Insurance industry success stories over the past few years have been networks, marketing groups, underwriting agencies and, to a lesser extent, alliances. The Willis Network has attracted quality members and has nearly filled its quota of franchise areas. The Broker Network has consolidated its position as the provider for the small to medium-sized broker market, Towergate has become one of the largest players in the sector by concentrating on niche areas. Countrywide has continued to grow, and newcomers such as HSBC Spectrum have made an instant mark.
All of these have been increasingly successful over the past two to three years since the announcement of the CU/GA merger. The driving force behind this success is brokers' fear of losing access to markets and the poor service delivery of insurers. The vacuum left by mergers and consolidations has been filled by these comparatively new players in the sector.
Access to markets is crucial. A broker with less than £1m premium income has probably only one major carrier who he can turn to for support. The majority of the remaining carriers are squeezing his margins and providing hardly any service. Brokers can probably support one more preferred insurer for each additional £1m of income. Only when this income reaches £5m can a broker begin to satisfy the needs of ever-demanding clients. There are fewer than 250 with this critical mass, so some 5,000 intermediaries are struggling to offer real choice.
This is the reason for the success of the groups. In many cases, they provide the only way an intermediary can provide real choice and good service. Are they likely to survive and prosper in a period when consolidation of the broking sector is going to be the major driving force in the industry? Let's look at each sector.
Choice and service
Marketing groups are mainly driven by software houses as a means of adding value to users. The old Lloyd's guaranteeing agents also see them as a way of continuing to grow their businesses, and some are formed to help brokers sell into specific areas e.g. Farmweb in the agricultural sector.
Those who are involved in the private motor area offer a vital alterative. Brokers need access to a large number of insurers, and the groups offer wide choice, higher commission, good added value services and often leading-edge delivery in the area of technology. They are a vital part of distribution in the motor market.
The specialist groups are also important as they add skills and provide markets which the broker on its own could not. Providing access to Lloyd's is another huge advantage in a time of rapidly reducing markets.
Using marketing groups for core commercial and household business needs to be carefully considered as it reduces the business brokers can offer to potential partners. However it does provide an alternative if a broker has access to only one or two carriers.
Motor, specialists and those offering Lloyd's facilities will prosper, while others may be less successful as the sector consolidates.
Underwriting agencies that are involved in niche areas provide an enormous benefit at a time when insurers are increasingly sticking to a strictly defined rulebook on risks they are prepared to take.
Why bother putting pressure on partners to write business reluctantly when there are specialists out there happy to take the risk and who can also provide the broker with expert assistance and wide wordings. These players will continue to prosper as brokers continue to want to place risks at the lowest possible expense as well as meeting the full needs of their clients.
Once again, those who concentrate on mainstream business have a less bright long-term future. As brokers consolidate, they will want to leverage this business in the market and use it to enhance commission levels.
They will see your use of an underwriting agency as a loss of purchasing power unless the class is not mainstream business. However, a major advantage in this area is service, especially relating to quotations and offering an exclusive alternative market.
The sector will continue to grow in the specialist areas where it offers exclusive facilities, while in other areas the industry's poor service levels continue.
Alliances meet with mixed fortunes. There have been a number of broker alliances set up and more are being formed. Some are successful but some sink quickly into oblivion.
Those that have been formed on the basis of a counterbalance to growing insurer power, with the aim of leveraging higher commission, have probably been disappointed. Those who share problems, discuss best practice and develop common and group services are likely to be much better at business, be more profitable and provide better client service.
The key is often the willingness for each participant to commit time, have open agendas and have a wholehearted commitment to the objectives of the alliance.
Alliances have their place in improving customer service and business performance. Those that concentrate in these areas are likely to be successful.
Lastly, there are networks. The biggest decision facing some brokers is whether to join a network. This often means giving up local agencies and an element of independence in return for security of market and earnings, access to training, management and marketing skills and being a member of a group at a time when being alone may be difficult. The onset of the General Standards Insurance Council (GISC) gives an added dimension for those who fear regulation and want someone to guide them through this on the same basis as the life networks.
For each intermediary, the decision is different, and a formal review and a thorough analysis of the risks involved should be carried out. The issues would seem to be:
Other questions involve the cost of change, the impact on growth, the loss of agencies, loss of status, exit from the arrangement exit from the business and sustainability of the proposition.
So what are the risks?
The next stage is to analyse the risks to your business, assess their impact, the likelihood of their happening and how joining a network can reduce the impact. Some examples of risks are: further insurer consolidation, service delivery meltdown from insurers, less access to markets, lack of competitive quotes, commission and credit terms being reduced, loss of profit share, increasing costs, in-house management capability, staff quality and succession, lack of organic growth, the impact of the GISC, erosion of personal lines business and training. After a through risk analysis, a more informed decision can be made.
The network option should not usually be considered for those thinking of exiting the industry in the next few years. The hidden costs of change will be high, and the number of prospective purchasers reduced. As a generality, the smaller the broker, the more attractive the option. The driving force behind any decision is likely to be achievement of critical mass and access to markets.
In conclusion, all have a vital role to play in the future markets. There is guaranteed future success for ones that provide motor facilities, access to exclusive and/or alternative markets and the specialist players. Others need to rely on their high service standards and the continual poor service from insurers. Networks will be appealing, in the main, to those who want to stay small and beautiful.
Marketing groups, underwriting agencies and alliances can provide very useful havens in the difficult and uncertain times which lie ahead.