional transaction services, for three companies the broker remains solely a market maker. By comparing this result with the future needs (also Figure 1), one can observe a shift toward consulting services. Nevertheless, despite the growing importance of consulting services, there still remain three companies that primarily rely on the brokers' transaction services.

 

Those multinationals that perceived an increasing relevance of consulting services emphasized the importance of a close relationship between a broker and his customers. Several interviewed persons (IPs) described the clients' need for high customer orientation and customer-specific services ("tailor-made solutions"). Additionally, many IPs highlighted the importance of an empathie and competent personality as well as a personal relationship when selecting a broker because "risk-management issues are always very person-oriented matters."

 

"It is always about personal things!"

 

Statement of a customer representative

 

This opinion corresponds with the brokers' point of view: according to brokers' representatives, personal relationships and sympathy, along with long-term relationships, continuity, and trust, are crucial for success.

 

Support

 

AU surveyed companies are highly dependent on the brokers' support in the decisionmaking process. Intermediaries can be of use on two fronts in this respect: they can fulfill a relieving function and they can be a valuable source of a second opinion. Customers generally value the broker as an independent and neutral business partner. This corresponds with the opinion of the representatives of the intermediary and the supply side, which also consider the intermediary's neutrality to be very valuable.

 

"Brokers have a number of competitive advantages ... ; compared to us [insurance companies] they benefit from their neutrality. "

 

Statement of an insurance representative

 

As indicated in Figure 2, however, most companies are not willing to fully integrate the intermediary into their risk management process due to concerns over preserving their independence and keeping know-how and business secrets in-house. Therefore, multinationals generally do not favor system suppliers but prefer the selective use of broker services in areas where they lack competence. One IP summed it up neatly: "We do whatever we can by ourselves and only source services from the outside where it makes sense."

 

In spite of the general preference for the selective use of services, Figure 2 shows that a few companies rely on brokers as a comprehensive system supplier. The desired extent of integration in the risk management process depends on the sophistication of the internal risk management department. Only companies with little competence in the field of risk management look to fully integrate a broker; those with a sophisticated risk management department prefer the selective use of services. It is especially those companies with in-house brokers (the triangles in Figure 2) that avoid the full integration of intermediaries. This negative interrelation between the degrees of integration and sophistication of the internal risk management department was also mentioned by the insurance intermediaries.

 

Since most companies try to improve their internal risk management in order to reduce their dependence on intermediaries, it is assumed that in the future, the need for holistic system suppliers may decrease. However, the necessity of broker support is not only determined by the sophistication of the internal risk management department but also by the self-evaluated degree of own risk exposure. Companies with a high degree of risk exposure are usually more dependent on the intermediaries than are multinationals with less risk exposure. Additionally, it can be assumed that the degree of risk exposure is related to the industry within which a company operates.

 

International Network of Relationships

 

"The broker is our extended international workbench!"

 

Statement of a customer representative

 

Multinationals highly value the broker's global network (Figure 3); according to the IPs, this is one of the greatest benefits of using a broker. Companies that have in-house brokers (the triangles in Figure 3) are especially likely to consider the implementation of risk management measures abroad as the most important task of an intermediary. Accordingly, several IPs said that they expect a "successfully operating network" as well as "access to international network units or network partners." This particular attribute of a broker is considered so valuable because companies lack the staff and necessary know-how to do everything on their own at the international level. Additionally, in contrast to the customers, global broker companies are licensed to do business abroad. However, it is crucial to keep in mind that the broker only facilitates international business; it is the customer who decides whether such is desired.

 

As Figure 3 illustrates, there is a remarkable difference concerning the geographical emphasis of broker activity between customers with in-house brokers and those without. This is not due to differences in the absolute relevance of the broker's international network but is instead explained by differences in the importance of the broker's domestic activity. The in-house brokers employed by some multinationals generally have the capacity and the knowledge to provide most broker services on their own, especially conventional transaction services (see Figure 3). These companies generally need broker assistance only for transaction services abroad, where in-house brokers possess neither the necessary know-how nor the required licenses. As far as consulting services go, companies with in-house brokers need more broker support for dealings conducted abroad but will use selective services in their home country too. In contrast, companies without in-house brokers rely on broker support both at home and abroad, regardless of the type of service - consulting or transaction - involved.

