Simon Cooter says insurers must prepare as the credit crunch catches up with the sector.

At the end of last year while many were predicting that consolidation would continue to accelerate, others, myself included, thought we would see a slowdown from the second quarter onwards.

The main rationale for this thinking was the impending changes to the capital gains?tax regime in April. Although the passing of this deadline did indeed bring a slowdown in activity, it is the volatility of the global financial markets and specifically the credit crunch that has resulted in activity all but drying up in recent weeks.

Against this background of economic uncertainty, the UK insurance industry is also contending with a soft market, rising inflation, reduced investment returns and a clear shift towards greater transparency.

Something has to give and everything begins to point to a need for insurers and brokers to focus on some of the fundamentals. That’s not a bad thing.

The early signs of this are already there to see, with some insurers reported to be looking at the levels of commission they pay to brokers. We’ve also seen the first in a new round of cost-saving initiatives, with others likely to follow.

It is always difficult and a little dangerous to try to predict the future, especially in these turbulent – and largely unpredicted – times for the global economy.

However, I expect to see some clear trends emerging in our industry in the coming months. We will see some continuing consolidation but the number of deals and the multiples on offer will return to more “normal” levels.

“Something has to give and everything begins to point to a need for insurers and brokers to focus on some of the fundamentals. That’s not a bad thing.

As part of this, insurer appetite for owning distribution may reduce but whether this will go as far as selling the distribution they have acquired, only time will tell. In the long term, I expect to see a shift back towards independent ownership, not least because of the huge cultural and economic differences between running insurers and brokers.

We can expect to see an increase in high-quality start-up brokers. There is a growing minority of people who, through acquisition, have found themselves in much bigger corporate organisations and found that it’s not for them.

In the past 12 to 18 months, a number of such people and teams have emerged from earn-out periods and other covenants to establish brokerages. I am confident that these will go on to become the successful and growing independent brokers of tomorrow. This trend is likely to accelerate and the trick for insurers will be to identify and support the winners right from day one, when they need it most.

We are also likely to see a continuingmove away from commission to fees for commercial business. This will make it increasingly difficult for insurers to justify high cost bases and will help to drive out market inefficiency, with electronic trading playing a key role. Insurers and brokers who adapt quickest will undoubtedly gain competitive advantage.

An optimistic outlook would be that we may even see the market move away from its obsession with price, with more product and service differentiation emerging.

Finally and most difficult of all to predict is the market cycle. All logic points to the need to increase net prices for property and casualty business but the market continues to defy logic and, at a trading level, there is little evidence of rates rising in these classes.

There are, however, increasing signs that we are in the final stages of the soft market and the odds are increasingly stacked towards a turn sooner rather than later. We are perhaps one event away from this turn. And when it comes? The insurers with the best trading underwriters and an ability to look at each client on their own merits will have a clear advantage. They can expect to win the business.