KBB – Fabio Massuda, Jesus Palacios, Sean Kelly Game Theory Final Assignment May 12, 2010 1""Introduction Fabio is currently developing a start-up, SGZ, that will operate in Brazil as the first online car insurance broker in which the consumer compares several options of car insurance plans from different insurance companies and acquires the one that best fits his/her criteria (e.g. price, coverage). Revenues come from commissions paid by the insurance company for each policy sale. Although common in other markets, this business model faces a unique legal context in Brazil, which empowers incumbents to apply a mix of market and non-market strategies to fight SGZ’s entry. Car Insurance Market – History, Structure and Stakeholders In Brazil, an individual or a company cannot buy an insurance plan directly from an insurance company due to a law that was implemented by a populist government in the 1970’s. According to the legislation, insurance must be purchased through a broker. The rationale behind this law is very controversial: it was created to avoid the formation of a cartel by the insurance companies and to provide a small part of the population with a way to make a living by creating an artificial market for car insurance brokers. To stop insurance companies from forming a cartel, the government allowed the formation of a smaller, yet powerful cartel of insurance brokers. This action created an anomaly in the market in which the brokers operate in a pocket of artificial demand. Every new player in the insurance brokerage business needs to earn an authorization by the national insurance brokers’ association under a very intense selection process creating high barriers to entry. InKBB – Fabio Massuda, Jesus Palacios, Sean Kelly Game Theory Final Assignment May 12, 2010 2""addition, this artificial market provides low incentives to modernize and compete with other brokers. There is also tacit coordination on advertising expenditures and targeting. As a result, the industry is heavily fragmented and old-fashioned. With all these conditions, brokers earn an average of 16%1 commission from insurance companies on every sale, including policy renewals. The Brazilian car insurance brokerage business is a $1BB/year1 industry, only considering individual car policies. An increase in the Brazilian population’s purchase power, the emergence of a middle class and increasing competition among car manufacturers has enabled the Brazilian car insurance market to grow at a strong and steady pace. In the midst of the financial crisis in the beginning of 2009, car sales in 1H2009 increased by 4.1%2 when compared to the same semester in 2008 (before the crisis was fully in place). The estimated growth in the industry for 2010 is over 10%2. In addition, insurance is an increasingly important product for many Brazilians, not only due to the chaotic traffic in cities, but also due to the high car theft rate. To enter the car insurance market, SGZ needs to be incorporated as a brokerage company to be eligible to sell insurance policies from insurance companies directly to the consumer. Since SGZ is bringing a disruptive business model to Brazil – current insurance agents only sell through phone – the Company must make sure to consider the reactions and strategies of all stakeholders involved, including insurance brokers, insurance companies, consumers and the """""""""""""""""""""""""""""""""""""""""""""""""""""""1"Source:"Superintendência"de"Seguros"Privados"(SUSEP):"Brazilian"Government’s"Agency,"which"regulates"the"car"insurance"industry"E"http://www.susep.gov.br/menuestatistica/ses/principal.aspx"""2"Source:"Associação"Nacional"de"Fabricantes"de"Veículos"Automotores"(ANFAVEA):"Brazilian"Association"of"Car"Manufacturers"and"Importers"E"http://www.anfavea.com.br/tabelas.html""KBB – Fabio Massuda, Jesus Palacios, Sean Kelly Game Theory Final Assignment May 12, 2010 3""government. SGZ must analyze the decisions and best responses each party may utilize in the event of SGZ entering the market. Repeal of legislation? The car insurance brokerage business relies on current laws to sustain its market. Without this law, insurance companies would no longer need to use middlemen and would immediately start selling insurance directly to the end-user. In this case, the car insurance market would resemble that in the United States, decimating the demand for car insurance brokers. SGZ will attempt to profit on the current inefficiencies and inconvenience of current brokerage practices by introducing an efficient and transparent means for consumers to directly pick the best policy for them, without having the need for a traditional broker. While there certainly is a tremendous opportunity to capitalize on a market that has been allowed to wallow in inefficiency, SGZ, like the current brokerage industry, also relies on the artificial market that Brazilian law has created. The repeal of this law would eliminate the opportunity. Since SGZ relies on this law, the Company must determine whether the law will be repealed (eliminating the current entrepreneurial opportunity) in the near future before deciding to enter the market. To do this, SGZ must analyze the mental models of the stakeholders that would be involved and affected by this decision. The players in this game are the government, consumers (voters), insurance companies and the brokers. Local insurance companies, who make up the majority of market share, are on the fence regarding the repeal of the law. Although it might seem obvious that they would want to get rid of a step in the value chain and be able to sell directly to consumers, the brokers’ law gives theseKBB – Fabio Massuda, Jesus Palacios, Sean Kelly Game Theory Final Assignment May 12, 2010 4""insurance companies the opportunity to lock in brokers and protect markets from the international insurance companies, which have always struggled to grow in Brazil due to the channel protection by the local companies. International insurance companies, on the other hand, would definitely want to have the