Insurance Times together with our partners, Groupama and Liberty, held a round table discussion where a panel of experts gave their views on the state of the North West market and the issues it faces
Chair: The first point on the agenda is an overview of the market in the North West.
Simon Hurt: From Groupama’s perspective, It is very buoyant. The North West seems to be striding ahead. Brokers are doing exceptionally well and we see a bright future.
Paul Moors: The North West market is particularly buoyant. It has a fantastic mix of different businesses – traditional brokers and new companies. It has Lloyd’s underwriters and service companies, and big
composites. It has large call centres and high street brokers. It has general brokers, specialists and consolidators.
Mike Drew: As the second market in the country, it is a far more personal market. Relation-ships are still important, which is possibly not the case in the City.
Mike Latham: There is a lot of innovation coming out of the North West, which means that we are not just broking in the North West. Most of us are broking in the UK with schemes and initiatives.
Allan Greenhalgh: There is a degree of saturation in the market, which you seem to disagree with. We have every major insurer and every Lloyd’s syndicate. We have new players still coming in and more planned for the future.
Andrew Linnell: Is the slice of the cake that is available growing, or is it merely that you have a fairly static cake that is just being cut up into more and more slices?
Latham: It is growing in the North West.
Greenhalgh: We have an industry boom.
Latham: We are attracting insurance
businesses into our UK schemes. We are bringing that into the North West market and to a certain degree we are taking it out of London. From our perspective, what we want from insurers is a very clear directive of what they want to do on a one-to-one basis. We would like to see insurers being more niche. You cannot work with them all.
Greenhalgh: What do you look for in a new entrant?
Latham: We look for innovation – to do something completely different. As a broker in a saturated market such as ours, we need to understand what an insurer will look for in a risk on a consistent basis. At the that.
Drew: A lot of the new entrants seem to be property-led.
Latham: They are coming into a very over-stretched market. It is property-led, small, SME-type business that will give you point-of-sale documentation, competitive prices and immediate decisions. It is pretty much a template that they are all using.
Moors: Many local insurers – the bigger insurers – have gone one step further in that, although new entrants have come into the Manchester market and their authority is being devolved from London or places in the South, a lot of local insurers have devolved that authority to brokers.
Chair: As rates go up, how can the market turn around?
Drew: The reinsurance market is looking to reduce rates anyway.
John Batty: They are looking to reduce rates by about 15%. But there might not be as much capital available from investors, so our rate is going to remain flat for the commercial market over the next 12 months. In personal lines you might see an increase. I believe there is going to be less capital investment. In personal lines, in light of the floods, we should start seeing rates increase. Overall our feeling, as a broker, is that consolidators might get squeezed next year, for rating and for commission levels.
Chair: The context of all this is sub prime; the US and the world economy is in a slump.
Latham: It will be interesting if the commission rates on the big consolidators are squeezed. That takes some energy out of the acquisition model.
Moors: We should turn this conversation around and – without being too controversial – from an FSA treating customers fairly point of view, we are talking about a hardening of the market. Is it the brokers’ position to assist in the hardening of the market? Or should we be looking to obtain what is the best deal for our client, that is, to obtain a competitive premium, wide cover, and great service? Artificial inflation, for whatever reason, of the rates required, is something that needs to be looked at very carefully, and I think it is very dangerous for brokers to be involved in that debate.
Linnell: Are we conscious yet of insurers talking about losing money? From what I can see, looking at results, their return capital is still pretty healthy.
Batty: They have returned £1bn of their reserves into their accounts in the past year and a half.
Moors: As brokers, what we really want is, if insurers are encountering difficulties and in need of returning to profit and if they are indeed not making money, for it to be done in a consistent way, over a period of time. It should not be the knee-jerk reaction that we had in 2001, where rates increased by 30, 40 and 50% overnight.
Latham: Insurers behaved quite irresponsibly then. They are to a certain degree now in the softer market. It is the insurers that we rely on to give a degree of consistency.
Greenhalgh: There are noises being made now by certain insurers that they are talking the rates up, certainly from a casualty point of view, which is good news. That is just talking it up, but that is where it starts.
Drew: You look at certain insurers, where they have had a bad July and August, they are prepared to write new business for almost any client, just to make the figures. As you reach the end of the month, they will write anything.
Greenhalgh: When the market does change, a lot of insurance companies, if they continue their growth at these unsustainable premium levels, will spend a lot of time on over-correcting the book. That is what happens.
Linnell: Where do clients sit in all this?
Moors: This has to be led by the insurers and it has to be led by their results and how they wish to develop their business plans, because we must seek, at all times, to have the best possible arrangements for our clients.
