Value generated by intermediaries
Many insurance intermediaries have broadened considerably the scope of their activities beyond the assistance they provide to their clients in obtaining insurance cover. Through their various activities they create considerable value in the insurance value chain.
For example, Maas (2010) finds in survey-based study of intermediaries serving large business customers that, nowadays, such intermediaries are expected to be suppliers, transformers of the client risk management, partners and problem solvers. While the relative importance of each these functions may vary from client to client, they are essential and require “an improved understanding of the client’s specific needs, good personal relationships, extensive knowledge in the area of risk management as well as innovation skills” (Maas, op. cit).
In fact, nowadays, the activities undertaken by insurance intermediaries, especially the larger brokers, encompass a wide range of risk advice and management consultancy services. These can be grouped into five broad categories: (1)Product buyer: this is the original function of business insurance brokers and involves the following type of activities: product description and comparison, price comparison, placement, and possibly also administration and claims assistance;
Risk transfer optimiser: the business insurance broker may also undertake qualitative risk analyses for the client and assist the client in designing a program which optimises the risk transfer on the basis of insurance costs and expected performance;
Risk controller: the involvement of the business insurance broker with the client may go deeper and imply an active involvement of the broker in helping the client control its various risks through the use of sophisticated analytical risk assessment tools and the development of appropriate policies and procedures. In doing so, intermediaries may also identify risk that a client is exposed to but is not aware of. In some instances the intermediary may advise alternative approaches to risk management which do not involve the purchase of insurance;
Risk manager: the business insurance broker may actually assist the client in managing its risks on a day-to-day basis, possibly even integrating the risk management into the general management systems, working with the client’s risk manager; and,
Captive manager: a number of the major corporate clients own captive insurance companies and the major insurance brokers manage their clients’ captives.
The intermediaries also undertake, in a number of cases, activities that the insurance companies would have to undertake otherwise such as, for example, the management of claim.
Some insurance intermediaries also develop specialised insurance programs and products for very specific risks and, in that capacity, act as wholesale intermediaries, through whom other intermediaries can channel the specific risks being insured.
Contribution of the insurance intermediation sector to GDP
Overall, insurance intermediaries (agents, brokers, bancassurance and other non-direct sales distribution channels) account for a significant proportion of the value added created by the whole insurance value chain. The data reported in the previous section showed that, for the group of EU Member States for which detailed data on insurance distribution by channel exists, insurance intermediaries accounted for 81% of total insurance premiums (life and non-life) collected in 2008.
The value added or GDP generated by the sector is much lower than gross premiums collected as GDP includes only the wage bill and profits and not the other costs of doing business. For example, in the case of the sector “Insurance and pension funding, excluding social security” (in the NACE classification), the ratio of GDP to gross premiums collected ranges from 10% to 20% across the EU27.
Estimates of the GDP generated can be derived by assuming that broadly speaking the ration of GDP to gross premiums collected observed for the sector “insurance and pension funding, excluding social security” applies also to the insurance intermediary sector. On this basis, the insurance intermediary sector is estimated to have generated an estimated €95 billion of value added (2) in 2008 or 0.8% of total EU GDP (at current prices) (see Figure 4).(3)
Within the EU, the contribution of the insurance intermediary sector to total GDP varies from 0.1% to 0.2% (Lithuania, Estonia, Bulgaria and Romania) to more than 1% in (United Kingdom, Portugal and Netherlands)
So far, the analysis has focused only on the direct contribution of the intermediary sector to EU27 GDP and ignores the indirect impact arising from the spending by the intermediaries on wages and goods and services from other sector. This induced or multiplier effect is often significant. While there exist very little information on the multiplier of the insurance intermediary sector, multipliers complied for the UK and Scotland suggest that it is of the order of 1.5 (UK) to 1.9 (Scotland).
Thus, in order to estimate the total contribution to EU27 GDP of the insurance intermediary sector, a conservative assumption of 1.5 was used. As result, the total contribution of the EU27 intermediary sector, including indirect effects, is estimated at €148 billion or 1.1% of EU27-wide GDP.
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(1) This typology of the activities undertaken by business insurance brokers is taken broadly from Funk (2002).
(2) The figure of €58 billion is derived by assuming that the ratio of industry gross value (GVA) to total premiums collected applies to insurance intermediaries as well. The data on insurance industry GVA are from Eurostat’s national accounts (national accounts by 60 branches). In cases where data on insurance industry GVA are missing, the ratio of industry GVA to premiums collected is assumed to be 10%, the same as in the larger EU Member States for which the data exist (France, Germany and Italy).
(3) Averages of the Member States for which information is available was used for Member States for which information is lacking. This assumption has very little impact on the estimate EU-wide contribution of the insurance intermediation sector as without such an assumption the total contribution of intermediary sector was estimated at 0.7%.
