Chair: What is your overall impression of the state of the Scottish broker market?
Douglas Young: In terms of true general insurance intermediaries and also some with IFA practices, the figure is certainly well below 200 now. There are probably 180-185 independent general insurance intermediaries. What we have seen is a great shrinking of the Scottish market in terms of the number of independent players. The nationals I know are still looking to try to buy share in Scotland, but there is not that much left for them to buy.
Chair: Why do you think the market has shrunk so much?
Young: It is part of the general trend throughout Great Britain. It is only recently that Northern Ireland has started to be consolidated. Apart from East Anglia, Wales and to some extent the North West, most parts of England have been heavily consolidated now among the independent players and there are regional reasons why brokers will not sell. It is all to do with the way they do business.
David Wilson: Particularly around Glasgow, egos have been a major factor. A lot of smaller independents, the partnerships, sole traders have kept going, almost in spite of market conditions. Smaller independents, and some of the large partnerships, really do enjoy very strong relationships and it has served them very well across the board. However, obviously there are plenty of hungry predators out there just waiting to gobble them up.
Karen Clifton: One of the problems for smaller brokers is that the larger brokers have more of a relationship with the insurance companies and sometimes, especially in this sort of market, certain brokers have more chance of getting quotes or cover from specific insurance companies.
Chair: Does that mean that the insurers have to change the way that they deal with the brokers?
Clifton: I do not know the answer. It is a difficult because I can understand why it happens that a larger group of brokers have greater clout with insurance companies, either because they have a large account with them or they have agreed to place x amount of business with them. Smaller brokers do not have that level of business.
Eric Galbraith: I am concerned about certain issues around not seeing new people coming in. However, if it is 100 or 200, the market will change, as we move forward, the way insurers deal with them has changed as well. I would like to think that Scotland, which has always had a solid business ethic and has been very professional, could take that and move it down south and even internationally. We have one around the table who is doing that [Chris Giles]. The question we might ask is why do we not have more people doing that? Why is it happening the other way at the moment? It happened in the 1960s as well. They came up and they bought up the businesses in the UK as well, so why should we not see it moving forward? We have one of the recognised universities that specialises in risk management, so why would not that be an excellent starting point to say that is what you are going to export throughout the world, the way we deal with business?
Chair: What are the difficulties?
Chris Giles: It was not a difficulty for me. Because no one would sell to me in Scotland, so I had to go south. There is going to be a radical reshape of the broker market. I think your 185 brokers in Scotland will be 25 in three or four years and there is an inevitability about the consolidation process.
What David says about Glasgow is right. There are a few egos knocking about. Quite rightly so. There are some good brokers in the Glasgow market who know their onions and it is relationship based. That is the one thing the independent broker has over the bigger brokers. The problem is the incredibly uneven playing field of working with insurers is becoming more uneven. What we have found, as a sales and marketing -led broker in Glasgow, is that we are winning the 'value adders' business that previously we could not win. Clients have been very close because of their relationship. There is a new generation of these and other people coming through and those strong bonds have been broken.
Andrew Linnell: We talk about value added and we read about it, but I am never sure whether people really understand what is meant by it. It may be the relationship element that you are talking about, but there are other ways, are there not, that you should be adding or attempting to add value? If you are not doing that, then you are leaving yourself open to what is going to be pure price-based competition. With some of the threats that I think will emerge in the next two years in terms of competition, if the independent broker is not finding ways of adding value in the way you are describing, then they are very exposed.
Giles: They are exposed. Insurers are becoming much less fastidious about dealing with a large number of brokers. But they are much happier dealing with a small number and that in itself has problems. Insurers have a big issue about distribution and they will start to act on that. AXA has put the first spade in the ground.
Young: Some of them beat them to it last year.
Giles: Yes, Royal & SunAlliance is making some niche purchases. But the AXA purchase of Stuart Alexander and Layton Blackham was a first real big step.
