Hungry predators are stalking the brokers

Are the days of the truly independent regional broker numbered? Given the way the UK insurance distribution landscape is changing. I would say they are. Insurance may have that stigma of being dull, it certainly hasn't been for the consolidators, networks and insurers who are shaking up the market with a steady stream of buy-outs and acquisitions.

Research from consultant JCL Hanson Young shows that 80 broker take-overs were completed in the UK last year, more than one a week, and judging from the spending sprees underway so far this year, this figure is set to rapidly rise.

Brokers can be forgiven for thinking it's a jungle out there...because it is! The carnivores are stalking their prey, silently waiting for the moment when they can leap in and drag their victim back to their lair. OK, this might be a bit dramatic, but the pace at which change is happening justifies this analogy.

If the jungle reference is too much to stomach for the hunters and those they pursue, perhaps I should liken the situation to that of a dating agency. Participants are looking for their perfect partner and before anyone meets, a profile is created (which usually contains a fair amount of poetic licence).

Those with common interests, who like the look of what they see, arrange to get together. And sadly, this is where it can end in disaster as the reality is often different from the perception. Brokers have many potential suitors to choose from – but who would make that perfect partner?

There are broker networks – marketing themselves as saviours of the smaller broker, offering enhanced commission rates and profit shares, financial inducements, access to wider markets and underwriting expertise, compliance, training, human resources and marketing support, common IT platforms, succession options and that golden apple, independence.

These run alongside other 'networks' – groups of independent brokers working jointly (regional or product based).

Pretty straightforward until you add the broking services operations to the distribution landscape.

While the FSA considers these service providers as networks, the providers themselves do not. They prefer to identify themselves as outsourcers of back office functions.

Whatever the network definition, it's confusing for brokers who at this stage may have only considered the 'networks' as a suitable partner. And unlike real romance, brokers do not have the luxury of a courtship before making their choice.

Networks are keen to recruit new members and increase their market share, but they have a new threat – the consolidators. Consolidators will argue they are the perfect match for brokers and will be vying for attention in what has now become a 'love triangle'.

Consolidators will be the winners in this triangle as they offer more than a networks' standard menu of benefits and support services.

Many are financing new initiatives, such as training academies and actively expanding the services of the businesses they buy, without asking brokers for more money.

They positively welcome innovation within the brokers they buy-up, and do not stifle it. Brokers are being paid for their business acumen and are not asked to pay for extra services.

However, for me the key differentiator is that a consolidator is not a 'halfway house' solution.Yes, consolidators may take over everything, including the brand, but at least the ownership is clear-cut and there's no confusion.

Consolidators avoid the complications and ego issues often associated with networks and their intentions are clear – to integrate the broker's business into their own.

Brokers join networks because they want access to a wider portfolio of products, services and resources, and while they may not want to lose their identity or client base, it can slowly erode away.

This view is borne out by a number of independents who say they do not want to be compliant with another firm's business model.

Indeed, a European investment bank has set aside some half a billion pounds for broker acquisition, but will not consider those that belong to networks – it believes they have passed the value of their business to the network.

Brokers who want to gain access to enhanced services shouldn't be giving away their business or intellectual property for free when they can gain a substantial sum from a consolidator. Just like romance, all participants want the same outcome.

For networks and consolidators it's to gain greater control of the distribution channel. And just when we thought there were only two generic types of partner brokers could opt for, a third joined in.

Insurers – the key to broker independence and impartiality – have jumped that great divide and positioned themselves as potential partners. It's turning the basics of broking on its head. Already this year AXA has acquired Smart & Cook, Stuart Alexander and Layton Blackham.

These purchases fulfill AXA's strategic goal "to strengthen its distribution network in terms of profile, geographical reach and diversify sources of revenue".

Isn't that what the other partners want? It's going to be confusing for brokers who have more suitors than ever to choose from.

There is reality v perception. I'm not convinced brokers can trade independently when they're owned by an insurer and I would like to believe Paul Meehan when he says Smart & Cook will "trade independently and that AXA will run the business at arms length". However, the jury's out on this one. Client choice has always been fundamental to broking and I don't believe an insurer buy-out is in the best interests of the client.

This will be the thin end of the wedge when it comes to buy-outs – OAMPS, the British arm of Australia's third largest broking group is looking to make some purchases and Towergate recently appointed HBOS to lead a fundraising project to raise £250m within the next six weeks.

Granted this will be earmarked for IFA acquisitions, but it clearly demonstrates that all intermediaries are ripe for picking.

Out of all potential partners, I believe consolidators make the best suitor. There are no hidden agendas and what you see is really what you get. IT

Simon Burgess is managing director of British Insurance