The existing insurance distribution structure in Italy, like that in continental Western Europe, is becoming outdated. This is a major obstacle for the various countries' insurance systems, now struggling towards increased efficiency. What kind of transformation is possible for agent networks, currently intermediating the largest part of families' nonlife insurance coverage? By Alessandro Scarfò, director Value Partners, Milan.

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Insurance Distribution in Italy: post-downturn scenarios
The existing insurance distribution structure in Italy, like that in continental Western
Alessandro Scarfo Europe, is becoming outdated. This is a major obstacle for the various countries’
Director insurance systems, now struggling towards increased efficiency. What kind of
transformation is possible for agent networks, currently intermediating the largest
part of families’ nonlife insurance coverage?
In Italy, the debate on the insurance business is generally limited to the only widespread mandatory insurance –
the motor class – with tedious, endless disputes on whether the high cost of motor policies is either fair or unfair.
But is this really the central issue hampering the insurance business in Italy? And how much of it has to do with
the distribution structure? The ban on exclusive agency clauses was expected to fix the problem. Why has it now
virtually turned into a fiasco, with costs rising by the hour?
The Italian insurance business is a long-established system, based on agent networks, and has experienced only
minimal changes over time. Non-life insurance seems particularly stagnant. Rightly or not, banks have been
considering the life class (worth over €54 billion in 2008) as an alternative to asset management and other forms
of short/medium-run investments. Their presence has consequently become significant. With a 58% market share,
banks represent a concrete alternative to agent networks which, in 2008, accounted for a 20% market share.
In non-life business (worth over €38 billion in 2008), on the contrary, things are much more crystallised. Over 84% of
the market is occupied by insurance agents. The much-hyped ‘direct’ (telephone- and Web-based) insurance achieved
a share of less than 4%. Considering that the broker channel – the second distribution force in Italy, with a share of
approximately 8% – is primarily focused on the corporate segment, it is evident how the agency channel plays a clear-
cut leading role in family-oriented insurance distribution.
Over 28,000 individual agents are currently active on the Italian market, collected into some 10,000 distribution firms.
This means that in 2008, each of them dealt with an average €3.3 million in non-life business and €1.5 million in the life
class. To put these figures in perspective, let’s keep in mind that big Italian banks operating at a national level manage
€7 to 22 million per branch – that is 50 to 450% more. Such fragmentation prevents the Italian insurance distribution
structure from achieving scale economies. Not by chance, distribution and general expenses account for 25% of
the total amount of premiums. In other words, some €38 billion in non-life premiums were collected in 2008. This
represents approximately €10 billion in funded operating and distribution processes, rather than product as such.
Undoubtedly, an inefficient distribution structure contributes to the high cost of motor insurance. Evidently,
however, this is not the only cause. Among other significant factors, the fraud system is particularly prominent.
In certain areas of the country, this is a veritable professional activity. We should ask, however, if any changes
will occur in the wake of the current downturn phase, which is making families more aware of costs and savings
opportunities than before.
Past, present and future of the Italian insurance distribution system
In Italy, the development of insurance agent firms has been fuelled by a strong synergy between companies and
their agent networks, especially with exclusive agency agreements maximising customer loyalty. Compared to
other integrated distribution systems – the banking sector, for instance – it is critical that agencies are individual
firms, entitled to independent and autonomous business decisions. This extremely integrated system is, therefore,
paradoxically made up of self-governing components. For a bank, decisions translate immediately into actions – say,
merging three branches into one, or redesigning end-to-end (from headquarters to branch) operating processes.
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For an insurance company, decisions are not so easily implemented. Negotiations with the agencies involved
are needed, and this often involves interacting with their respective labour unions. The resulting unbalanced
development has led to a structurally inefficient system – the result of too many compromises.
Ironically, the many mergers of the past 20 years haven’t helped, either. A merger is supposed to achieve greater
economies of scale, with all of the economic parties involved benefiting from the resulting higher efficiency levels.
Managing a merger, however, would require a redesign of the entire operating context, from the company itself
to agencies (local presence, product mix, agency-specific IT systems, and so on). This has always been impossible,
due to the absence of a common vision of development. Mergers might have been great opportunities to better
serve the market and achieve higher returns. Instead, individual parties’ interests and advantages have been
safeguarded and the transfer of significant amounts of activity from company to agency has often been the only
tangible result. While companies were allowed to submit reasonable levels of post-merger synergies to business
analysts, agencies were being saddled with extra workloads, increasingly turning from sales-oriented structures to
plodding managing entities. Any complaints were hushed by increased commissions. All of this has burdened the
whole insurance system. In times of low sensitivity to price levels, periodic and systematic increases of distribution
costs were being transferred to premiums, against a backdrop of a huge range of factors working to inflate costs.
Lastly, over time, a series of regulatory requirements has been imposed on agencies. Although these were
intended to control the quality of sales processes and secondary intermediaries (subagents, producers, and so
on), they ended up further burdening agencies’ administrative/management requirements, depressing their sales
potential and growth prospects.