 

Innovation

 

In addition to acting as transaction executors and risk management consultants, customers expect brokers to develop innovative products and services. For example, one of the IPs expects brokers "to be proactive, to think ahead, and to provide innovative solutions besides traditional insurance products." As potential desirable innovations, customers particularly mentioned new software tools, as well as alternative risk transfer (ART) solutions.

 

Although sophisticated and innovative products and services are important for most companies, different types of companies view such as more or less important (see Figure 4). Companies with sophisticated internal risk management departments, especially those with in-house brokers (the triangles in Figure 4), are mainly interested in innovative services because they already have a good understanding of traditional products. For those companies with fewer risk management skills, innovation is not as relevant, since they are much more reliant on intermediaries to provide products and services. Finally, there are the three companies already mentioned above (see section entitled "Consulting") that use brokers only for conventional transaction services. The increasing relevance of innovation, creativity, and dynamism is also affirmed by the intermediaries' representatives. According to them, the innovative abilities of an insurance broker "separates the wheat from the chaff."

 

The insurers concur with these opinions from customers and brokers believing that innovation should be initiated by insurance intermediaries. Because the products and services are sold through the brokers' distribution channels, brokers have the customer data necessary to perform customer needs analyses and thus are better positioned to create innovative products and services.

 

"I would expect brokers to be more innovative, also with respect to products. They are the ones that possess the best access to customer data."

 

Statement of an insurance representative

 

Derivation of Brokers' Skills

 

The tasks expected of brokers, as discussed above, influence the skills they need to satisfy their clients. Figure 5 sets out a set of essential broker competencies rated (as to importance) and evaluated by the customers.

 

In line with the increasing relevance of consulting services and individual support, the industry- and customer-specific knowledge, personal relationships, competence in risk management, and problem-solving capabilities are all rated of very high importance; however, customer expectations or desires in these areas are often matched by broker competence. IPs generally expressed disappointment with brokers' superficial information and their insufficient industry knowledge. A broker's strategy is often sales driven and focused on insurance solutions instead of customer orientation. Therefore, brokers are unable to offer services that are based on companies' needs. One IP stated: "What I miss most - in contrast to the broker's capability to sell products - is the broker's ability to understand a problem and to say that there is either a way to solve it or not. A valuable result can also be achieved by saying that there is no solution to a specific problem. But all broker activities are still very distribution-oriented." Accordingly, customers desire that brokers enhance their problem-solving capability. Furthermore, intermediaries' knowledge of risk management is regarded as insufficient with respect to their consulting role and corresponding requirements. Thus, it is desired that brokers will develop such consulting-related know-how. However the news is not all bad: multinationals highly value brokers' competence in their conventional market maker role and several IPs particularly praised brokers' insurance know-how, their knowledge of insurance markets, and their skill in executing transactions.

 

According to the IPs, one of brokers' greatest strengths is their global network. As already mentioned, these networks, as well as region-specific knowledge, are very important, especially for companies with in-house brokers. Note, however, that only a few intermediaries have the capacity to manage an international network, a situation confirmed by representatives of insurance companies.

 

"Only a few players in the market can afford to establish those international networks, because they, for example, require enormous investments in IT."

 

Statement of an insurance representative

 

With regard to brokers' weaknesses, companies mentioned the cultural differences between the brokers' regional business units as a major difficulty that often leads to misunderstandings and coordination problems. For example, one IP said: "The weakness of the broker is a God-given weakness: You talk to 30 different countries and accordingly to 30 different cultures. How can this possibly work out?" Moreover, some companies would like to see brokers improve their region-specific knowledge. With respect to the high demand for innovative services, brokers currently incapable of satisfying the needs of multinationals. According to both the customers and the insurers, insurance intermediaries could do a better job with regard to innovation.

