In the last quarter of any year brokers look forward and should begin the planning process for the year ahead. The outcome for this year has virtually been decided and it is difficult in the last two or three months of the year to have a significant impact on the year-end figures.
The major unresolved issue is profit-share earnings. It is important that this is focused on to ensure that these are maximised. Now is the time to bring out the agreements, check on the current position and consider pushing business towards those underwriters where there is a chance of earning payouts.
In the past few years, profit-share payments for many brokers have been the difference between profit and loss and it is unlikely this year will be any different. For 2001 and onwards however, the availability of profit share may be reduced as the larger insurers capitalise on their increased power and market share to tighten up on these arrangements.
In the main, profit-share arrangements are in place to maximise profit growth and the priority in 2001 may be to turn the existing book into profit rather than actually increase it. The reduction in the availability of profit-share payments, increases the importance for brokers making a profit on its core activities.
Following the lean period of the 1990s, expenses have been cut to the bone and now the only way to truly increase profitability is to grow substantially.
The first vital and initial stage of the planning process is to work on forecasting income for the coming year. It is only when this is established that the remaining parts of a budget and business plan can be completed.
The issues affecting income are:
All brokers will lose business through liquidations, to competitors, or because a risk ceases to exist. The retention rate for good-quality provincial brokers is usually very high, as they capitalise on strong customer relationships. The retention rate is normally well above 90% and there is no reason why this shouldn't continue at a high level. However there may be some pressure on this figure. National companies that have been a soft target over the past few years may well become aggressive as their merger problems are left behind them and they begin to target the small to medium enterprise (SME) market. The hardening marketing may cause clients to look elsewhere and private motor customers will be under attack from direct writers and the onslaught of ebusiness.
Therefore it is wise to take a slightly more pessimistic view of the tension levels and reduce the forecast for 2001 by 1% or 2% compared to the expectations for 2000.
There is also the need to recognise that there is a natural erosion of the client base as a result of incidents such as businesses closing, cars being sold and death. This can cause a further loss of between 5% and 10%, depending on the mix of business. Small business and private motor accounts are the most affected.
A commercial broker whose core business of clients pay more than £5,000 should realistically expect a 10% loss overall, but those with a bias to small business and personal lines should expect a loss of up to 20%. Every broker should establish their own base figure, for example broker ABC which has a 50/50 personal commercial lines split with a broad range of customers and a premium income of £3m should realistically expect to lose 15% of income, reducing its base business for 2001 to around £2.5m. Each broker should naturally carry out his own calculations.
Premium increases
Premium increases are still coming through, especially in motor insurance. There will be further increases in this sector next year, as insurers seek to catch up with claims developments such as “claims chasing”, government claw backs, increasing repair costs and higher awards.
A further 15% increase should be planned on motor business. Liability rates will also increase for similar reasons and there will be premium increases for small business because of liability pressures. Property-based commercial cases and household risks are likely to remain static.
Market increase is therefore likely to provide brokers with income growth of between 5% and 10% depending on the mix of business. Broker ABC could therefore plan for a 7.5% growth, increasing its premium income to £2.7m. This still leaves a further £300,000 of business growth just to stand still.
Client growth
Most brokers have proactively cross-sold and up-sold to clients over the years and there is little real potential here. However, the economy is good and this could produce natural growth in areas such as wages, sums insured and turnovers.
Some sectors are expanding more than others. Construction, transport, service and technology sectors are likely to have good years whereas manufacturing, retailing, agriculture and food will continue to be under pressure.
There will also be geographical differences and economic activity and the type of client base will affect growth. An old client base is unlikely to show much organic growth, whereas a young, acquisitive and aggressive one will.
If one assumes that broker ABC obtains 5% organic growth from existing clients, its premium income will grow to £2.85m.
New business
A further £150,000 of revenue is still needed to achieve real growth and this can only be obtained by new business or acquisition. It is difficult to plan for acquisition and this should be treated as a separate issue. The broker will need to decide how much new business he will write. The impact is dramatic.
A broker's past performance is a good guide to future success and if this is extrapolated some idea of the future figure can be obtained, and a gap between expected and aspirational growth can be measured.
If there is a gap, it can only be bridged by a change of strategy. This could be a new business executive appointed, specialisms being created, aggressive telemarketing, concentrating on getting referred leads from existing customers, or a change of focus from servicing to new business.
Some of these can increase expenses in the short term but may be vital in the longer term if the business is to prosper.
Increased commission and fees
If growth is difficult to achieve, there may be some opportunities left to increase commission or charges. The former is unlikely unless there is room to consolidate business with fewer carriers. However, in many cases there is opportunity to increase charges and non-commission income. These are: charges or increased charges to personal lines customers; marked-up third party premium finance; increasing the selling price of add-on services such as accident management or sell specialist services such as risk management.
It is important to remember that brokers are businesses not charities and the prime requirement is to make profit. Charging is not an ethical issue, it is imperative if the business can't generate enough profits from its core activities.
A mediocre broker will be achieving growth (acquisition of under 5%). The average is between 5% and 10%, the good ones between 15% and 20% with outstanding ones approaching 25%.
The outstanding ones are very good at development focus and will grow to greatness. The mediocre ones will shrink into obscurity.