Linnell: What do you think of medium sized SMEs at the moment? What sort of expectations do they have of their brokers, in terms of service and how they are looked after? What do they think is going on in the market? How do they view us as an industry?
Moors: That is down to the broker to educate their clients: to let them know what to expect, and for us to keep them fully advised of what market conditions are like.
Chair: That brings us on nicely to the issue of commission disclosure. It sounds like the FSA is going to rule on a market failure and there will be a cost-benefit analysis of how we go forward, but if we are talking about repeat clients, how does it fit into all of this?
Moors: Back in April 2005, [FSA chief executive] John Tiner was quoted as saying that the FSA looked at situations very carefully and the only area of the market where it felt commission disclosure was relevant was in the area of commercial insurance, and that should only be for when a client asks for it. Mandatory disclosure was not relevant and not on its agenda. It shows what a mess the insurance industry, the broking market and our trade associations have made of it, to reach the stage that we are in at the moment.
Drew: The only time that you have a situation where the client is inquiring about commission, is when he has been prompted by a competing broker. What the competing broker was doing was basically saying: “We can keep up with that market, but we will go on a fee basis and we will save you money.”
Latham: Mandatory disclosure would only encourage that. A broker will come along who is probably less service orientated, and say it will halve its fee.
Moors: The problem is that there is nothing scientific about how brokers, in general, charge a fee. They work out something around 10%, they knock some off for their trouble and then they see what they need to reduce it to in order to win the business.
Linnell: If we have hard disclosure, will that put more focus on understanding costs and, if so, should we be thinking about giving out?
Moors: I am very much in favour of hard disclosure for larger clients. A broker should not be scared to tell his client exactly what he does for his money.
Latham: Even without the commission, we all have a treating customers fairly strategy. We all equalise the commission, so there is no differentiated commission within an insurer. What is the real benefit to the client?
Drew: I would agree. If you are going to go down the fee route, you are then an accountant. You are calculating only the hours that you are putting in on that particular client.
Chair: How does hard disclosure affect your businesses in the short term? Is it a huge amount of cost, the way you set yourselves up?
Hurt: Most brokers around this table would say that if they were asked tomorrow to disclose commissions, they would be able to do so.
Linnell: I have worked with a reasonably sized broker in the past 12 months that, as part of its strategy, has decided to tell all its corporate clients what it earns. It is almost trying to be ahead of the game a little. ‘
‘ Moors: Having said that, I do not think that brokers around this table need to be bullied into working in a certain way, due to failures by national brokers.
Latham: We are ready for it. We have agreed that we do not need it, there is no requirement for it. But if it comes, we are ready for it and we will trade within it.
Greenhalgh: From an insurer’s point of view, we do not see any problems with mandatory disclosure, except that we might have to change our documentation.
Moors: One area that might be a bit of fun on mandatory disclosure is for a Lloyd’s broker who also has a retail operation, where it is paid a commission via a syndicate. It is paid through to its Lloyd’s operation. Then the retail broker, in the same company, places business for that client.
Greenhalgh: What we are forgetting here is that you have mentioned that the commission reward is between the insurer and the broker. To some degree, we now have a situation where you have to justify why you are receiving your reward from the insurer.
Moors: Our enhanced commissions with certain insurers are mainly to do with work transfer, quotations, policy issues, administration and claims management.
Linnell: It does strike me that as we move into a marketplace where we may have to disclose things, you have to understand in much more detail the cost of the service you deliver.
Chair: The word ‘innovation’ has come up in the conversation already, and the whole business, not just for insurers, is going online. Do people see that as a threat or an opportunity?
Drew: I was looking at the motor business and motor insurance fraud – 19% of business is written online and 95% of fraudulent claims are claims that have been dealt with online.
Moors: From a new business and a client acquisition situation, online technology
has to be embraced because the general
“It shows what a mess the insurance industry, the broking market and our trade associations have made of it [mandatory
disclosure], to reach the stage that we are in at the moment
Paul Moors, Bollington
consumer, whether it is a personalised
client or a small commercial client, is being educated anyway to buy other products online.
Batty: We have developed an online presence whereby a freelance professional can have a quote within 10 seconds, fill out an application form, pay for the policy and have his policy documents in his own customer log-in area within three and a half minutes.
Moors: Perhaps the local broker needs to change its business strategy and start to sell fruit and newspapers, as well as insurance, just like Tesco now sells insurance.
Greenhalgh: What we are saying here is that all local brokers have to embrace technology to some degree.
Hurt: You are seeing vertical intermediaries starting to appear in the market.
