Oliver Laughton-Scott analyses the Top 50 brokers and finds consolidation slowed in 2001

A quick glance at the annual Insurance Times Top 50 list of brokers and intermediaries is notable for some significant absences. Gone is former top ten intermediary NatWest Insurance Services - a casualty of the bank's acquisition by the Royal Bank of Scotland.

Another company missing from the list is Towry Law. Not because it has stopped placing risks, rather that it could not separate its general business accounts from its life accounts to help out with our survey. But, we reckon, that Towry Law would come in at around number 20.

There are three recent major mergers and acquisitions which happened after the 2001 year of account, and are therefore not reflected in the table. Swinton acquired Colonnade, Budget merged with Dial Direct and THB acquired TL Clowes.

So, on the whole, 2001 was not a year for big mergers and acquisitions. Rather it was a year for the larger intermediaries to grow organically and with smaller acquisitions.

The top five intermediaries now account for 56.4% of the income of the entire top 50 compared to 50.7% in 1999/2000 - some evidence of consolidation, with the top ten representing 75.5% compared to 71.6%.

The text books explain how a market should progress from its initial development. The numerous small and new participants grow rapidly to reach the sorting-out stage. Here, the stronger businesses start to emerge and they move on to the mature market where growth is slow and the larger, quoted companies mop up the smaller brethren to sustain their earnings.

The insurance market is mature and its natural food chain has been the constant feeding by larger brokers on smaller ones right the way up the scale. But this is no longer evident. The chain has been interrupted by the lack of the larger quoted brokers buying - there are no quoted consolidators at the moment.

The large quoted brokers, not that numerous, have probably just about recovered from the hangover caused by their indulgence of some ten or so years ago. While the hangover may be gone, they are no doubt the wiser for the experience. They are not rushing to buy people-based businesses unless there are all the appropriate facilities to prevent staff walking out after the earn out. When in full frenzy there were a lot of buyers and the remaining sellers were of reducing quality. Reality bit, earnings suffered and share prices collapsed. Quoted companies were "forced" to merge and/or taken private, this included the likes of Willis, Sedgwick, Heath and SBJ.

This process is being reversed now. Willis has re-listed in New York, Heath Lambert is considering a re-listing and a number of IMAS clients are considering their future and the timing of such moves. Those that progress should find a deep pool of quality companies to acquire, but the current lack of quoted consolidators has left the field open for others to secure a presence in this arena and will provide some competition.

What is happening now? The capacity crunch that currently dominates the market has done a number of things; it has made distribution more valuable and has allowed insurers to be more selective, dropping the costly and inefficient business and accounts. This has impacted many brokers of varying sizes and profiles in different ways.

The major brokers, having focused more recently on organic growth, are in more control of their "book" and can use their placing power to "encourage" underwriters. They will continue to underwrite their risks and demand the support of underwriters.

The current market should also start to benefit the specialist distributors such as KwikFit and Saga and the much newer niche of internet based brokers that have yet to make a real impact. With increased rates, insurance purchasers will look for better value and movement will benefit the "new tech" arms.

For London Market brokers, the hard market has had a dramatic effect, generating significant winners and potential losers. The significant increases in rates have gone hand in hand with a contraction of many markets, thereby putting significant emphasis on successful placings. The ability to place business will be a defining factor for the winner's enclosure.

The more specialised of the London brokers, Jardine Lloyd Thompson (JLT), Benfield Greig and others, are probably the key beneficiaries of the market changes - JLT's share price reflects this. It has not used this strength in any significant way recently, but this cannot last long. Its ability to be a consolidator is probably limited if it remains true to its current model. But if it looks to broaden its scope then there are plenty of opportunities.

The larger provincial brokers continue to make progress up the list, most of their

business is still "placeable", most of their clients are accepting the increases and income is growing. There will be some pressure for a move to fees and this is likely to have longer-term implications for margins with the removal of "inflationary" uplift factor. There may however be a lag on the initial downturn in rates once more stable markets emerge.

The significance of the capital markets to the insurance cycle should not be forgotten. After a period of prolonged strength the current "adjustment" (see chart, left) is reminding people of its influence.

The losses of the UK insurance market leading up to the WTC loss, and that loss itself, were large, but have been dwarfed by the collective impact of the decline in equity markets since January 2001 and, in particular, the consequences for insurers world wide.

Many general insurers and brokers are influenced by the fixed interest markets and these too have caused strain on results and balance sheets with rates at record long-term lows.

There appears to be little likelihood of a quick return to strong and confident capital markets. These two influences would therefore suggest that the current phase of the insurance cycle may sustain itself for rather longer than it has done in the past.

They may encourage a return of quoted brokers as being the only sector to profit in the general economic climate. If so we could see the consolidation talk convert to real action.