Medium-sized brokers are facing a profit squeeze and a tightening of their credit terms as insurers use the shortage of underwriting capacity to radically change their approach to trading with intermediaries.
These are the bleak findings of an in-depth survey by merger and acquisition specialists IMAS of 70 medium-sized brokers with a turnover of between £3m and £10m.
But IMAS found the £400m sector was leading the drive for consolidation. Medium-sized brokers are buying up smaller brokers, particularly those with a turnover of less than £1m, as insurers focus on brokers with a premium income of more than £1m.
Report author and IMAS director Oliver Laughton-Scott said a sharp divide was opening up between brokers with a turnover of more than £1m and those with less.
“There is an increasing pressure to consolidate, and while smaller brokers are as keen to partake in this process they do not have sufficient fire-power to compete.”
He said that brokers in the UK retail commercial sector were facing the toughest market conditions, despite a recent hardening of rates.
Laughton-Scott said: “Given the highly competitive nature of the market, we anticipate that commissions will come under pressure and the drift towards fees will be accelerated.”
The majority of growth in the sector was acquisition-driven – organic growth for individual companies very seldom exceeded 10%.
“The brokers in the survey have been buying other brokers and integrating them into their existing operations to extract the maximum cost savings,” said Laughton-Scott.
In contrast, acquisition activity in the London market was very muted and profit margins here are actually widening. This is because the ability to strip out costs in this sector is less than in the provinces, as business is often attached to individuals.
The personal lines sector, meanwhile, is becoming more polarised.
Large national brokerages now own the majority of high street brokers and are gradually buying up smaller personal lines brokers.
Almost all those personal lines brokers in the survey have developed telephone-based niche operations.
This is a trend that IMAS describes as being driven by hardening rates and mainstream brokers exiting specialist lines.
Laughton-Scott said he expects direct writers to increase their marketing spend in 2001. But he believes that this will only lead to a small migration from traditional brokers as most direct writers cannibalise each others customers.