Entrepreneurs take note: if you have the cash and you’ve identified the niche, you could make a break for independence. We assess the mood in the market for broker start-ups
Now is not the time to start up in business as an insurance broker. Or is it? Despite the constrained economic conditions, it’s not necessarily all doom and gloom for entrepreneurs out there looking to launch a broking business.
Granted, it is difficult to borrow money from banks, and you may find it challenging to secure agency agreements with insurers. But there is a view in the sector that both customers and insurers are beginning to look more favourably on independent brokers. Customers are trying to secure the best deal and insurers want to do business with brokers that won’t hold them to ransom when attempting to secure bigger commissions. So could 2010 be the dawn of a new age of the independent broker?
Managing director of Nottingham-based broker Russell Scanlan, Bryan Banbury believes that while the current economic conditions mean it can be difficult to get a broking business off the ground, start-ups can succeed.
“It is tough, but it seems to be a good time because people are setting up small brokers,” he says. “You have to invest a lot of time, but the evidence is that people are doing it – for example, if they’ve previously sold their business to a consolidator and they want to move on.”
However, Banbury says it will be the brokers that can draw on their own cash reserves – rather than being forced to borrow funding from banks – that are likely to flourish.
“You’ve got to have money behind you, because it’s difficult to borrow from banks at the moment. But if you can invest money for the first year, it is a good time to launch,” he says. However, Banbury sounds a note of caution, adding that it may be “difficult to go to insurers to get agencies”.
Heartland Insurance Brokers director Andrew Powell, based in Warwickshire, agrees that the prospects are bright for broker start-ups. “There’s a host of opportunities to set up under your own steam with your own agenda. People are keen to get personal service, which is lacking with consolidators,” he says.
The Institute of Insurance Brokers’ chief executive, Barbara Bradshaw, is more pessimistic. She sees the landscape for broker start-ups as being particularly harsh.
“We’re seeing vary few set-ups from a cold start, although we are seeing brokers [starting up] who sold to consolidators and are coming out of their contracts,” she says. “It’s expensive now – you have to be authorised. Ten or 15 years ago, you were not registered by the FSA. It’s also difficult to get agencies. Insurance companies don’t want to deal with small units; they have to have minimum support levels.”
While Bradshaw sees a value in brokers retaining their independence, it is not always the best option. Staying independent is an advantage, she says, if “you want to be your own boss, if you’re in a niche market and you’re producing good business”.
She adds: “If you see a gap in the market, it’s always a good time for an entrepreneur with a niche broker business. Successful brokers are often niche brokers.”
Powell agrees on the value of developing a niche area, but points out: “It’s probably not a time to be innovative. We deal with standard SMEs – there’s plenty of that business to go around. If you get yourself a niche, it pays off to stick with it.”
Bradshaw adds a caveat to this. “There are a lot of successful independent brokers, but you have to be a reasonable size to get economies of scale. If you’re quite small, you may not get the best deal.”
So does this mean it’s also a good time for well-established independent brokers to sell up? Not in Russell Scanlan’s case. It underwent a management buy-out in 2007 and Banbury says there are no plans to sell the company.
“We completed our buy-out three years ago, we made a success of it and we are looking to continue,” he says. “We think it’s better to stay as we are, as we are not beholden to anyone – we act entirely in the best interests of our clients, whereas if you’re with a consolidator you have various deals to work to.”
In addition, says Banbury, brokers looking to sell will not be able to get the same amount of money for their business as they would have done three or four years ago.
Bradshaw agrees that the sale value of independent brokers is less attractive now. It is estimated that independent brokers were being sold for around 3.2 times their brokerage income three or four years ago, but that the average ratio between turnover and valuation is down to about half that now.
Heartland’s Powell too doubts the wisdom of deciding to sell up under the current circumstances. “The multiples available for selling are going down – they are not as good as a couple of years ago,” he says. “There’s also an issue with [obtaining] finance for buy-outs.”
Joined up thinking
While Banbury bangs the drum for independence, he also believes there are benefits in joining an umbrella body such as the Unitas Alliance, to which Russell Scanlan belongs. “We share information with other brokers,” he says. “For example, we may find out about a new scheme available in Scotland that is not available in England.”
Powell believes that remaining independent rather than joining a consolidator, for instance, enables brokers to better serve their clients.
“Being independent, you have the ability to go to the market that suits the client, and you’re not governed by commissions,” he says.
He sees no benefit in joining a consolidator.
“You lose your identity, you’re giving away the business you’ve worked hard to build up, and your hands are tied,” he says.
Banbury agrees.“If you’re independent, you can make quick decisions, you can do what’s right for clients and you can be transparent on fees.”
Powell acknowledges that some brokers approaching retirement age may see selling up to a consolidator as an attractive option if they have nobody in line to assume control of the business. “There are quite a few independent brokers aged over 50 with no succession planning,” he says.
Of more concern to the IIB’s Bradshaw is the impact of the hike in rates brokers pay to the Financial Services Compensation Scheme (FSCS). Over the past two years, general insurance brokers have faced a 48-fold increase in their annual levy to the FSCS.
“It could be the straw that breaks the camel’s back for a lot of brokers,” she says. “Some of the fees are incredible and it’s causing a great deal of concern.”
Unitas Alliance executive director Mark Boucher describes the future for broker start-ups as “on a knife edge”. He adds: “We’re in challenging economic times, gross written premiums are going down as companies are going bust, and you have to have immediate credibility with a broad range of insurers.
However, he adds: “Customers are always looking for choice, and a lot of entrepreneurial brokers got caught up in consolidation and are now looking to come back to the regional independent broker model. If you develop good products customers want, they will come to you. Buyers are sophisticated and will see value.” IT
Top tips for broker start-ups
1) Make sure you have a budget
You must be clear about what income you need to generate and what your costs are, advises Andrew Linnell of Hansen Young Consulting. Costs are more predictable than income, so ensure you have enough capital to sustain your business.
2) Draw up a business plan
A business plan should show how you are going to run your business. It will provide discipline by setting out what you want your business to achieve and how you want to achieve it. If you are using external capital, you will have to devise a business plan to satisfy your investors.
3) Determine your 'value proposition'
This means being clear about why clients should buy cover from you and not your competitor. Linnell says: "Ask yourself whether you are going to be all things to all men." Be clear about what exactly you are offering your clients.
4) Decide on your marketing strategy
This will depend on the type of client you are targeting, but you need to consider whether you need a website, for example. If you do, you should ensure the cost is built into your budget, Linnell says.
5) Determine where you will get your clients from
Think about how you will generate prospects. Perhaps you could use a professional contact who can introduce you to their clients.
6) Work out how you will access markets
Consider the possibility of joining a network.
7) Find out what is needed for FSA approval
You need to be registered with the FSA, and if there are money-handling issues you will need to satisfy the requirement for a 'fit and proper person'.