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13.12.07
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Agents Of Change?
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By Graham Stack
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Russia’s Insurance Companies Buck the Internet Trend, Sticking with Networks
Since the introduction of compulsory motor liability (CMTPL) in 2006, the Russian insurance sector is booming, with growth rates of 30 to 40 percent per year. But paradoxically, these rates of growth have strengthened rather than weakened the sector’s obsolete dependency on agents as their primary mass sales channel – with all the inherent disadvantages for companies.
There is general agreement among analysts and managers in the Russian insurance sector that agents are a problem. And yet their numbers grow from year to year, as the industry booms at rates 7 to 8 faster than the economy, while in the West, they are a dying breed.
A major insurance company like RESO-Garantia maintains a network of around 19,000 agents across Russia. But is this a sign of success or a hindrance to further growth?
“Insurers suffer from the high commissions and high bargaining power of their intermediaries,” said Anastasia Voronkova of Fitch Ratings. The root cause of this is simple: “Unfortunately, few of our agents work exclusively for us,” said RESO marketing director Igor Ivanov. Most agents sell policies for a number of companies, focusing on those that offer better commissions – and a better deal.
“Obviously, an agent is going to sell the policies that pay the better commission,” said Svetlana Bierge, an insurance broker in Moscow. But the salability of policies also makes a difference. “We make auto insurance policies for young drivers expensive,” says Igor Ivanov. “So this means our agents will offer their customers cheaper policies from companies not so aware of the risks connected with young drivers as we are.”
Agents themselves dispute whether commissions or salability of a particular policy are decisive. Larger commissions do not help if the policies do not sell. But Alexander Valerevich, General Director of Russia's largest insurance company, Ingosstrakh, was quite frank about the subject in an interview with Insurance Today: “Let’s not entertain any illusions: It’s the money that decides. You can’t retain or win over agents just through the brand name. Everything depends on the agents’ commission: if the difference is significant, then even the most loyal agents will take their customers to the company that pays more. And for some, the difference does not even have to be significant – it can be very small indeed. And foreign companies are going to have to learn this from their own experience if they want to work in the retail sector in Russia.”
Companies might moan about the cost of their intermediaries, but spare a thought for the poor agents themselves. They get by on a pittance ranging from $200 per month in the regions to $1,000 in Moscow – depending, of course, on how much they sell. “Many of our agents also have other jobs,” Ivanov said.
In fact, the misery of the insurance salesman is not a new topic in Russia. “In Soviet times, insurance agents had about the same social status as cleaning ladies, and were often the butt of jokes,” St. Petersburg sociologist Maria Kudriavtseva said. Their reputation has still not recovered.
Despite the costs incurred from this sales model, companies insist on actively increasing their number of agents in the field because there are simply no other options. Banking is not sufficiently developed to act as a major sales channel and, at the moment, less than 1 percent of insurance sales take place online.
Considering that the current insurance boom is being driven by the introduction of CMTPL, a mass retail product ideal for standardized sales, this is clearly an unsatisfying state of affairs. Yet it is unlikely to change anytime soon. “We don’t kid ourselves that we can reduce the role of the agents’ network at any foreseeable time in the future,” Ivanov said.
Remedial measures
So it's all about damage control. Increasing competition due to sector consolidation and growing foreign involvement now means that companies are desperately looking to cut the costs associated with their agents.
One method is to weed out underperforming agents and increase the number of effective ones. Martina Richter, deputy chairwoman of the management board of the SOGAZ insurance group, named "lack of effective agents" as one of three main problems facing the insurance sector, alongside legislation and poor customer awareness.
In an interview with Insurance Today, Dmitry Popov, the deputy director general of ROSNO Allianz, defined an effective agent: “The number of ‘formal’ agents can be easily puffed up. It’s much more difficult to create an agent network that really sells. An effective agent is one that sells enough to earn total commissions equivalent to the average wage for the region.” ROSNO evaluates the quality of agent management by the number of effective agents. “In 2006, our number of effective agents grew twofold, and it gives real results in CMTPL business,” Popov said in his interview. The number of purely registered agents, on the contrary, remained unchanged, meaning we’ve focused on clearing our base of ‘formal’ agents.”
