Brokers have faced threatening market changes for many years and came out stronger, so the arrival of the consolidators should be welcomed. Simon Burgess explains
The problem with change in any sphere of life is that people are always more likely to fear change rather than embrace it. This blinkered approach refuses to recognise the advantages that change often brings.
This is particularly true in the business world. It frequently takes a long time for a revolutionary business concept to be welcomed and built upon by one's peers.
Nowhere is this reticence to embrace change more pronounced than in the insurance sector. Think back on all those fin de siècle moments that were set to spell the end of the road for the broker, but instead turned out to offer new opportunities.
There was the advent of the direct players, the internet, and the entry of the supermarkets into the insurance sector to name just a few. Each was believed to pose a threat to the continued existence of the broker.
But the threat as perceived never materialised. Most brokers simply adapted their offering or embraced the technology to offer a better service to their clients.
It would now appear that we have reached another defining moment in the history and development of the broker. This has been brought about by the success of the consolidators and aggregators whose models are feared by many.
Indeed, if you were to believe some commentators, we have not had such a threat to our existence and way of life since Hitler and his henchman were supping schnapps in Cherbourg and contemplating which room to have in Buck House.
This was exemplified by the furore that surrounded Broker Direct's recent acquisition of Bolton-based broker Greenhalgh & Gregson. This level of excitement was difficult to understand and appeared to be a knee jerk reaction to yet another market acquisition.
Except this time it was possibly more difficult for brokers to accept as it was made by a network that was established to support brokers. In doing so, Broker Direct was only seeking to protect its business and seeking to support the broking sector at the same time.
It's no good brokers burying their heads in the sand and hoping that the trend to consolidation will simply disappear. It won't.
Market analyst Datamonitor believes that broker consolidators could control 13.7% of the total UK broking market by 2010.
Leading commercial lines consolidators, which include Towergate, Oval and Smart & Cook, currently control 8% of the market, equivalent to £3.4bn in gross written premiums (GWP).
AXA's recent acquisitions of Layton Blackham and Stuart Alexander (and latterly Smart & Cook) are a clear signal that the major insurers fear being squeezed in the important SME sector.
Brokers may have some justified concerns about how this relationship will pan out in the future. But I don't believe that the same concerns apply to the conslidators.
Towergate, the biggest, is set for increased dominance as its drives towards its £3bn GWP target by the end of 2007, which will increase its market share to 7%. In 2006, the leading consolidator controlled £1.7bn GWP, equal to a 4% share of the market.
This is a remarkable success story that should be celebrated by the broking sector. For, effectively, the Towergate Partnership is a massive broking operation and one that understands the sector and is committed to making its partner firms successful. It is also much more than that.
In many cases it also does all the policy delivery administration, the survey and risk management, handling the claims and health and safety issues. In fact it has reached the point where it does almost everything that the insurer does, including underwriting, and it is this added value that insurers recognise and enables Towergate to demand excellent commission rates.
This is of crucial importance at a time when insurers are looking to rein in the commission rates that they pay to brokers. Like everyone else, insurers will not mind paying over the market rate as long as they feel they are getting good value for money.
With so much duplication in the market, any firm that can work with insurers to change the present model will be welcomed. This is linked to the service provided to the customer.
We have a much more educated consumer base than we did a decade ago and the level of service elsewhere has increased accordingly. Brokers have to make sure that they can deliver a level of service that the market now demands.
There is a criticism of consolidators that, as the smaller players in the broking business are bought up, it leaves behind an industry lacking in innovation and creativity. But where is the rationality in this? Surely a consolidator would be the first to listen to good ideas about how to grow the business?
What's more, it will have the finance to support any new initiative while smaller operations have always struggled to command the cashflow to support new business ideas.
Good people and good ideas will always be encouraged by any successful business. Witness Towergate. It launched the Towergate Academy with the aim of developing management talent.
It also puts high emphasis on employees achieving CII exams and offers many short courses run internally and externally.
The drive towards consolidation is not going to dissipate, but we should not fear change.
The choice for smaller provincial brokers is to attempt to grow organically or to seek an exit strategy.
If they are looking for a way out they can do worse than throw in their lot with an organisation that prides itself in understanding the broking sector and has the financial might to make a difference when taking on the might of the major insurers.
Consolidators and aggregators are not the brokers' enemy. They are eager to work in partnership in an enduring relationship that is beneficial to both parties. IT
Simon Burgess is managing director of British Insurance