Grant Ellis says the gathering pace of insurers buying brokers is simply a move to protect revenue

The announcement that AXA has acquired Stuart Alexander and Layton Blackham surprised a good number of people, but having had time to ponder, I wonder if we really should have been surprised after all.

At the beginning of 2006, Oval announced that it was consolidating its small commercial business and placing it all with Allianz Cornhill. Overnight other insurers, including AXA, found themselves with a smaller portfolio of risks and a consequently lower premium income.

However, while at a stroke their income had fallen, their costs had remained broadly the same. This resulted in a flurry of activity in the months following the announcement, with a number of insurers competing to see if they could replicate the Oval/Allianz arrangement with other significant players, and a few deals were struck as a result.

Now, on the face of it, this is what has always happened – brokers change their allegiance to insurers from time to time, and books of business move around the market as a result – nothing more than 'business as usual' surely?

Well, that may have been the situation a few years ago, but not anymore.

Ten years ago there were around 10,000 brokers in the UK, and outside a handful of national and international brokers there were very few with significant volumes of commercial business. Today the picture could not be more different. Cornell Consulting suggests that 20 broking firms now control 60% of commercial insurance in the UK, and by 2010 this will rise to 80%.

Now put yourself in the shoes of an insurer that relies on this handful of brokers for the bulk of its distribution. It only takes one or two to 'do an Oval' and you could lose large chunks of revenue, and even larger chunks of profit.

It would be difficult to replace such large volumes of income quickly enough to stop your combined operating ratios (COR) shooting up overnight. So your options are somewhat limited, particularly as the analysts have been taught to look to the COR as an indicator of good (or poor) performance.

Therefore, taking this thought process to its logical conclusion, the only way you can ensure that your revenue stream is secure is to ultimately control the decisions your distributor makes about where he places business, by owning him.

So we shouldn't be surprised by AXA's move, and we should expect a flurry of activity from its competitors as 'doing a Reid' replaces 'doing an Oval'. Indeed, owning a broker could become the 'must have' accessory for insurers in 2007.

But there is a bit of a sting in the tail in the shape of the FSA, and Treating Customers Fairly. AXA has been quite right to play down the influence which the insurer will have over the day-to-day placing decisions made by 'Blackham Reid' or whatever it decides to call it. (Actually you can get quite a few interesting anagrams from either 'Stuart Blackham' or 'Layton Alexander' including Ultra Smack Bath, Next Loan Already and perhaps most intriguingly X-Rated Lay On Lane. But I digress).

The fact remains that, through its ownership, AXA will be able to block any decision by its new subsidiary which might disadvantage, or indeed undermine the performance of the wider group. And surely, when it comes right down to it, that is what it is paying for after all. IT

Grant Ellis is chief executive of Broker Network Holdings