The US sub-prime crisis is starting to have an impact in the UK, so how will this affect brokers? Caroline Jordan asks six insurance professionals for their opinions
The credit crunch has started to bite: two months after the crisis hit the US sub-prime market, analysts are warning that hundreds of broker jobs in the UK insurance market are under threat.
Add to that the new difficulties of obtaining credit, which are particularly tough for a market going through an M&A craze, and a heightened scrutiny on brokers’ books coming from insurers, and a very big problem emerges.
Recently, mortgage broker APS went into administration. Managing director Peter Guntrip said: “Trading profitability has been difficult for our sector for some years But, lending restrictions following the credit crunch proved the last straw.”
Although the credit crunch has its roots in US dodgy lending practices, its repercussions are going to be wider than the mortgage markets.
The availability of funds, borrowing and defaults all impact on a broker’s business – and this crisis is far from over. Some believe worse is yet to come.
So, should brokers be expecting minor ripples or a tsunami? And, for those thinking of selling up their businesses, have they missed the boat or can they still expect a good price?
Insurance Times asked six experts from different sections of the market what they believe the credit crunch will mean for brokers.
1. Biba technical director Peter Staddon
Staddon warns: “As the crisis bites harder, then certainly this could affect the UK trading position.” In particular, this could mean an early ending to the soft market. “When the natural cycle comes to an abrupt halt due to unforeseen circumstances, then that has a more devastating effect. Insurers could be forced to amend their rating structure again, after taking the hit from the flooding. This would have an effect of higher than average rate increases or exclusions.”
Staddon believes UK businesses need to do all they can to attract investment: “If the UK market is held to ransom by yet another US failing, then investors would be looking at our economy and could start to question its viability to stand on its own feet.”
He sees further implications for brokers looking to make acquisitions or otherwise plan for their futures: “As the credit crunch tightens this could have an effect on both the acquisition trail of some companies, and on any succession planning, where employees wish to take some equity within a business but find it harder to obtain the funds. This could pave the way for the larger consolidators to move in and take control of the middle market.”
2. Paul Dickson, chief executive of Dickson Insurance
Dickson believes the credit crunch will have a big impact on brokers. He believes insurers are also going to put in tighter credit checks for brokers and reduce the number they have agencies with.
“There’s going to be less money around, it’s as simple as that,” he says. “Capital access for brokers has been too easy. Now there will be far more checks when it comes to borrowing.” He agrees the credit crunch could precipitate a hard market. “There has been so much talk about it, ‘ ‘ but we are already seeing signs and there could be marked rate increases by summer.”
3. Aon technical director Tom Sheffield
Sheffield foresees implications for larger brokers in the UK that may well have clients with US interests. “There are likely to be long-term directors’ and officers’ claims linked to the sub-prime sector and that will impact on future provision of cover for financial services.
“Professional indemnity cover will also be affected and I know underwriters will be looking at putting in more restrictions. Brokers will obviously be looking to offer clients the widest possible terms and so there will be a lot of negotiating going on.”
He emphasises that, while the major claims may occur in the US, the UK will be impacted by the shockwaves. He believes all financial services will be under increased scrutiny.
“The role of hedge funds has also been called into question and whether they exacerbated the problems. We will see more regulation in this area and, when that happens, there will be additional cost. Certainly in the US, there are going to be stricter standards in lending.”
4. Simon Burgess, managing director of payment protection specialist (PPI) British Insurance
Burgess offers a different point of view – for his sector of the market, the credit crunch could have some benefits. “From our perspective, we think more PPI will be sold because of the economic uncertainty,” he says.
He adds that if it is tougher to obtain funding or agencies and some brokers struggle to get by, then he has limited sympathy.
“Money will be available to those that have expertise. I don’t see Towergate struggling to obtain funds as its recent purchase of Open GI shows.”
He argues, controversially, that tougher conditions will sort the wheat from the chaff. “Despite regulation, there are still a lot of brokers out there who are sitting on their hands. They’re not adding value and their days are numbered. They should give up broking and become estate agents.”
5. Stuart Reid, chief executive, Stuart Alexander
Reid believes the credit crunch will force brokers into making some difficult decisions about their future. “Be acquired, join a network or be niche,” he says.
And, for those looking for a network, he says Layton Blackham Broking Solutions – part of his company – is undergoing a revamp.
“In the past I’ve bought businesses and my company was acquired by AXA’s Venture Preference arm. And, while I’ve enjoyed being at the sharp end as a smaller broker, this is not the time to be a small generalist. There’s no stability.”
He says small brokers are a resilient bunch, but trading conditions could worsen and their income may reduce.
“Beyond access to funding, if the FSA makes commission disclosure mandatory, this could cause further problems. Added to this, insurers are finding it increasingly uneconomic to service smaller brokers.”
And as for those brokers that believe their earnings will be pushed up by a hard market, Reid takes a contrary view. “A lot of people are saying the hard market is round the corner. But, you have overseas insurers in the UK that are hugely competitive. One big US insurer is particularly aggressive in its pricing.”
6. Margarita Rodriguez-Piza, partner, Mazars
Rodriguez-Piza questions the belief that the credit crunch will have an impact on rates. “In respect of the soft rate environment, it may be that the much awaited increases in rates for 2008 may not crystallise, in which case, given how disciplined brokers have become during the past three years, they should be able to continue to manage.
“In fact, most brokers we have spoken to have maintained an assumption of flat or declining rates for their next year budgets.”
Rodriguez-Piza adds: “Banks make lending decisions on cashflow fundamentals and this is not going to change. Interest expense levels will increase by 1%, but this is unlikely to have a major impact. Also, covenants will be more stringent, but it could be argued that’s not a bad thing.”