Last year, Peter Cullum startled the broking industry with a plan to control £300m of premium. Now, his strategy for Folgate has taken a quantum leap.
No one in the insurance industry thinks bigger than Peter Cullum. When Cullum launched Folgate Partnership, following the battle with NIG to buy Folgate Insurance in April 2002, his plans were startling.
Cullum's idea was to own a chain of brokers controlling £300m of premium. This seemed a reasonable target as it took Towergate, his other business, five years to build an operation controlling £200m of premium. And Towergate is in a league of its own: Britain's next biggest, independent brokers handle between £50m and £100m of premium.
But with just one year of the three-year plan complete, Cullum has raised the stakes. He now talks conservatively about £550m of premium handled after three years and that the figure could be as high as £1.1bn.
The plan to create regional hubs connected to spoke brokers is proceeding with gusto. But Cullum, along with chief executive Andy Homer, is talking about more hubs. Instead of six or seven over three years, it seems there will be eight hubs in the next few months. It is unclear where they will be based.
Cullum says Bristol is one centre under consideration and an M4 corridor grouping is also likely. Other notable gaps in geographical cover include the North West, Scotland and East Anglia. But Cullum says Scotland is not a market that particularly interests Folgate at the moment.
Intriguingly, Cullum and Homer have three strategic acquisitions on the cards that would not fit the hub and spoke model, but which could account for over £500m of premium in the next two years. While they are tight-lipped about the acquisitions, market sources speculate the purchases could include a substantial London Market broker, an IFA network or a non-UK foray.
Overpaying
Critics say Folgate is overpaying for its purchases. Some say that Folgate is paying 1.7 times brokerage for brokers. This is denied. Folgate insiders say that the average price being paid is around 1.2 times brokerage and that plenty are being offered for 0.75 times, but that many of these businesses do not have the qualities that Folgate is looking for.
Another revenue strand that is gaining greater prominence in the Folgate model is the Masterplan network. The network is currently generating £35m of gross written premiums for the virtual insurer, but Folgate is aiming for £100m in 2004.
The network plans include the already available, Seasons, SME, PA and travel, property owners and Towergate non-standard products. Motor policies are currently underwritten by Fortis and a panel of seven is being formed that, according to Cullum, should be in place by the third quarter of this year.
Folgate's Masterplan also has big plans for an FSA compliance service. Plans are currently under wraps as the FSA's consultation process proceeds, but it is understood that the service will be based on an electronic product. Homer says this will provide training and compliance recording capacity and, perhaps, also training modules such as those provided by CII's ed.
Cullum is excited by the potential of a compliance product. "There are huge opportunities. Some networks have shunned the idea of offering compliance products. I think that is a serious error of judgment," he says.
Existing relationships
At the heart of Folgate's plan, are the deals that it can do with insurers. Norwich Union (NU) and AXA are the two high profile insurers that have been attracted by the volume of SME premium that Folgate can and will control. But Allianz, Zurich, Fusion, Creechurch, PRI and Newline have also taken "deckchairs on the deck" as Cullum puts it.
One significant omission is Royal & SunAlliance (R&SA). A group deal is currently being thrashed out after a stand-off period. But, says Homer, R&SA is still supplying brokers like Smithson Mason with lots of capacity. He explains that for now, Folgate is happy for the brokers it acquires to continue with existing relationships.
While this is undoubtedly good for the insurers and the brokers in situ, it begs the question: where is Folgate adding value? Folgate is keen to keep the relationships going at a local level and now ties in principals of the brokers it buys for two years.
The deals it is creating at a national level are not simple and rely on a great deal of trust. One deal insider explained the insurer is working towards supplying cover at net rates (claims cost, plus a profit margin). Then it is up for discussion between Folgate and the insurer as to who does the administration and what the cost of that will be. A profit share is available if brokers and clients beat the claims cost estimated by the underwriters. So nothing about the infamous 10%-20% commission allegedly charged by Folgate above the hub or spoke brokers' commission.
Critics say the relationship between Folgate, NU and AXA is too cosy. Homer says this is not true. "We had NU's largest property owners' book and took it elsewhere," he says.
