You don’t have to look far for evidence of a country racked by financial crisis and cutbacks, but this is the very environment in which independent brokers are thriving
With their doors locked indefinitely, former Woolworths and Threshers stores, along with abandoned local newsagents, now blight the UK’s high streets. Meanwhile, one-man band professional services firms based in family homes – set up to take advantage of the boom years – are struggling to make ends meet.
Nearly 2.5 million people are unemployed, a figure likely to grow as the coalition government’s spending cuts strike. Up to 90,000 businesses will go into receivership, administration, and compulsory or voluntary liquidation in the period between 2009 and 2012, according to research by accountancy BDO Stoy Hayward. As ever, this is disproportionately hitting small businesses, which simply do not have the balance sheets to survive major contract withdrawals or severe downturns in demand.
The sheer scale of those business failures, coupled with the stormy economic climate, means that Britain’s 3,000-plus independent brokers should be particularly concerned about their immediate future.
Yet the sector has proved remarkably resilient, even nimble, through this most dire of downturns. Anecdotally, most small brokers are optimistic about their prospects, even taking advantage of slip-ups made by their big-name, big-bank-balance rivals.
To kick off Insurance Times’s month-long Best of Broker focus on independent brokers, we explore the key challenges facing the sector.
Strange as it may seem, it could be that independents emerge from the economic crisis in better shape than any other sector of the insurance industry.
Certainly, the broader industry’s struggles cannot be blamed on the indies. The payment protection insurance (PPI) scandal has led to a 58% increase in complaints over mis-selling of the products in the past year, with 49,000 new grievances. The vast majority of insurance brokers do not sell
PPI, yet under the FSA’s Financial Services Compensation Scheme (FSCS), the sector will have to provide £61m to cover the likely compensation costs in the current financial year.
Again, this hurts smaller, independent brokers far more than their bigger peers. Peter Smits, managing director at 25-year-old Hertfordshire-based independent Ashbourne Insurance Services, says his FSCS fee has increased 157%, leaving him to pay a five-figure sum this year.
“That’s a direct consequence of PPI,” he fumes. “Well, I never sold it, so I’m a bit miffed. When this [economic] crisis started, we always knew it would be modest, prudent businesses that would be left to foot the bill. Are we going to have to continue paying for the mistakes of others?”
Unfortunately, as things stand, the probability is that yes, brokers will have to keep mopping up the mess. But, on the plus side, the quality of advice offered by local brokers is being recognised as a result of failures such as PPI. As Smits puts it, they can “see the whites of the eyes” of their customers.
Local brokers can better understand their needs than online aggregators, which Smits insists is “a model that doesn’t work”.
Paying the price
Reading-based Macbeth Insurance Services, founded 18 years ago, is a typical family-run broker. Paul Macbeth has worked at the company, which his father founded, since he was 14 and is now its managing director.
Even for an independent with all that experience, the FSCS fee hurts. Macbeth says that although he has not had his levy demand through yet, he believes it could increase by up to three times as the FSA tries to fill the compensation pool. “That’s a quite a sum of money,” he says, pointing out that his “stereotypical small broker” has a gross written premium of just £1.7m.
Macbeth also points to softening rates, particularly in commercial lines. Yet, he insists that the business has continued to grow even through the recession.
He says this is largely because the group is part of Bluefin’s broker network, which helps the individual firms work together to negotiate better commission rates with insurers. “We joined the network in 2004,” Macbeth says. “It would be very difficult for brokers of our size to grow without being part of one.”
Matthew Stringer, managing director at Basingstoke-based Bloomhill Insurance Solutions agrees. He believes that being part of a network has saved the business £200-£500 a month, mostly through the administrative support provided, such as IT and compliance.
However, at least one month of that saving has been eradicated by what Stringer calls “ridiculous bloody FSCS fees”, which will increase for his firm from £600 to £1,150 this year.
Nevertheless, the overall savings meant that it took just 18 months for Stringer to be able to draw a salary, and now he earns as much as he did when he was directly employed. Plus, there is the bonus of the residual value of the business.
To network or not
Neil Grimshaw, who founded West Yorkshire-based independent Ravenhall Risk Solutions four years ago, is less convinced about joining a network. While he acknowledges some of the advantages, he thinks joining a network strips a broker of some of its independence, particularly if it joins early in its life. At this stage, a broker might not have decided the direction it wishes to take and is therefore easily led by whatever biases there may be within a network.
“It’s more difficult to have independence if you join a network straightaway. It’s better to look to a network to assist you later down the line,” argues Grimshaw, who concedes that network bosses would disagree with this assessment.
Ravenhall is certainly doing okay by going it alone: profitable every year since it started and not saddled with any debt. Grimshaw suggests that opening a brokerage during a soft market means the group has immediate deadlines.
There is no fat on a business, as there would be in one set up during the boom times. Equally, customers are turning away from bigger brokers as they look to save money in the long term – advice that local firms can offer more easily.
“In hindsight, you can only go one way: forward,” Grimshaw explains. “We couldn’t have had a recession at a better time, if you can say such a thing.”
Grimshaw chuckles that one person who wouldn’t agree on his views of joining a wider alliance is Grant Ellis, chief executive at the Broker Network, which has more than 250 independents on its books.
If nothing else, though, Ellis does make a robust defence of the indies, pointing out that it is the biggest brokers with significant overheads and hundreds of employees that are closing branches.
