Independent brokers are enjoying good margins and high growth, but the fall-out from 11 September and regulation fears may make life tougher. Oliver Laughton Scott analyses their businesses

IMAS has surveyed 75 independent brokers with brokerages of between £3m and £10m for 2000 (but including figures up to March 2001 if accounts have been filed).

It focuses primarily on brokers with incomes between £3m and £10m, splitting them into four categories: personal lines; financial services; UK commercial and London Market brokers (see table right).

The growth rates of the surveyed brokers were also compared with two bands of smaller brokers: £250,000 to £1m brokers and £1m to £3m brokers.

The financial information is extracted from the IMAS database which has details of over 4,000 independent companies and partnerships covering risk carriers, intermediaries and insurance related operations.

Competitive pressures have been greatest among commercial brokers, with organic growth hard to achieve in either 1999 or 2000. Most growth was achieved by acquisition.

According to IMAS, financial services enjoyed the highest growth rates in both years, benefiting from a rising stock market and strong earnings growth over the two years.

London Market brokers continued to prosper with reasonable growth and the best margins over the two years. However, the spread of individual company performances was the greatest in this sub-sector, reflecting the diverse nature of their operations.

Productivity (as measured against turnover) per member of staff was highest among financial services companies, who also experienced the greatest increase in productivity.

Productivity of personal lines brokers is almost exactly the same as commercial brokers, having closed the small gap that existed in 1999.

The growth of brokers with income of less than £1m continues to severely lag behind those brokers with incomes in excess of £1m, though the disparity has lessened somewhat from 1999.

About 80% of the £3m to £10m brokers surveyed are owned by people in their fifties or older. There is a particular concentration of commercial brokers in the 50 to 59 age range. This means they could be vulnerable to acquisition.

Looking ahead
The level of regulatory changes currently being considered is bewildering. The Financial Services Authority (FSA) will take over the regulation of general brokers in a couple of years time. Also Lloyd's is considering fundamental changes to its structure of Names and corporate investors.

The events of 11 September have clearly had a huge impact across the board. In the London Market small reinsurance brokers have been particularly squeezed and certain specialist brokers have seen their placing markets disappear. Commercial brokers have seen rates dramatically increase in some cases, although this has also increased the move towards fees, which is arguably not in the sub-sector's long-term commercial interests.

Personal lines is also seeing sharp increases in rates as reinsurers across the board have put up rates dramatically.

The weakness in the stock market has meant that insurers are actually trying to make an underwriting profit, 11 September just greatly sharpened a significant squeeze. It has also knocked a lot of new business for IFAs who have also seen their fund based income being reduced.

Current conditions
The comments on current trading, effectively covering 2001 (and for London Market brokers the commencement of 2002, given the importance of the New Year renewals) are based primarily on our own discussions with numerous brokers and insurers during the course of our work.

The announcement that general broking will be bought under the wing of the FSA will, we believe, help the General Insurance Standards Council (GISC) establish itself as the only credible interim regulator of general brokers. The difference between life and general products is so great we do not believe that the FSA will look to impose a similar regime.

The disaster of pension mis-selling has convinced many never to venture into financial services again. The success of financial services as demonstrated in this report suggests this view may be misguided. Having a single regulator may encourage more brokers to go down the composite route in the future.

Financial services, having been marched up the hill, is apparently to be marched down the hill again with polarisation being abandoned. The move has been triggered by concern that it is currently not cost effective to give advice to the less well-off so that these people are being ignored. This change in the legislation will tend to impact on the smaller IFAs who service the less well-off clients.

Lloyd's has announced that it is considering far reaching proposals in respect of the annual venture and three-year accounting.

To the extent that these eventually reduce Lloyd's differences to other markets the role of the small Lloyd's specialist broker will be more uncertain in the future.

London Market
Hard markets favour established players, so this will put intense pressure on some of the smaller London Market brokers. However, for those that can find markets, hardening rates will boost profitability substantially.

Commercial lines
Dramatically higher reinsurance rates have resulted in a considerable tightening of the commercial market.

While this has fed through as greatly increased premiums, it has also led many buyers of insurance to require their brokers to charge them on a fee not commission basis. Thus a short lived upswing in income has also be accompanied by a long-term shift in the terms of trade to the disadvantage of brokers more generally.

Personal lines
The hardening of the markets has been less marked in this than other sectors, partly because the process had started long before last September. The direct writers with their own capital have been able to determine what rates are appropriate.

Certain high street brokers have found life much tougher as the insurers have not chased premium and priced accordingly. Although income may not have dropped significantly, retention rates have. When rates soften, they will find it difficult to replace the lost business.

Financial services
The sharp fall in stock markets has led people to reassess the attractiveness of equity markets in general and certain products in particular. This has led to a fall in business.

The expected changes in respect of polarisation may see life companies looking to buy up IFAs in a bid to control distribution. It certainly makes the networks tempting targets and their value has soared as a result.

The level of enquiries from buyers and sellers that we are dealing with in this sector has increased dramatically in the past year.