Brokers are anticipating further market consolidation and most are saying the market is already starting to soften, according to a recent survey by Mazars and Biba. Michelle Hannen reports
The vast majority of brokers say the broking market is set for further consolidation over the next 18 months.
Ninety-five per cent of the 217 brokers who respondent to this year's Mazars'/Biba Insurance Broker Industry Survey said that the number of brokers would decrease over the next 12 to 18 months, while just 4% said
broker numbers would remain unchanged.
Mazars head of insurance Robin Oakes says the accountancy firm, which has been involved in seven deals over the last year, is seeing a huge amount of activity, talking to more than ten brokers looking at either buying, selling or getting their businesses valued. The chief executive of broking consolidator Oval, Phillip Hodson, agrees that consolidation will continue, but says it could be 12 or18 months before a lot of transactions are finalised. He says: "Lots of brokers have lots of talks. There's a lot of indecision."
Hodson believes the most significant find is that the market cycle has turned. More than 50% of those surveyed said the market was already softening. The survey report noted that the industry was developing a trend of shorter hard markets, with longer soft markets.
"It is important that all the players work together to ensure we don't hit the problems of the past," Oakes says. But some brokers were more optimistic, with 20% saying the market would remain hard for another one to two years.
Given market conditions, Oakes expresses surprise that 64% of brokers said they would grow by increasing market share, and 30% said they would grow on the back of overall market growth. "Only 30% believe new product development is something you should be addressing," Oakes says.
Regulation was found to be a concern for respondents, with 67% of those surveyed saying that the work required to satisfy regulation was too onerous. More than half said that complying with the FSA's requirements would cost more than they originally anticipated, with 85% saying compliance would have a negative impact on profits this year.
The true cost of regulation continues to be heavily debated, with 41% of those surveyed estimating the impact to be between 5% and 10% of profits, a figure the report described as a "realistic estimate". But some brokers could be in for a rude shock: 44% thought the cost impact of regulation would be less than 5% of profits.
The FSA had failed to convince brokers that regulation would be of benefit to their clients as 43% of brokers said it would have no effect on clients. But Oakes says that the FSA seems to have succeeded in "winning the hearts and minds of brokers", as 46% of those surveyed said regulation would have a positive effect on the UK insurance industry, up from 37% last year. Hodson says: "Regulation will be a benefit. It's overstated as a reason for merger or sale."
This determination of brokers to go it alone may explain their negativity towards networks. Almost 60% said they would not consider joining a network, up from 37% last year, while 16% weren't sure. Just 27% of respondents said they were either current network members or would join one, down from 39%. Merging with another broker has also lost some of its attractiveness, with 52% responding that they would not merge, up from 35% in 2003. Just 29% said they would consider it, while 17% were unsure.
Succession remains a troublesome issue, as 55% of respondents said they did not have a clear policy on developing their team. In order to ensure the business continues, 45% said they would promote from within while 25% said they would recruit new management. Oakes questions whether there is enough
talent in the market to satisfy this demand. Just 9% considered a management buy-out a viable option, compared to 31% who said their succession plan was to sell up.