It’s a tough time out there, what with a persistent soft market, the country’s slow creep out of recession, and current political uncertainty. The first of our AXA roundtables tackled these topics and more and there were some interesting conclusions
The first of a series of roundtables hosted by AXA, for regional brokers across the country, was held in the Bank restaurant in Birmingham. The event sparked a lively discussion on a variety of issues affecting the insurance sector, including the economy, rates, political change and the future of the independent broker.
The delegates first tackled the problems posed by the economic climate. They all agreed that while the recession may have been declared officially over, it was hard to be optimistic about the foreseeable future. The Heartland Group account executive Andrew Powell said: “I see a lot of people – about 10 clients a week – and everybody chuckles when you say, ‘the recession has ended’. It is an amusing thing; it has become a bit of a joke.
“I do not think that anyone is fooled. Just because the recession has ended, things do not instantly change the next day; it has had a massive effect. There was a big build-up to it a couple of years before it hit, and presumably there will for a couple of years afterwards. We are just trying to manage it as best we can.”
Meanwhile, Morrison Insurance Solutions’ managing director, Don Morrison, said that while the statistics may signal the worst is over, it would take time to rebuild shattered business confidence.
“Sometimes there is a discontinuity between the underlying reality and the confidence that people have. The recovery will inevitably come, but to try to second-guess that when you are investing in a business is difficult. The tendency will be to retrench.”
AXA commercial managing director Anthony Middle warned that while there had been a sign of returning confidence in late 2009, this could evaporate in the coming months. “People were just delighted to be getting out of the back end of a really tough year. There is a reality check now about 2010; there is a realisation that there is another decent stint to go.”
Wilson Organisation’s group financial director, John Steele, pointed out that brokers were likely to continue to feel a knock-on effect from cuts in public expenditure. “There are some concerns going forward. We have got a large exposure to construction of property, for example, and there are concerns that there will be further cuts to public expenditure after the forthcoming election, which will have a knock-on effect in the private sector. I do not think anyone is very enthusiastic about the immediate prospects.”
He also pointed out that the withdrawal of the planned debt referral would put extra pressure on people who owe VAT or tax while increasing property prices, which could encourage lenders of security to ‘pull the plug’.
Growing political uncertainty was also a cause for concern. Brokerbility’s managing director, Ashwin Mistry, said: “For the first time, this year we have uncertainty. The Conservatives were aggressively ahead last year [but] the differential between Labour and Conservatives has narrowed considerably, and yesterday for the first time they were talking about a hung Parliament.”
Mistry added that this lack of clarity could lead to under-inflation, rising interest rates and uncertainty over investment and borrowings. “What is happening now is that this indecision is causing a lot of grief, and as business owners ourselves around the table, we have got to make some decisions: do we get more staff? Do we get new premises? Do we invest in IT? What do you do? That is one of the fundamental questions to answer,” he said.
Moreover, the participants believed this political uncertainty was contributing to and helping maintain a soft market.
“It is accentuating normal soft market behaviours, the usual amount of dual pricing and competitiveness,” Steele said.
Mistry added that insurance was a prime target for those looking to save costs. “If people knew what they were doing they could plan, but now you know there is potential trouble ahead, so everything is up for grabs.”
AXA’s Middle pointed out that increased capacity in the marketplace could also prevent rates from moving upwards. “Another factor is the relative attractiveness now of the insurance market compared to other investments, so actually the capacity available in the market right now is perversely massive.”
Some participants agreed that it was becoming impossible to forecast market cycles, while The Heartland Group’s Powell suggested that it was no longer useful to think of the market in cycles.
“Is it not conceivable that hard and soft markets are a thing of the past? We have been in a soft market for so long – is it a soft market any more? Is it just the market?”
Mistry also felt that such labels were becoming redundant. “The question we have to ask is: why do we have to label this a hard and soft market? It is demand and supply.”
Steele felt that reactions after the fall of insurer Independent had a role to play in extending the duration of the soft market, however. He predicted that a hard market was now imminent.
“There was an overreaction when the market folded in 2001; insurers jumped in and doubled their rates or whatever, and also that hard market lasted longer than it should have, perhaps by a year,” he explained. “All those profits and the reserves that went along with them have been released, maintaining false underwriting results, and, with every day that passes, we are getting a day nearer to the next hard market, which is encouraging more capacity into the market.”
Meanwhile, Morrison pointed out that it was difficult to concentrate on quality when clients were increasingly focused on price. “I have known a couple of clients as a broker for a long time, and I have tried to preach value, with limited success. What the client says in the end is: ‘Yes, I want value, and at a cheap price.’”
Powell believed brokers needed to be firm with clients. “It is absolutely essential to maximise earnings in a period like this; if you let it all walk out through the back door, then you will run out of business. You have to test the loyalty of your client – and specifically the right sort of client – with the added costs to administer their accounts,” he said. “You have to be brave. As a rule, if they are good enough clients, they understand. You cannot just assume that they are going to walk because you want to charge them that extra fee. They will see that value.”
The conversation then turned to the relationship between brokers and insurers. Mistry believed both needed to look more closely at business models and to become more discerning when selecting whom to do business with.
“What insurers have got to do is to look at the broker and say: ‘What business are you in? Which areas are you actively trading in?’ And then ask themselves: ‘Does that model fit the model that we want to write?’,” he said. “Those are the sort of areas that we need to concentrate on: the interface between broker and client, and the relationship between the carrier and broker, needs to be more defined and refined.”
The participants then turned their attention to the thorny subject of commission disclosure. Morrison felt that transparency was of major importance. “Clients do not realise, half the time, the things we do for them. I think the key is transparency. It is absolutely straightforward: ‘This is what we do for you. This is the value that we give you. This is what we get for it.’ I have never had an argument with a client when we have presented it in that way,” he said.
Steele pointed out that transparency was not an issue for many clients, however. “How many clients have asked you how much money you are earning when it is not on a fee basis? I cannot think of many in the last 25 years, to be honest.”
But all the participants believed that the future looked bright for the independent broker.
AXA’s commercial lines distribution director, Keith Hector, suggested that independent brokers could potentially benefit as the tide of favour turned away from the consolidators. “Is the opportunity for the independent driven by the fact that the independent broker is managing their business – which is looking after their clients – whereas some of the consolidators may potentially be managing their shareholders?” he asked.
Mistry also believed that independent brokers were in a prime position to profit in the coming years. “In terms of whether there is a future for the independent broker, I think it is absolutely brilliant. What is going to happen in 2012 in terms of capital markets and who is going to take a stake in what – there will be starbursts and opportunities. Brokers are survivors. All of us in this room, regardless of condition, are survivors.” IT