Young: It was a more aggressive one, because AXA's relationship with the consolidators has historically been that it has partly helped consolidators do their part. '
Giles: Yes and there is a lot of froth right now. The big four are out there, and the corporate finance teams of Deloitte, Ernst & Young and KPMG are out stirring them up.
Linnell: Going back to the consolidation issue, clearly Chris is a national consolidator, as are others. But there are different sorts of consolidators, are there not? There are the more local consolidators and you would expect to see perhaps some of them in the Scottish market and yet it does not really seem to be happening at the moment.
Giles: What you do not see too much are two local brokers getting together. What you tend to see is the usual suspects, such as Towergate.
Alan Russell: When you look at Edinburgh and Glasgow, it is almost irresistible to say if these brokers looked at each other and they could get along with each other it would make a great case for a super independent. Based on a service relationship where the history and traditions of the market are respected.
Dawn Harley: In an area like, for instance, Stirling brokers have historically been there for a long, long time and have always fought each other for business. It almost goes against the grain to think we could get together. It is an historical thing.
Linnell: Is the network, as a proposition for the smaller independent broker, a potential saviour for that group of individuals in the marketplace?
Clifton: As long as the individual broker is on the team and not a lone personality. As long as their office is completely branded and rubber stamped by the powers that be, that is where you can continue with your personal relationship.
Chair: David Kerr, you are a member of the Willis Commercial Network, has that served you well?
David Kerr: Pretty well. It is not the answer to every maiden's prayer, but it is a useful tool.
Giles: Can I challenge you, David, on that. We are talking to Willis Network or we have done, and it strikes me that Willis takes quite a lot out of the pot in terms of commission, given what you as a decent sized business in Scotland could negotiate direct with insurers. I would suggest to you that you are hiding your light under a bushel with Willis. I think you can do it yourself.
Kerr: You may well be right, Chris. Due to the number of changes that have been taking place in the market and within Orr Kerr Dykes, we have been focused on other matters, but at the moment we are asking Willis to search its conscience carefully and look at certain aspects of things.
Wilson: One of the things that Chris mentioned is about a lot of the independents, or certainly the partnerships, knowing their onions. A comparison can be made between what is likely to happen within the industry and what has happened within, for example, the retail food side of things. Is it support your local trader or go to Tesco? It is Darth Vader versus Jedi Knight. It is good versus evil and clients are a great deal more selective. Due to the way that the industry has presented itself, and I have to say mainly via the insurers, they have cheapened in many respects the professional status of brokers. They have gone out there, told people that you can negotiate commercial contracts in the same way that you can deal with your house or your car insurance.
Linnell: If you look at other industries, and food is an interesting one, where there has been a wave of consolidation, generally what follows is a wave of new start-ups. It creates opportunity for specialist businesses; it creates opportunities for people who do not want to be part of that big organisation and do their own things.
Russell: There is a trigger, and that is when the big consolidator is consolidated itself. In the medium term, professional brokers shouldkeep their nerve and they should realise there is a place for relationship and serving your own community. Looking at Scotland today, the independents that are still independent, have to fight to retain that independence. The other aspect is what the insurers are doing, not just in terms of consolidation. We have now come back into a period where the bigger insurers have given the signal to their sales teams: we want growth, top line. We all thought we were past that but we are not.
Russell: Getting back to consolidation, this goes even further. I am not sure if it will go down to 25, but even down to 50 it does create great opportunities for the larger independents. Edinburgh, to an extent, has for the time being dried up and it is probably down to JW Group and us as the only true independent brokers there. We are in a fortunate position, mainly by luck rather than good planning, because we got together with some other large independent brokers and formed the Unitas Alliance, which is a different way of looking at it. Basically, it is co-operation, it is assistance, it is discussion, it is compliance, it is training, it is sharing of ideas.
Giles: However, the alliances have not taken off. Your one has been successful, but not many others have.
Russell: There were two or three very strong characters at the start who put it together. The likes of David Slade and Alec Finch pretty much dominated the thinking of the group, but now we all see the benefits of it and there is, in fact, a Unitas strategy happening shortly where we will sit down again and think, right guys, what now? It has worked very, very well for us and it does give us the buying power.