A second method is to introduce new software for agents. But this assumes they actually have computers and know how to use them. Even the largest companies, such as ROSNO, balk at giving their agents laptops – which would equally benefit their competitors. But they reward top sellers with computers, and more and more agents are acquiring their own laptops or PDAs. “The majority of our successful agents are advanced PC users,” said Popov proudly. Computer savvy agents can use their software to calculate and sell policies that use deeper segmentation and more correctional ratios to achieve fairer ratemaking.
A third approach is to have agents specialize, especially when it comes to selling life insurance, which starting from a very low base, is expected to double over the next two years. Ariel Gorelik, a vice manager with ROSNO Allianz Life, spoke at the annual Russian Insurer’s Summit at Sochi in May 2007 on the pros and cons of training agents who have previously not specialized in this field to sell life insurance. According to his presentation, East European Allianz subsidiaries with such specialized life insurance salespeople have grown significantly faster than those with combined sales channels.
Among the pros he listed were the existing developed structure with established connections and client portfolios and the need to increase agents' income.
But Gorelik's cons were more convincing: insurance is a very complex product, and lifelong training is essential. There is low acceptance of the need for life insurance in Russia, so selling it requires the agent to have a completely different mentality. Insurance agents also have a high turnover rate and low training levels, due to risk of losing them to freeloading competitors.
Bancassurance could be an answer
Bancassurance, which is simply the sale of insurance products by a bank, seems to be the most promising alternative to selling through agents. Driving growth in bancassurance is a rapid expansion in consumer credit from banks, the volume of which doubled in 2005 and again in 2006. Banks can sell insurance policies developed by partner insurers for their credit products. Loans for automobiles is the most developed competitive segment, although the majority of the sales in this field are actually made by car dealerships, as Russians flock to showrooms to buy new foreign models on credit.
A government-supported mortgage boom means that mortgage risk insurance has a rosy future, but only insurers with long-standing relations with top banks will be able to benefit from this. Currently, Russia’s 10 largest banks control more than 70 percent of the consumer credit market.
The move to bancassurance marks a qualitative shift in customer orientation in the insurance sector, argues Elena Borinina of Ugoria, Russia's 18th largest insurance company, with a pioneering 25 percent of sales made through banks. Bancassurance demands a fundamentally new, client-oriented approach. When developing a joint project with a bank, the insurer undergoes qualitative changes reflected in the growth and significant improvement of its client base along with the upgrading of business processes, sales coordination and insurance product distribution channels. As a result, the client receives an improved, complex financial service.
However, Russian insurers are still unwilling to insure financial risks for small ticket consumer credits. Although many companies are licensed for this class of insurance, the lack of statistics makes calculation of non-repayment risks shaky, and companies mainly provide accident insurance. Boronina believes that the volume of financial risk insurance volume is set to increase, especially as banks’ foreign partners ask them to sell credit portfolio insurance.
While insurers remain reluctant to underwrite consumer lending financial risks, banks are reluctant to sell insurance products not related to their credit products. But collaboration with banks is developing away from its business-to-business roots, where in order to collaborate with a bank and access its client base, the insurer had to first place its reserves with the bank. Boronina said that this is no longer a decisive factor since banks can get cheaper syndicated loans from Western credit institutes and foreign investors. They are no longer primarily aiming to get their hands on insurance companies' reserves. Increasingly what counts for banks is the insurer's ability to develop a profitable joint product.
Other very promising segments for bancassurance in Russia include the ongoing redistribution of the corporative captive segment to the open market and an anticipated upcoming boom in small and middle-scale business insurance.
The future is in the Internet
Currently, the Internet plays a miniscule role in selling insurance, so growth in this segment of the market is almost a given. There are currently around only 22 million Internet users in Russia, out of a population of 147 million. However, it is estimated that by 2010, more than 70 million Russians will be online, 10 million of them with broadband access.
Since adult Internet users are generally more affluent and educated than their peers, it is hard to imagine that the Internet will not become a major insurance sales channel, even in the relatively short term.
This would obviously entail a huge break with the current system, but whoever pioneers it, and succeeds in winning customers' trust, will gain a decisive competitive advantage.
For foreign entrants to the market, lacking any agent network in Russia, but boasting a trust-inspiring global brand, pioneering Internet sales of standardized mass insurance could be a shortcut to success. |
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