Are personal lines brokers back in fashion?

For years, there was talk of personal lines brokers' death, but now insurers are beating a path to the doors of these businesses to acquire them.

Ageas set the tone last year when it paid £200m for Kwik-Fit. Then French mutual giant Covéa paid about £70m for Provident Insurance. A big reason for the latter was to protect its relationship with Swinton. Covea owns Swinton, which constantly posts healthy pre-tax profits. If, say, somebody like Hastings had got its hands on the business who knows if the Covea relationship would have lasted.

And if it’s not the broker, it’s the distribution into personal lines that insurers want. RSA bought high net worth firm Oak Underwriting last month.

Why the sudden interest?

The first point is that insurers are really suffering on their personal lines books. Motor’s combined operating ratio was 122% last year. That’s just not sustainable and there’s immense pressure to act.

Second, the distribution channels through brokers can be tough for insurers – with commissions taken from already thin margins and brokers making money from claims referrals that come back to haunt insurers

Furthermore, there are the tricks personal lines brokers employ to distort underwriting. One of these is differential pricing, in which the broker places the business on an aggregator below the net technical rate, but then recovers the loss through add-ons and referrals to gain volume.

This has the effect of pushing prices down, leaving insurers with “winner’s curse” – customers who are after cheap deals, but are likely to be costly on claims.

Third, with big brokers having so much power they can pull and place a book elsewhere as soon as a deal expires. They essentially have control.

By acquiring a personal lines broker or MGA, the whole process can be controlled by the insurer from top to bottom, cutting out waste through expensive commissions, claims referral problems, technical pricing differentials and lack of stability in holding books of business.

Finally, at the niche end, it’s the personal lines broker or underwriting agencies that have built relationships with customers that are happy and unwilling to move. That’s one of the big reasons why RSA bought Oak.

Chubb Europe chief executive Michael Casella sums it up: “Standard property casualty is so beat down that, as far as prices are concerned, you have a huge portfolio that you are getting killed on right now.

“The second piece is the brokers. Between the consolidation in the UK and the alpha houses doing MGA and systems, they’re creating a dynamic for all insurers that creates very difficult trading conditions, pushing us to the edge.”

Casella adds that the control of the facility is very much weighted towards the brokers. He says: “That’s creating a situation for carriers to sit there and say, ‘where else can I play?’ The easy thing for them to do is then to go out and buy somebody.”

Some insurers, Aviva for example, say they are not interested in buying personal lines brokers. But increasingly, it is looking like the only real way to manage the value chain effectively.