Linnell: You are unique in that – almost. There are not many alliances that are delivering to the insurer.
Russell: It does restrict your chance to grow from a UK perspective, because you would argue that you are not going to build an office in Birmingham if Slade is there.
Galbraith: Is it not the natural progression for some of the networks and groups to come together more anyway? You would expect that. You become like a franchise, an owned or operated franchise in some way, so you would develop. In addition, you have the French coming in. Does that mean you have more people on the Continent thinking that perhaps they should expand?
Russell: Again this is inevitable, because it is the insurance companies that are driving it. To retain and to develop new business you need to keep thinking we will get by with four or five markets.
Chair: It cannot be all doom and gloom. There are benefits to being a Scottish broker,surely?
Russell: It is a lively marketplace; both JW and ourselves have bought businesses here and are continuing to develop. We have taken on more staff on the development end and we have seen quite significant growth in our last quarters. However, the benefits of being Scottish are, I do not like the words like nationalism, but there is a sort of feeling that Scottish brokers do have something slightly different to offer. We are on hand to look after clients.
Wilson: Would you go south of the border?
Russell: If the opportunity was there and it was good, yes. We have quite strict rules when we do acquisitions as to what return we expect from that business and over what period of time. If we cannot deliver it then we will not buy it. We are looking to continue with the ethos of these companies that we know of in Glasgow and so far we have not made any redundancies in any of the deals that we have done.
Giles: Why would you not make redundancies when you buy a broker? The whole point is you buy a broker, you keep the trade, you have a resource in your head office that provides accounts, credit control, HR, etc. The whole point about buying a broker and making money from it is that you sometimes have to make some people redundant. We should not be embarrassed about saying that.
Linnell: You are looking at how you make it out of the top line, but you also look for the opportunities
Giles: To my mind, it is a manifestation of the lack of entrepreneurial spirit within this industry. All other industries have absolutely no problem with buying a business and laying people off and making that decision. That is life, that is business and every single sector is doing it.
Linnell: My experience of being involved in one or two acquisitions is that they are all different. There is natural wastage. You lose people through natural wastage and you do not replace them in those situations. If you buy a business that has scale and it has a perfectly good IT system, you leave that perfectly good system, there is no point in just bashing in a new IT system if they have something that functions perfectly well and you can get the information you want out of it.
Chair: Going back to the question, are you saying that there are no benefits to being a broker in Scotland?
Giles: Scotland is also quite a strong brand? There tends to be a perception of Scotland south of the border that we punch above our weight a wee bit, so there must be some advantages in being a Scottish broker.
Russell: One area where we have found clients appreciate the Scottish market and us is continuity.
Giles: That is not just a Scottish thing. You get that in England and in Wales.
Clifton: Why is there difficulty in finding it so hard to get staff, to get good quality staff coming through?
Harley: Maybe there is a shortage of staff because most people go through insurers in England initially. That is where most people start when they leave school. Very few people go straight into brokers.
Russell: The reason is that the insurance companies themselves have turned people off by the way they are portraying their companies with their advertising and their marketing. The 'quote me happy' scenario and all this. People are thinking, who wants to go and work for that bunch of plonkers?
Galbraith: We are not recognised as a profession. Not like accountants or surveyors and architects are. Until we change that view then people are going to think insurance is a call centre job.
Linnell: I find it very disappointing that in virtually all the businesses I work with at the moment, when they are looking to recruit their immediate reaction is, we are going to have to advertise to find someone. Why do they not have anybody ready in their own organisation? Why are they not recruiting the right people at the bottom level of their business and training them?
David Kerr: In conjunction with Unitas we have the facilities to train and, if necessary, move people around the country to get different levels of experience.
Clifton: There is a problem with the staff who come from insurers. They deal with insurance day in and day out, but they do not underwrite. So when they go to a broker or go out to see a client it is difficult.
