With a major merger being proposed and more M&A activity quite likely, leading brokers from the North West debate the effect on the industry in the region, and look at how companies are standing up to consolidators as well as unrealistic expectations from clients
The implications of RSA’s audacious bid for Aviva and the effects of insurer consolidation were top of the minds of brokers at AXA’s latest regional brokers’ roundtable, in Manchester city centre.
Starting a wide-ranging discussion, Walmsleys Commercial Insurance Brokers managing director Michael Whittle believed the proposed merger highlights the possibility of brokers becoming too dependent on one insurance giant. “It’s interesting when you look at the aggregation of a broker’s exposure to one particular insurer,” he said. “If you suddenly have a situation in a fluid and downward market where there’s a considerable aggregation of your entire premium, it puts a completely different slant on things. There’s an awful lot to think about.”
Caunce O’Hara associate director Steve Vachre said the merger would reduce consumer choice and could lead to poorer service. He said: “You would hope that when two companies come together, you’d get the service levels of perhaps the improved two companies. In reality, we find that, when two companies come together, you get the service levels of one and a half companies.”
Sagar Insurances commercial broking manager Gary Quaine added that mergers were difficult and can lead to a spell of instability, pointing to difficulties following the 1996 merger between Sun Alliance and Royal.
Ease of dealings and consistency
The brokers speculated that whether or not the RSA/Aviva merger happened, the industry may see M&A activity elsewhere. “There’s a big impact when you get the coming together of two significant organisations,” Whittle said. “We want ease of dealings and a degree of consistency. I think, for the period before systems come together, we’ll get anything but that.”
Quaine argued that it would be better for brokers if smaller players merged instead, to reduce excessive competition in the marketplace. “It is some of the smaller insurers that we’d prefer to amalgamate, because that’s where the fighting is going on.”
Bollington Insurance Brokers managing director Chris Patterson said the market presented an opportunity for an American player with a relatively small presence in the UK market. “A lot of the American organisations over here can have a smaller market share in the UK, so it is an opportunity for them to actually acquire one of those bigger organisations and make an impact on the market,” he said.
AXA commercial lines director Keith Hector , who co-chaired the event at the Michael Caines restaurant, agreed that an RSA/Aviva merger could have a negative effect on the marketplace. “I would welcome it if they stayed separate entities,” he said. “I do agree with the view around consumer choice, and how that would play out with fewer providers. More power in the hands of one provider is not necessarily a good thing for the state of the market in its competitive frame.”
Future of the broker market
However, Whittle suggested there may be one advantage to the mooted tie-up. “The only thing I can think of is that when you aggregate a massive premium together with one particular insurer organisation, and if that represents a significant part of each broker’s book, then the connection with that insurer would have to become closer.”
David Roberts & Partners operations director Stuart Bennett added that if the two companies merged, they could be in a better position to drive up rates.
The conversation then turned to the future of the broker market in the North West. Insurance Times deputy editor David Blackman, who co-chaired the event with Hector, asked if the region was primed for a period of consolidation.
Vachre predicted that this process would continue, creating a difficult period for independent brokers. “As far as Caunce O’Hara is concerned, and the independents in general, I think it makes it even more difficult to stand on one’s own two feet,” he said.
However, both Hector and Patterson felt the rate of consolidation had slowed. Hector asked whether the marketplace would see consolidation through the existing consolidator model, or a new model driven by smaller players making more local acquisitions.
Whittle believed the heady days of the major consolidators had come to an end. He said: “I agree that we will see the emergence of not quite super-provincials but regional strong brokers, who will continue to buy when appropriate.”
Networks versus consolidators
The issue surrounding broker networks versus consolidators was then raised.
Vachre suggested that independent brokers were much better suited to broker networks than consolidators. “The North West and the Manchester market is known for the strong independent brokers and is well respected,” he said.
“Out of four independents around this table, three are part of Brokerbility Group, which is an alternative that suits the independent brokers. It’s a very, very good, popular model, and we prefer that to the consolidator groups.”
Bennett agreed that networks are more suited to independent brokers. “We’re in the Willis Network and it works fantastically well for us. It keeps our independence but gives us that back-up,” he said.
The roundtable then tackled the thorny issue of covenants. Bollington’s Patterson believed the industry should make a stand against unethical behaviour by brokers. “If you acquire a business and you pay good money for the business, and if somebody then exits and takes chunks of that business with them, it is completely unethical. It shouldn’t happen,” he said. “As an industry, we should take a stand on that, and I think insurers should do something about it as well.”