 

In particular, several IPs mentioned that they wish more suppliers had the capability to provide innovative software support and ART solutions in the area of risk management. Finally, the price of broker services was discussed. Multinationals generally agree that although prices and costs are important, they should and do not receive first priority. Most companies are very willing to pay higher prices for high-quality services that meet their needs.

 

IMPLICATIONS

 

The results presented above focus on several different aspects of brokers and their customers, including current and desired future broker functions. The present section summarizes the insights gleaned from this study.

 

Classification of Insurance Brokers

 

The research reveals a demand for broker functions that vary according to the specific needs of the customer. Figure 6 illustrates a possible classification of these functions. The framework identifies four main types of functions that can be differentiated according to the customer's desired degree of innovation on the vertical axis, and the required degree of individualization on the horizontal axis. This results in a continuum with a broad spectrum of feasible configurations at both the content and relationship levels. The vertical axis represents the level of content; the horizontal axis represents the intensity of the relationship between customers and brokers.

 

The four possible functions of an insurance broker from the customer perspective can be described as follows. A broker acting as a supplier provides conventional services with little individualization at very low cost. Thus, the offered services are low in complexity and innovation at the content level. The relationship between brokers and customers is superficial and interchangeable. Consequently, the services can be only slightly adapted to customer-specific circumstances but, nevertheless, must meet market-relevant customer needs. A broker fulfilling a supplier function focuses on standardized and costefficient services, such as the execution of insurance deals or the handling of claims.

 

The services offered by a broker fulfilling the function of a transformer are also characterized by a low degree of individualization but - in contrast to the supplier - a high degree of innovation. A transformer focuses on being an innovative services provider, serving the market from a supply-oriented perspective. As a result of highly standardized but nevertheless innovative services, the broker meet market-relevant needs at low cost. A typical transformer function is the implementation of risk management software tools.

 

A broker functioning as a partner maintains a close relationship with the customer. The broker's activities are primarily driven by the customer's needs and specific problems and less by the broker's own interests, such as, for instance, completing insurance deals. A partner offers highly individualized services (tailor-made solutions) with a rather low degree of innovation as far as content level. As the research findings suggest, partners are especially used for conventional consulting services, such as identification and quantification of risks; procurement, analysis, and forwarding of risk information; provision of industry-specific information concerning risk-related subjects; and evaluation of self-financing and insurance solutions.

 

Brokers acting as problem solvers provide highly individualized services that are also innovative and complex. Brokers fulfilling this function have the opportunity of achieving competitive advantages in the market through new and innovative products, services, and business models, for example, in the area of ART. A problem solver should be able to manage the risk transfer of a company by coming up with alternative risk-coverage solutions based on a well-founded analysis and evaluation of the particular customer's risks.

 

Designation Criteria for Broker Functions

 

Since, according to the customer-value approach, broker functions depend on the customer's needs and expectations, the customer's individual characteristics are very important. Thus, this section deals with the customer-specific criteria defining the broker function.

 

As the research reveals, the importance of both innovation and the selective use of services depend on the sophistication of the company's internal risk management division. Accordingly, companies with relatively unsophisticated risk management departments aim for a holistic integration of the broker into their internal risk management process. This requires a very close broker-customer relationship and highly individualized services. However, innovation is relatively unimportant to these customers. Consequently, the broker fulfills the function of a partner (see Figure 7, Field A). In contrast, companies with sophisticated risk management divisions usually demand innovative, but only selected, services, suggesting that the best broker function for them is that of a transformer. However, because of the great relevance to these companies of consulting services, which require high individualization and a close relationship between customers and brokers, the intermediary can act as both a transformer and a problem solver (see Figure 7, Field B). The same applies for companies with in-house brokers when they use the intermediary in their home country (Figure 7, Field Cl). Abroad, the external broker primarily fulfills the function of a global partner, providing highly individualized, but not very innovative, services (Figure 7, Field C2).