Michael Hynes: The insurance companies are retracting. There is no breeding ground in there for the school leaver to go in and be trained up knowing full well that a percentage of them will go to the broker or a percentage will stay at the insurer. St Paul does it Redhill. It takes in half a dozen sixth formers and they may be put on a graduate system so they will go around the departments and they will learn about them. It is very successful.
Galbraith: So you have to start training your own.
Kerr: Well we are. Again, we are making a lot of use of material through Biba, through AXA Campus.
Hynes: Is there also an element of the money involved? Is there not enough salary out there for a university leaver to be in our industry?
Russell: The starting salary for a graduate in London, I understand, is currently between £18,000 and £21,000. In comparison, we are starting people, who are probably university standard, maybe on £15,000?
Chair: Are they willing to work for that?
Russell: Yes and they have shown a great deal of loyalty. We have several employees who have come through straight from being an office junior, coming in at 16 or 17, and one of them heads up our property unit, one of them headed up our IT and has decided to go on his travels. You have to keep them moving.
Chair: Therefore, is it about retention as well as recruitment then?
Russell: Retention is important. But it is also healthy that you have staff who move and create opportunities, because then if somebody moves there is somebody beneath them to whom you can say, how would you like to take over?
Harley: I was a bit disappointed when we received the leaflet through from Biba on the courses. They are all down south. There was not one in Glasgow or Edinburgh.
Galbraith: That is not true. There is a separate regional course. There are regional courses throughout the UK. The other thing that we are doing, and perhaps it is not clear from the literature, is we are putting together many courses designed for the firms themselves. We can supply the trainer, we can do it in house.
Harley: But there was nothing north of the border. Because we are asked to send people down to London and it just gets very expensive.
Russell: The solution is partly to do with Biba in that ourselves, the JW group, and one or two others, have got together to do our training course under their auspices.
Hynes: Looking at getting new blood into the industry, if in three or four years' time we have 25 brokers up here, what will be the lure?
Giles: Well, there isn't one. That is why I think it is a bit of a futile debate. If there are not the jobs why would young people come? What is the incentive?
Linnell: If you want to get good people in, you have to be able to be seen to be successful.
Wilson: There is an issue there with one of the things that I think Eric said or coming across historically. The burden, if you like, has been with the insurers to train broker staff. If brokers are not perceived in the same manner as surveyors, architects, etc, then it really is about time that we stood up to be counted. The FSA has come in to help that process because of the requirement for training.
Galbraith: They really have come out of the woodwork and you are quite right, the industry has let it go.
Wilson: Absolutely. The FSA says that we must do it. Many of the larger independents still operate on an entire servicing role, they get involved in a bit of broking and they try to run their businesses. That kind of structure has not lent itself to bringing people through and training them.
David Young: However, the nationals never stopped training. Long before the FSA they were all training.
Chair: Has the FSA acted as a reminder to the independent brokers that you should be training your staff?
Wilson: Absolutely.
Russell: It is a reminder, but I think people have woken up.
Giles: Staff are leaving the nationals because their final salary pension scheme has gone tits up and their employee benefits are the same as we can offer.
Clifton: I am seeing people who work for the nationals and it amazing how it is almost snobbery. They will say: We do not want to go to a provincial broker. But I do think it s changing.
Wilson: Independent brokers have had to learn and have had to learn hands on and in some instances learned by their own mistakes.
Chair: What about distribution?
Young: It evolves. It is going to change, obviously, but people are going to find alternative markets because certain insurers are behaving in a way that distribution does not like it.
Russell: It is not a natural fit, is it, an insurer buying a big broker with real distribution?
Young: Well, Layton Blackham has a network in there. That is a very interesting dynamic.
Giles: Almost a more natural progression would be for brokers to vertically integrate and take more of the underwriting, so you have your own underwriting agency.
Russell: We do not seem to have a clear idea of where it is all going to go or end up. It might go this way, it might drift that way. All I can say is that the broking market will be smaller.
