Long dogged by exaggerated predictions of their demise, personal lines brokers are beating the odds and staging something of a comeback. If anything, writes Tom Flack, they have got smarter and richer.

Personal lines brokers will soon be extinct – or so the myth goes.

Given the increasingly commoditised market, steadily eroding the need for traditional broker advice, and the combination of a long period of falling rates and rising levels of consumer churn, the morbid predictions are not so surprising.

Yet the latest numbers emphatically prove that the personal lines broker is alive and kicking. For the year ended 30 June, the combined revenues of the top 50 brokers rose by 17%, up 1% on 2007.

Leading the pack are household names such as BGL (43% growth in 2007), Swinton (37%), and Kwik-Fit (19%), but the figures suggest that smaller players have also found ways to expand.

Ironically, much of the brokers’ growth has come from the source long tipped to be their annihilation – aggregators. Instead, there has been a seismic shift in brokers’ business models, turning the distribution power of aggregators to their own advantage. For the larger players this means low margins, high volumes, and profits from the sale of ancillary and additional products, namely upselling and cross-selling.

“Five years ago, a broker’s business model was to take an insurer’s rate, add 20%, and take the proposition to market,” says Ian Clark, insurance partner at Deloitte.

This strategy gave companies such as Direct Line an expense advantage, allowing them to undercut and grow their policy count while cross-selling legal expenses cover to over 90% of their client base. At £5 per policy – and with more than two million policies – the implications for the bottom line were considerable.

Brokers took note. Now, instead of uplifting the rate, they will pass it on at nil, increase or even discount it. This allows them to build up a big customer base while creating vast potential for selling other products, such as breakdown cover.

Clark adds: “Big brokers control claims. They get kick-backs from credit hire companies for replacement vehicles, and from law firms and medical reporting organisations for personal injury claims.

“It is very aggressive on-selling and kick-back based on competitive pricing. This creates reasonable value, and potentially high margins.”

Bert Main, business development director at Kwik-Fit, which has 1.1 million policies on its books, credits ancillary products for growing the business. “Upselling is a common feature. We’ve all had to take lower margin in private car and household simply to compete, but this has allowed us to employ tactical pricing.”

Though upselling has lucrative implications, some commentators – including Paul Smith, managing director of Heath Lambert’s £100m GWP personal lines arm, HLIS – urge caution.

Smith says: “The vast majority of the larger players pursue the add-on strategy, underpinned by up-selling and cross-selling. But we think this is dangerous. It’s a short-term strategy. Add-ons are expensive – more expensive than including it in the original policy. What if people stop buying them? There’s also the issue of Treating Customers Fairly, and the reliance on getting your name to the top of the [aggregator] screen.”

“Upselling is a common feature. We’ve all had to take less margin in private car and household simply to compete but this has allowed tactical pricing

Bert Main, Kwik-Fit

Despite this, over a tenth of HLIS’s 13% increase in revenues in 2007 was derived from aggregators, a total figure that could rise to 25% by 2010. Market-wide, this figure stands at over 60%.

“Five years ago, this figure was 15% to 20%,” says Matthew Donaldson, group director at BGL. “We’re now seeing a 5% increase per year.”

With ample room for further upselling, this trend looks likely to continue. Cross-selling, meanwhile, remains at relatively low, though rising, levels.

“The power here is cross-selling motor to home,” says a spokesman for the AA, commenting on higher volumes of contents insurance being purchased on the back of last year’s floods. Kwik-Fit, meanwhile, is targeting growth of a third in its household account to 80,000 policies by the end of the year.

While motor accounts for the largest chunk of growth in personal lines revenues, household portfolios are growing at a faster rate. Patrick Smith, chief executive of Swinton, says that while motor and home have grown in parallel since 2003, over the past year, half of the company’s growth came from motor, and about 30% from home.

Swinton is certainly the odd broker out, in that the hub of its retail strategy is its network of more than 480 branches. While there are benefits of having an infrastructure with such broad and personal access to clients, most observers argue that the value of the high street broker will inevitably reduce as transactions move to the web.

BGL sold its retail branch network to Swinton two years ago, but Smith insists that given the margin pressures aggregators have created, branches and call centre models still offer best profitability – especially on a scale that no one else can touch.

“We have a core of clients who may not buy their insurance on the internet,” he says. “That number has not diminished.” Half of Swinton’s new motor business and up to 80% of household is generated off-line.

By contrast, Kwik-Fit and BGL source between 85% and 90% of their total business from the web.

The top 50 brokers’ revenues are growing fast, but market share is growing slowly, and profitability, as Smith suggests, is falling: “Net premiums are growing but there has been a reduction in retail margins, including our own. As for discounts, we don’t recoup them.”

The solution is to increase the top line. “In the past five years profits have grown. It’s a role reversal in recent years. We have the challenge of pursuing volume. There is very little profit coming out of aggregators and anyone who relies on that strategy could run into trouble.”

Deloitte’s Clark adds: “Aggregators mean that brand is of less importance. But to pull volume, you have to be competitive.”

BGL’s Donaldson agrees that his operation has a volume-led strategy. “Our profits are not a reflection of the net value we have created. Not that we make a loss, but it’s less about margin.”

“Net premiums are growing but there has been a reduction in retail margins including our own. As for discounts, we don’t recoup them

Paul Smith, Heath Lambert

Kwik-Fit’s Main says that the company’s strategy, underpinned by private equity capital, means that both profit and volume are key drivers.