 

Second, the nature of a company's business and the corresponding level of risk exposure have a great influence on the desired broker functions, too. For example, companies in the pharmaceutical or chemical industries, which have very high risk exposure, need holistic risk management advice, requiring a close relationship between the broker and the customer. Thus, for this type of company, the broker is both a partner and a problem solver (Figure 7, Field D). In contrast, companies with very low risk exposures solve their risk management issues without external help and rely on brokers only for transaction services. For this type of company, the broker chiefly acts as a supplier (Figure 7, Field E).

 

Finally, the desired broker functions also depend on other individual circumstances and preferences, including, for example, the size of an enterprise or its corporate culture.

 

Future Importance of the Different Broker Functions

 

The continuously changing nature of the insurance industry has led to changing levels of importance for the four broker functions discussed in this article. In the past, the supplier function was of great importance to customers. Due to the growing risk complexity and incessant emergence of new risks, the relevance of consulting services has already increased and will continue to do so. Thus, most companies will expect selected, but tailor-made, solutions, calling for a close personal relationship between themselves and their broker. In addition, the research results show a growing demand for innovative services, a trend suggesting the desire for a higher degree of individualization at the relationship level as well as a higher degree of innovation at the content level. Therefore, a shift toward the problem solver function can be expected in the future (right-hand side of Figure 7). Companies that currently lack competence in the field of risk management (Figure 7, Field A) are expected to become dependent on brokers as they improve their internal risk management departments, which should result in a shift to the left on the relationship level toward Field B (Figure 7). Nevertheless, this will not be a dramatic shift, since the selected services demanded by those companies still have to be highly individualized. Moreover, in spite of the rising demand for problem solvers, the traditional supplier function remains crucial. Customers with a comparatively low degree of risk exposure still prefer rather standardized and conventional services, such as, in particular, the execution of insurance deals. Overall, we can conclude that the supplier function remains relevant but is no longer the most important function a broker can fulfill.

 

Consequences and Requirements

 

Because most companies now operate globally, brokers are expected to act as international partners who can perform certain risk management tasks abroad. However, this role is possible only if brokers have a global network as well as specific regional knowledge. Gaining and increasing such region-specific knowledge will certainly be one of the greatest challenges facing brokers in the future.

 

As this study has discovered, most customers are not keen on using system suppliers, preferring, instead, to purchase selected services. Therefore, it is crucial that brokers offer a broad range of unbundled services. Through this kind of modularization, brokers will be able to meet the need for individualized solutions in a standardized, less costly way. To this end, it is increasingly important that at least some of the services offered feature a high degree of innovation. Brokers providing innovative services tailored to customer-specific needs will be well positioned to attain a huge competitive advantage.

 

The Implications of this Study for Current Theoretical Discussion

 

This study's approach of discussing broker roles from both a customer and functional perspective gives a new angle of insight into the current scientific debate on insurance intermediation, which to date has mostly taken an economic point of view.

 

The results of the study indicate a rising relevance of broker services that go beyond the traditional market maker function, such as, in particular, consulting services and innovative solutions in the area of risk management. This suggests that brokers do and will continue to do more than executing insurance deals. This insight somewhat conflicts with the extant literature, where the market maker role and the provision of insurance solutions are still considered as the predominant functions of a broker.

 

In line with the growing relevance of consulting services, the results and implications discussed in this article highlight the relationship level as a new and essential dimension of broker services. Insurance intermediaries fulfill not only economic functions but also social functions. In particular, trust and security established by long-term personal relationships are crucial social functions performed by brokers. This type of function has rarely been considered in the literature to date (cf. for an exception, Maas and Graf, 2008).