Ellis points out that smaller brokers can adapt to market downturns more quickly. If, for example, income falls by 5%, the owner of a small broker can choose to simply not draw a salary temporarily or not hire an extra person. A larger business cannot make any serious savings by similar adjustments.
“Small brokers are fast; they are fleet of foot,” Ellis enthuses. “They are a very resilient bunch.”
They can also find that their business is counter-cyclical. Customers become more discerning, looking to save money, which is why a smaller broker with a personal touch can pick up new customers.
Continuing to beat the drum for the industry, Ellis says that the recession has proved to be “the catalyst towards new technology”.
As brokers shared the spoils of growth, there was no need to improve their efficiency through top-notch data sharing. But as times get tough and insurers’ data systems suffer from a lack of investment, indies are upgrading.
“[As a sector] we’re making progress 10 years after we should have invested in new technology. Behaviour doesn’t change unless it has to, and at times like this people have no choice but to become more efficient,” Ellis argues.
One way insurers are being efficient is by getting poor-performing units off their books. NIG has decided to exit personal lines to concentrate on commercial, as it believes the former will not “sustain a sufficient level of profitable growth to meet our business requirements”.
NIG’s move has affected 3,000 brokers. North London indie Topaz Insurance Services’ managing director, Richard Mikula, is seething. He says that NIG is accepting renewals for a few more weeks, but the rate has increased drastically. “People aren’t going to agree to that – this is just an easy way of getting shot of personal lines quickly.” Mikula says that he is desperately trying to get new policies in place so that he can move over his existing clients.
An NIG spokesman said that the company could not comment on this example, but argued it was “not typical of the increases we have introduced”. The spokesman also pointed out: “Car insurance premiums have risen substantially over the past 12 months due to factors such as increasing bodily injuries claims.”
Whatever the facts of that particular case, generally brokers say they can sense an improvement in the big insurers’ attitudes towards them. It seems there is a realisation that the commoditised model, through online aggregators, cannot be expanded throughout broking and should only be used for simple, quick products such as travel insurance purchased at the last minute.
“They know their market and I continue to be impressed by independent brokers,” says RSA managing director, broker, Paul Donaldson. “There is room for a number of different distribution channels, but the independent guys keep the rest of the market sane. People want to continue to own their own business, have their name above the door and take that pride in what they do.”
Donaldson might have always held this view, but other insurers had been swayed by the sheer size of the big consolidating insurers. Chris Blackham, a former broker and founder of private equity-backed general insurance consultant Endorphin, says: “Independents’ main competitors two to three years ago were consolidators, which had much more buying power. If you walked into the main board of an insurer, you would find that they were mainly talking to consolidators.”
However, the consolidators have been left with high levels of debt to fund their acquisitions, which must now be paid off as times are lean. Brokers that willingly sold in the hope that there would be a bonanza from a future flotation are disappointed – stock exchange listings are not profitable proposals in a time of struggling equity markets.
“Consolidator brokers have found that they have to sell products at vastly inflated prices to clear debts,” Blackham claims. “The great thing is that some good people have gone off to set up their own businesses. At a local level, they can charge a fee commensurate with the job. They can provide low cost and a real personal service. There’s a good opportunity for independent brokers now.”
The consolidators were appropriate for a different economy, when mergers, acquisitions and flotations dominated the market, Blackham argues. He and others lookng to support fledgling businesses will hope that the economic circumstances favour smaller players that can track down a cheap policy and help provide value for money by finding clients the opt-outs or opt-ins for an individual’s needs.
This more austere environment will be defined by the comprehensive spending review in October, when government departments could have as much as 40% slashed from their budgets.
Thirty-four firm network Brokerbility’s chairman, Ashwin Mistry, believes that cuts in areas such as crime and justice and flood defences will mean there will be a need for more insurance against damage.
As maintenance investment is cut, so local authorities and individuals will need to increase their cover to pay for potential repairs.
“There will be additional opportunities for local brokers under the spending reviews, as there will be more contracting out [for example, by councils],” Mistry says. “We are anticipating more and more business for our brokers.”
The independent broking sector is hopeful, then, that it has survived the worst of the recession in good shape, while any further hits could, perversely, translate into more business for the local specialist.
The boarded-up high streets look desolate, and a wave of strikes threatens to disrupt Britain as the spending cuts are revealed. But independent brokers still stand to regain their pre-boom eminence. IT
Mark Leftly is deputy business editor at The Independent on Sunday.
The independent broker: surviving and thriving
Nobody needs any reminders of how tough times are out there. And with upcoming public spending cuts threatening to tip the UK into the second leg of a double-dip recession, confidence remains fragile in the local communities that many independent brokers serve.
However, the death knell of the independent broker has been sounded before, in spite of which a host of firms continue to survive and thrive.
This week, Insurance Times begins a four-part series 'Best of Brokers', which focuses on the independent sector.
We will look at the issues of concern for the smaller broker, such as technological advances and how to get a better deal from insurers.
We will also examine what small and medium-sized enterprises, which many independent brokers rely on, want regarding their insurance needs.
And each week we will turn the spotlight on a different region, starting this week with the north of England and Scotland, seeing how the independent-national dynamic
is playing out in different parts of the country.
Most importantly, we will celebrate what independent brokers do best: providing high-quality advice based on an intimate understanding of their customers' needs, which no computer programme or website will ever replicate.
The histories of companies like Google and Microsoft - both set up during downturns - show that hard times can breed innovation. For every consolidator king plotting his next purchase, there remain many more brokers dreaming of going it alone - and succeeding in their ambition.
David Blackman, deputy editor