Chair: On another point is the FSA an hindrance to smaller brokers?
Kerr: In economic terms of course it is. It does bring discipline, which is undoubtedly good in the long run, but it is a total pain in the neck. A single motor insurance going out to a private policyholder with two cars has 28 pages to read. It is just absolute nonsense.
Galbraith: Yes. Is it for the benefit of the client or, as the client sees it, for the benefit of the broker. There is talk of better regulation, deregulation. It does not mean deregulation; it means a second tier of regulation – what they call 'protection' policies or 'non-protection' policies, which to me is all their language mixed up.
Young: We are the only country in the whole of the European Union that has implemented this directive from top to bottom.
Chair: Some would argue that that would give us a competitive edge.
Young: No, it does not.
Giles: The directive is for the FSA to maintain the integrity of the insurance broking industry when, in fact, it is destroying it.
Young: The FSA never talked about it being for the benefit of brokers, Chris. It said it was for the benefit of the consumer.
Giles: Obviously.
Galbraith: It is supposed to make sure that it is performing correctly and in the right way. However, it has to look at treating customers fairly. We have been shoe-horned into a financial services sector that is administered in the wrong way. It is as if we are all bond traders or investment bankers in some way. It will change. The government's 'better regulation' process is in place and it is moving forward.
Chair: With the FSA there is also the question around transparency with commission disclosure.
Russell: Insurance is a product. At the lower end, household and motor insurance are products with variances in terms of the level of cover versus the premium. You are expecting value for money from them. It will drive the smaller players out. But it will also educate the larger players to vertically integrate. So you put your underwriting agency together or you have your insurer offshore in Gibraltar.
Young: The people with scale will have a windfall and will drive the people that the FSA is trying to protect.
Russell: Look at volume deals, for example. The fewer agencies that we have the better, but we cannot because we have to go all over the place to get markets. It is just a very weird distribution model.
Linnell: I still think that when we do get hard disclosure, because the odds are it will end up in our market, whether you are a large player or a smaller player the key will be working out what it is you are trying to do for your client. Because you are going to have to be able to warrant a fee based charge.
Galbraith: It is a very complex area. We are certainly becoming more transparent than we have ever been, but we have conflict. It is not an issue for the market at the moment.
Linnell: I still have the question in my mind, which I think is the point Alan and Chris are making. In that environment, the larger broker may be able to buy his product slightly cheaper than me. Therefore, the end result of that is that the smaller businesses are squeezed out unless they become specialist or niche operators.
Young: That is the reality now. Some people do buy their products at the net rate. We all know that and you have to gross it up for IPT purposes somehow. This was the big thing with travel insurance years ago with tour operators, because the commission was a marketing cost and that was why they came down heavily on it.
Russell: One of my brokers told me that travel insurance is probably the most complicated policy in the whole of the insurance brokers armoury. It is personal accident, it is health insurance, it is contingency, it is property, it is the whole bit and yet people decide to buy their £30 a shot travel insurance from what they saw on television last night.
Galbraith: The Treasury is looking at that. We have issues with travel, but we have come out and said that it has to be regulated, or at least we have to have a level playing field. Can I ask around the table, is there a balance of fee-based income you have or is the majority still commission based?
Linnell: From the businesses I have worked with in the last six months, half a dozen of them have a negligible amount of business on a fee basis and when they do, there is no real mechanism for understanding what it should be.
Russell: A lot of people are changing that way. Our fee business is certainly increasing. I would say now that any new business above £20,000 you always try to get on a fee.
Giles: The biggest problem with that, Alan, is as soon as we are in the business we never really create anything new, we just pinch it from each other.
Russell: Well it's going back to a principle of insurance, back to marine. Out of 24 boats that go out one is not going to come back and the rest will bear the cost. For that one failure every 20 years or so, you would make a loss on that one claim, but the other 19 years where it runs pretty well, you are probably quids in.
Chair: It is clear that Scotland has much scope for growth within its smaller broking business community, but also many challenges to face as well. IT