 

In addition, our research provides some insight into the current situation in the market for insurance brokers. On the one hand, according to our results, most customers want individualized, but selective (i.e., unbundled) services in areas where they lack competence. This provides an opportunity for a multitude of small but specialized firms with specific skills and competencies. On the other hand, multinationals rely on a broker's global network, a function that can only be fulfilled by large international players that have the capabilities to establish such a global network. The results also reveal that some companies want a holistic integration of the broker with themselves, which also requires big players with a broad range of services covering the whole risk management process. These customer needs, especially the demand for a global network, may explain the recent market consolidation of insurance intermediation and the corresponding concentration in the broker market, as described by Cummins and Doherty (2006). In general, we conclude that the requirements of the customers discussed earlier are being met by the current market (see Cummins and Doherty, 2006; Curnmins et al., 2006), a market that includes not only big players with a international network of relationships and the capability to handle the whole risk management process but also small specialized brokers that offer selective (and innovative) services and solutions.

 

CONCLUSION

 

The present study highlights the current and future functions of insurance intermediaries from a management-oriented perspective. Applying the customer-value approach, the results of 20 interviews with risk management decision makers of multinational companies reveal four possible functions for brokers: suppliers, transformers, partners, or problem solvers. Although all four functions are essential, there will be some differences in their relevance to particular companies. In line with the increasing demand for consulting services and innovative solutions, a shift toward the problem solver function can be expected. From an intermediary's point of view, this requires an improved understanding of the client's specific needs, good personal relationships, and extensive knowledge in the area of risk management, as well as innovation skills. Finally, an efficient global network and the further development of region-specific knowledge remain highly important, given the ongoing relevance of the intermediaries' function as an international partner.

 

Expanding the existing literature on financial intermediation, this study finds, among other things, that successful brokers need to provide "social" or networking functions for their clients. Trustworthiness and relationships built on confidence are crucial to success. Especially these days, when the world grows more complex almost daily, multinationals want to be able to rely on tailor-made consulting services provided by persons they trust.

 

This research focused on large, multinational organizations. Although we are convinced that the present research sheds light on the insurance broker function in general, the restrictions in research led to certain biases in validity. For example, multinationals often have sophisticated risk management departments and high risk exposure. Hence, future research should be directed toward analyzing the broker role in other settings. Moreover, because a qualitative research approach has been adopted in this article, further investigations with quantitative approaches are needed for a more detailed analysis of the issues discussed here. FOOTNOTE

 

1 There are considerable differences in the degree of independence of the intermediaries. An exclusive agent, for instance, represents only one company and has the lowest level of independence. In contrast, brokers and independent agents deal with several companies and act autonomously. For a detailed discussion on the various degrees of broker independence, see Cummins and Doherty (2006). FOOTNOTE

 

2 The DAX100 is part of the DAX (Deutscher Aktienindex), which is the most important German stock index. It was created in order to measure the development of the 100 most liquid titles of the DAX. The SMI (Swiss Market Index) comprises the 20 most liquid titles of the Swiss Performance Index (SPI) that is considered the most important Swiss stock index apart from the SMI. FOOTNOTE

 

3 All statements were translated into English.

 

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IMAGE ILLUSTRATION, FIGURE 1, Contemporary (Upper) and Future Focus (Lower) of the Broker's EmploymentIMAGE ILLUSTRATION, FIGURE 2, Need for Brokers Depending on the Quality of Internal Risk ManagementIMAGE ILLUSTRATION, FIGURE 3, Geographical Emphasis Depending on Different ServicesIMAGE ILLUSTRATION, FIGURE 4, Relevance of Innovation Depending on the Quality of Internal Risk ManagementIMAGE ILLUSTRATION, FIGURE 5, Importance and Evaluation of Broker SkillsIMAGE ILLUSTRATION, FIGURE 6, Types of Insurance BrokersIMAGE ILLUSTRATION, FIGURE 7, Brokers' Current (Left) and Future (Right) Functions Depending on the Customer's SituationIMAGE CHART, APPENDIXIMAGE CHART, Appendix

April 12, 2010

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