James Sullivan looks at the pitched battle between brokers and direct insurers now being fought in the commercial property arena.
The march of the direct writers into areas previously seen as the preserve of brokers has been a source of continued anxiety in recent years. The biggest threat posed by the direct writers has been the commoditised policy for small to medium-sized businesses - potentially a goldmine given the volumes involved.
However, there are other, more distinct commercial areas which are now also increasingly under threat. The one which is currently worrying some brokers is the commercial property arena, for so long the bread and butter business to commercial brokers.
Is the deluge likely to arrive if this business line starts to flow away from brokers?
Mike Townsend, divisional director of Oval Insurance Broking, spells out the real threat: "In recent years more and more direct writers have turned their attention to the commercial property insurance market.
A number of commercial property products are now available on a direct basis from a cross-section of insurers. The underwriting parameters and scope of cover is usually pre-determined and cover is only available provided that the appropriate boxes can be ticked."
However, that the scope of cover provided by such writers is more limited is hardly surprising. After all, this is a relatively difficult marketplace at the moment. The commercial property insurance market's gross written premiums declined by 7.4 per cent in 2005, following a slowdown in premium growth rates the previous year.
And perhaps more importantly, according to the same research, commercial property claims costs increased significantly in 2005, following a benign year in 2004. Overall, claims costs rose by 69.1% in 2005, driven by a rise in all risks except theft. Claims costs resulting from fire and weather damage soared and, as a result, business interruption costs also increased.
So cover not provided by a broker can be rather limited, but still useful, according to Townsend. The products on offer from direct writers can thus be attractive to the sorts of property owners that have "small straightforward insurance requirements that fit into the appropriate underwriting pigeon-holes".
But the real concern with such a service, he points out, is that the property owner receives no independent professional advice and is provided with a quotation - only if they have ticked all the right boxes - from the sole insurer approached.
But how concerned should brokers really be? According to Townsend, at the moment there are several factors working in their favour. "A competent commercial property broker should have no major worries about this competition as their role goes well beyond the mere placing of insurance cover," he says.
"The provision of professional advice is a crucial element of a broker's service delivery and without this input a property owner is left to make his own decisions on the most appropriate level of insurance protection. On the other hand a broker with a property market focus will fully understand their client's business process and the key objectives of the insurance programme.
"Other features of a broker's service delivery include administrative support, the vetting of contracts and leases and advice of any other related areas of insurance including construction risks and liability issues. It is a brave property owner indeed that ventures into the insurance market single-handed."
Indeed, some people in the market take the line that there isn't really a threat to brokers at all. Stuart Reid, chief executive of commercial property brokers Stuart Alexander, is reasonably relaxed about the issue. "We don't see direct writers getting involved at all," he explains. "Commercial property is either dealt with by managing agents or large firms, so it's dealt with business to business. The internet isn't really used."
Nonetheless he recognises that if the current situation were to change significantly, it would be a concern: "Are direct writers going to take over the world? No. Are they going to do certain things? Yes. And commercial property is one of the golden eggs of the insurance world, with a high volume and low claims. But at the moment we don't see direct writers giving us any cause for concern at all."
Yet for others such a lack of concern is itself the problem. According to Simon Burgess, managing director of broker British Insurance, direct writers taking a bigger share of the commercial property market is merely a "natural extension" of what has already happened with other lines of insurance.
He blames such encroachments on the brokers themselves: "They have allowed the competition to come in because they have not been proactive. There are no real professional qualifications for brokers. There is no kitemark of quality, so it all comes down to price."
Yet the price issue - albeit in another form - could actually be the brokers' salvation in the next few years in the opinion of Tony Boobier, vice president, international solutions, at property specialist Marshall & Swift.
He says that with underinsurance levels of up to 50%, one of the big issues for brokers is calculating the rebuilding cost - for both residential and commercial properties - which directly impacts on premiums. This will be a major issue for the market as the cost of rebuilding in future is likely to be higher, affecting premiums.
Level playing field
Thus a crucial tool for commercial property brokers in their battle with the direct writers, in his opinion, is to use impartial, third-party data on rebuilding costs. He says: "Similar challenges were faced by the Canadian broker market. They recognised that the only way to keep a level playing field on rebuilding costs was for all brokers and insurers to use the same independent, impartially created data. Calculating the correct level of insurance was seen to be a 'golden truth' for brokers and insurers alike, and that this was best left in the hands of impartial experts."
Whether third-party data alone will be enough to aid the broker in this key area will remain to be seen. Perhaps the vagaries of the marketplace, with b2b purchasing the norm, will ultimately save them from the encroachment of the direct writers. But if price wins the day, a much tougher fight will yet have to be fought.