But Bennett believed that different factors had to be considered. “I agree with you absolutely, that when people have taken the money on the deal, there is an ethical responsibility on them.”
However, he added: “Sometimes the circumstances as to why the employee perhaps went to that broker in the first place and now wants to leave – especially if they’ve not actually made a financial gain out of it – needs to be looked at. There’s always that question about restraint of trade on the individual employee who wasn’t party to the deal to sell.”
All the brokers agreed that the recession was having a big effect on their companies, with the drive for new business keeping the market soft. Giles director Garry Leverton said: “We’re all reducing wages and turnover; we’re all in retention. It’s a bunfight for every case, it really is.
“I can’t remember the last time we picked up a piece of new business on full commission. You’re giving the client such a reduction or you’re scrapping against other brokers, and that inevitably impacts on the insurers.”
Patterson said that acquiring new business was more important than ever. “We need to be really sharp on new business acquisitions to actually maintain any momentum and maintain any growth.
“Obviously you’re not going to get anything on rates, you’re not going to move anything forward there; the chances are you may not get full commission. You need a sustainable and robust pipeline of new business to actually have any impact on the market at all.”
Commissions versus fees
The question of commissions versus fees then came up, and the brokers agreed they were facing unrealistic expectations from clients.
Quaine pointed to the difficulty in competing with a broker prepared to offer cut-throat prices. Aon client services manager Hannah Ebbitt said: “There is pressure on fees and the brokers offering pretty much what you might consider to be ridiculous levels of fees to service accounts. There is a point where you have to draw the line and consider the value that we are offering, the technical expertise, the support, and the strength that we can give.”
Quaine said there were problems with clients’ perceptions of the value of a broker’s services. “It’s that old adage, isn’t it? The client will pay £200 an hour for a solicitor or an accountant, but for a broker it is perceived differently. We probably help the business a lot more than the accountant or solicitor, but they’ll pay them a lot more than they’ll pay us.”
The roundtable then turned to the challenge of professional development. Ebbitt said: “We need to change our own perception of our industry. I feel strongly about this topic, about professional standards and us pursuing them properly, and making sure that the client understands that we’re professional people providing a professional service.
“One way to achieve this is by encouraging our staff to gain qualifications.”
However, Patterson said he was becoming impatient. He pointed out that the industry did a lot of talking but was not really tackling the issue of professional development head-on.
Finally, the discussion switched to the increasing importance of e-trading.
Whittle said it was vital for brokers to embrace new electronic models. “I think it’s a sociological trend, isn’t it? It’s the customer choice that’s driving it that way, whether we like it or not.”
He said that both brokers and insurers had to be more vigilant when it came to detecting the potential for fraud offered by these new models.
“We need to be savvy as an industry to get around this potential problem and make sure we’re pointing out the implications of that as well.”
AXA’s commercial customer delivery director Dave Gill said: “I think it is really product specific. You have to really nail down which products you’re prepared to do this with.” IT
From the emergency budget to a greater understanding of the seriousness of the proposed cuts in spending, the start of the party conference season and the possibility of a winter of discontent; that seems to sum up the three months between our roundtable discussions in June and the lively and considered debate on 7 September. Where on earth did the summer go?
As usual, we considered those matters most pressing for our industry but from a positive, not problematic, perspective. Every cloud can have a silver lining. It is all about how we position ourselves and how we react to the opportunities and threats we face.
The topic of the moment was the proposed move by RSA to acquire the Aviva general insurance business, which is widely seen as quite negative. This is partly because, from a broker's perspective, it will mean less customer choice in terms of products, services, strategies and provision of cover, and it also creates uncertainty.
There are many legacies in our industry that show how hard it is to emerge unscathed from such major disruption. We will all watch this space.
On the same theme, the subject of ongoing broker consolidation was also a talking point, though due to the change of capital backdrop there is little likelihood of a return to anything like the M&A activity of the mid-Noughties.
The more encouraging sign for our industry is the number of start-ups and small- to mid-market growth. Perhaps that reflects the adage that big is not always best: such smaller outfits and niche operations can offer a different type of customer service.
Talent, of course, is of critical importance to smaller brokers, and standards of professionalism were once again a hot topic.
Brokers are very much behind their CII bodies and are keen to pick up on the opportunities offered by the Aldermanbury Declaration and chartered status. It will
help us to demonstrate quality and professional standards across the board, which can only augur well for the reputation of our industry.
Keith Hector is distribution director at AXA