The ‘freezing’ of such a fragmented distribution landscape led to the failure of the ban on exclusive agency
agreements: the agencies were too small to really able to manage two or more product mixes, or two or more
accounts to principal companies, without being buried under the weight of management duties and the
associated fixed costs.
The challenge awaiting the insurance distribution system
The economic market is evolving, especially now that economies worldwide are going through a downturn
phase. There is a need to find feasible alternatives for companies, allowing them to acquire quality products
and services while maximising savings. Is it reasonable to assume that insurance companies alone will escape
this trend and keep burdening premiums with general and distribution expenses (25% of what policyholders
pay)? Obviously, the current scenario is not sustainable in the medium term. The opposition it creates between
companies’ and distributors’ economics can no longer be resolved by transferring the system’s inefficiencies to
product prices. Moreover, regulatory commissions are intensifying their scrutiny.
Which concrete, viable alternatives can we imagine at the moment? There are three possible scenarios:
• The company-agency supply chain is redesigned
• An aggregation model brings agencies together
• An entirely new distribution model is introduced
The company-agency supply chain is redesigned
Each company identifies an efficient distribution model, in which a few basic paradigms are respected:
• Simple, measurable, and efficient end-to-end processes;
• Management and back office activities are minimised by automation and centralised outside of agencies;
• Agencies become much smaller and focus on sales/customer service activities
and proposes such a model to its own agencies (potentially, to others as well) as a New Deal to help overcome
the current impasse and shape a new role for insurance agents. A newly acquired awareness and agents’ concerns
for their future leads them to weigh the proposal, this time with a view to long-term sustainability, rather than
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to the safeguarding of consolidated advantages. A significant number of agencies accept that this is a concrete
possibility. Obviously, the scenario requires that companies have large investment potential, now that investments
are less easily sustained due to significantly reduced returns. The ideal moment to turn this corner would probably
have been a few years ago, but bold, innovative decisions are often prompted by difficult times.
An aggregation model brings agencies together
Agencies find a way to organise themselves, independently from their principal companies, starting partnerships
(either geographically based or within the various agent groups) and sharing back office activities, so as to relieve
their respective workloads and concentrate all efforts on sales. These structures operate as purchase centres as
well, selecting the product mix offered to customers and competitively urging companies to improve products
and services and reduce costs.
This kind of aggregation, which could generate a model comparable to that of the US market (big independent
agencies, minute and articulated networks, and extremely efficient operations), will necessarily incorporate a
number of features, such as:
• The presence of a recognised leader among agencies willing to band together;
• The market availability of operating/IT platforms suitable to manage this kind of organisation and to grant
customers access to efficient and low-cost services;
• The capability to execute larger-scale projects than the vast majority of insurance agents has ever had to deal
with.
This aggregation model would significantly reduce the number of insurance distribution companies operating on the
market, increasing their average size and clearly affecting the ban on exclusive agency clauses. A more balanced (if
not ‘equal-to-equal’) relationship between company and agency would emerge, as well.
An entirely new distribution model is introduced
Given a backdrop with deep-rooted flaws and no real will to change, the solution could come from an external
catalyst, be it a foreign player not yet active (or marginally active) on the Italian market or a project/financial entity
capable of organising a number of distribution players around a shared vision.
The aggregation of these parties could give intermediaries a large enough average size to create a professional
entity to manage back office activities, an efficient and customer-oriented operating/IT system, and a distribution
structure (retail locations, ‘light’ offices, producers) focused on selling a few, simple products for family needs. This will
represent some form of direct insurance, but with actual retail locations, so as to remove the real critical issue of that
business model: the absence of a ‘human’ interface in key moments such as the underwriting of policies and, more
importantly, claim processes.
The new player would have a huge advantage in establishing this aggregation on novel principles – completely
different from those currently regulating the Italian insurance distribution system. The risk, on the other hand, is that
– in such a closed and self-centred world – an external entity could be associated solely with foreign experiences,
unsuited to the specific reality of the country.
Conclusions
It is not easy to divine which one of the aforementioned scenarios will unfold. Will one of those solutions prevail on
the Italian market, or will it be a combination of the three? It is likely that the push for change will come from a number
of companies willing to herald a distinctive value proposition for customers and insurance intermediaries. The entry
of new and determined players, carrying a different framework with them, would obviously speed up any changes in
the insurance business. Current players would read that as a threat and feel pressed to adopt unconventional models
themselves.
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4. PERSPECTIVE
In any case, in the medium, if not the short term, we will witness change in the distribution system. The demands from
customers – struggling with family budget cuts and more pressing needs for insurance products due to a reduced
social expenditure – will definitely push in that direction. The answer this time will necessarily be a sea change,
driven from the perspective of long-term sustainability. It will also represent a contribution to the modernisation
of the country. An efficient insurance sector is crucial for the entire Italian economic system. People should not be
turned away by it, but rather educated and helped in managing the risks inherent in their jobs and lives.
About Value Partners
Founded in 1993, Value Partners development, commercial For more information on the issues
is a global management planning, technology decisions, raised in this note, please contact
consulting firm that works with and change management. alessandro.scarfo@valuepartners.
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