“Our strategy is to make year-one profit. That might hold us back in volume terms,” he says. Still, like BGL, Kwik-Fit has delivered 20% growth from new customers in the past year.

The problem is that few brokers can actually be volume players. Instead, the opportunity is to specialise, filling in the holes in their rival’s armoury – a process that Heath Lambert’s Smith describes as the reversal of the 80/20 rule.

“Some brokers are happy to go for that 20%,” says?Smith. “There are opportunities for smaller brokers on aggregators to pursue the niche, to form strategic alliances with volume players to create that extra channel.”

These brokers can position themselves to suck up consumers who elude most insurers and brokers’ risk profiles following a killer question, such as high flood risk. ‘

‘ Commentators add that there is ample room for growth in segmented lines, such as motorbike and caravan.

Be it by web, by phone or by foot, the increase in rates over the past year has boosted commission revenues for brokers, with motor climbing 6%, buildings 4.3%, and contents 3.3%, according to the AA.

“We have a linear relationship with our insurers,” says Donaldson. “As rates increase, so do our revenues.” Like many of the larger personal lines players, BGL acquires business from its insurer partners on a net-rated basis, with variable commissions added on, allowing it to benefit from any upswing in the rating environment.

And while the brokers grow, the direct insurers have scaled back.

“NU has gone backwards,” says Main, adding that bancassurers have also struggled. “They have talked a good game. But they will have to change their strategy.”

Donaldson adds: “Many of the banks are tied into solus deals with insurers that don’t have that competitive footprint. Those with a panel do well.

“The direct insurers are looking to maintain profitability, which means shrinking in size. With their limited footprint, they are unable to grow.”

Still, some direct insurers – most notably Swiftcover – are growing fast. Direct Line, despite losing volume in its motor book, achieved substantial growth of its household portfolio in 2007.

“We offer insurers distribution capability. They, in turn, choose their underwriting footprint where they can compete
and do well. It’s win-win.

Matthew Donaldson, BGL

Heath Lambert’s Smith suggests that because fewer mortgages are being bought at the moment, banks and building societies’ opportunities for cross-selling are more limited. In 2006, bancassurers controlled around 28% of the household market and direct insurers 17%, according to the ABI.

In the motor market, direct players had around 45% market share in 2006, up from 38% in 2003. With that figure now starting to fall, opportunities for partnerships have been created as insurers look to strip out costs across their businesses. Deloitte’s Clark says that insurers are happy to sit behind brokers because they, too, save on marketing spend.

“Insurers will always want to underwrite,” says Smith. “They accept between 60% and 70% of their leads. We can take the other 30%. That creates opportunities for schemes that we can manage operationally on their behalf.”

The move towards the partnership approach been demonstrated recently when Junction, the affinity arm of BGL, inked a ‘lead-off’ deal with More Th>n, the direct arm of RSA. Leads that fall outside More Th>n’s risk profile are passed on to Junction, and its panel of insurers.

BGL credits Junction – which has more than one million policyholders under the umbrella of brands including the Post Office and Marks & Spencer – with driving the company’s growth over the past year.

“We offer insurers distribution capability,” says BGL’s Donaldson. “They choose their underwriting footprint where they can compete and do well. It’s win-win.”

He adds that consumers respond well to stronger brands, which is contributing to the move away from price.

“It’s not as one-dimensional as cross-selling and upselling,” he continues. “We estimate that 40% of consumers are choosing their policy based on factors other than price,” says Donaldson.

He appears to be right, with the Post Office and M&S ranked second and fourth in terms of absolute growth last year in the motor market. Budget came eighth, according to research by Consumer Intelligence. In terms of relative growth, the Post Office and M&S ranked second and third, and the two brands also featured in the top 10 household insurance lists.

So why aren’t all the big brokers piling into the affinity market?

“Some brokers will perform well,” says Kwik-Fit’s Main. “But you need a huge amount of capital. Margins are so tight at the moment there is no value in us getting involved. And there is no long-term guarantee in those types of deal.”

Indeed, when it comes to personal lines, there appear to be few guarantees of any kind. But, as Junction managing director Peter Thompson puts it, big brokers will have a big part to play in the future.

“The direct writer model that was once so ground-breaking is now dead.

“The winners today are those that can provide quotes for a wide range of customers and do so competitively.”

On aggregate - a win for brokers

A year ago aggregators, already controlling over half the personal lines market, were treated as a threat to brokers. The reality, however, is they have created opportunities at both ends of the broking spectrum.
First, they have lowered barriers to entry into the market. This is key for smaller players with limited marketing budgets, while also allowing volume players to grow and cross-sell. The fundamental importance of this was highlighted earlier this year when one site banned brokers from cross-selling products, triggering outrage.
Aggregators provide brokers with a wealth of information on both consumers and competitors. This means schemes with underwriters can be tailored to compete more effectively with direct insurer rivals.
Consumers benefit by getting an idea of a good price and then going to a broker to buy the policy, at which point revenue-boosting ancillary products can be bought.
Though other personal lines, including travel and pet, are yet to take off online, brokers and analysts agree that it is merely a matter of time.
Despite the focus on price, there are also signs that consumers are moving away from price-driven purchases and towards the purchase of more complex products online.
The flipside of the coin is that aggregators are driving high rates of churn, with over half of ‘aggregator consumers’ having switched insurance provider in the past year. Heath Lambert’s Smith says: “I don’t think anyone has stabilised their business model. We were all too optimistic about benchmarks for retention.
“If you make it easier for customers to change their policy, you will lose customers. You live by the sword – and die by the sword.”