1. PERSPECTIVE Insurance Distribution in Italy: post-downturn scenariosThe 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insurance distribution structure in Italy, like that in continental Western Alessandro Scarfo Europe, is becoming outdated.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 Directorinsurance 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, lets 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.1

2. PERSPECTIVE 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 havent 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 systems 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 activitiesand 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 2 3. PERSPECTIVE 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.3 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 PartnersFounded in 1993, Value Partnersdevelopment, commercialFor more information on the issues is a global management planning, technology decisions,raised in this note, please contact consulting firm that works withand change management. alessandro.scarfo@valuepartners. multinational corporations and Its 3,100 professionals, com or one of our offices below. Find high-potential entrepreneurial from 25 nations, combine a all of our contact details at www. businesses to identify and pursuemethodological approach andvaluepartners.com value enhancement initiativesanalytical framework with a across innovation, international hands-on attitude and practicalMilan expansion, and operational industry experience developed in Rome effectiveness. 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