Chair: To what extent are local brokers and everybody doing that? You have a good example with niche products that you are looking to grow.
Moors: It is local brokers becoming national brokers.
Linnell: Small brokers still obtain their
business by referrals. They talk to somebody else, who talks to somebody else and they have a client. They do not have the scale to make the IT investment you need to go online to do that.
Moors: The very important point is – and we talk about embracing online – I received a report this week from our head of motor trade. Of all the new business we wrote in August, only 25% came through advertising that we do, or Google clicks – 75% of it came from recommendations, or former clients, or direct marketing from us.
Chair: From the insurers’ point of view, how do brokers fare in terms of their online
presence? Are you seeing growth coming through the change?
Hurt: The take -up is growing month on month. We are seeing more people, and a wider audience is now starting to use it.
Moors: One of the problems that we have is that insurers are so far behind the brokers in terms of this kind of technology. We have been paperless since 1998. There are some insurers that are still not paperless.
Recruiting young people into the market
Chair: The next point on the agenda is young people entering the market. Are we seeing good people enter the market? Is it still a big problem?
Hurt: Insurance still has a stigma in that it is not looked on as the same as other professions, such as accountancy or law. Insurance does not figure up there.
Latham: We are our own worst publicists as well. We do not do a great deal to promote the industry.
Moors: Also I do not think as brokers we have done enough to embrace people either leaving school at 16 or 18, or even graduates. There is an education required so that young people do not see insurance as a commodity, but as an actual profession and a career to become involved with.
Greenhalgh: Insurance is not seen as a glamour industry, but a million industries are not seen as a glamour industry.
Linnell: If you put a similar group around the table from other industries, you would be having exactly the same debate. Everybody I talk to really has the same problem about bringing in good quality younger people into whatever their industry is.
Moors: One of the problems is quality as well.
Greenhalgh: The CII has done a tremendous job, over the past few years, in raising the industry’s profile.
Hurt: You also have to recognise entrepreneurs in any industry. All the brokers round this table were set up by entrepreneurs some years ago when the market was very different, and they took a gamble.
Chair: What about the issue of staff retention?
Latham: Staff retention is a big area for us. You have to look after them, train, manage, motivate and reward them; otherwise, someone else will.
Moors: It is important that brokers embrace Investors in People and similar principles and try to give something back to employees. Employees are our biggest and most expensive asset, apart from computers, and it is important that we acknowledge that and move that forward.
Linnell: The majority of people do not come to work just for the money; they come to work because they like the people whom they work with and the culture of the organisation. And they like being involved or not being involved – everyone is different.
Chair: Are salary rates going up because of the skills shortage?
Latham: It may be because of the shortage of good quality people in the market.
Moors: There are certain roles where there are gaps in the market and others where there is a surplus. Brokers need to address this by looking at how they operate.
Linnell: If your recruitment and training policies work well, you can fill more senior roles from internal sources.
Moors: Every one of our directors and heads of division has come up through the ranks of Bollington – none has been brought in from outside.
Insurers buying brokers
Chair: Our last topic is about whether insurers should be buying brokers.
Moors: If the broker is selling for reasons of investment to help that broker grow, why should it not be an insurer? An insurer knows a broker’s business, which a third-party investor, venture capitalist or bank may not.
Latham: That is not a sale, but an investment.
Moors: It is an investment. The Bollington arrangement with Groupama began as an investment. It is a shareholder in Bollington, which we did for our strategy and business planning. It is not an ownership situation for the sake of it.
Latham: It is competitive finance and a friendly partner, which is different to someone selling out lock, stock and barrel to an insurer.
Moors: Our model is completely different than the VPL/AXA model. AXA set up a holding company to manage its investments in one model going forward.
Latham: What is the FSA’s view on that going to be long-term? Does that not challenge the only independent status of the broker? If insurers continue to buy out
brokers wholly, the distribution network will change completely. Brokers will be selling products on behalf of insurers. Where does the client go for independent advice?
Drew: You will end up with a continental-style approach.
Latham: When you look at the potential future landscape, what is the FSA doing about it? It might be working well in France.
Hurt: I am not sure that we will end up with tied agents in the UK. France is not a particularly good comparison: the market is very sterile compared to the UK. In the UK, a market- place exists where competition is good.
Moors: The whole question of independence and tied agents is a total red herring. There are brokers in this region and elsewhere in the UK which are already tied by default. They deal with up to five insurers for all their business. There are brokers who have said they give all their business under a certain size to one insurer. That is a ‘tied by remuneration or service’ model.
Linnell: At some point, however, they have the option to change that. They still have the control of being able to say: “This is not working for us.” When they reach the end of the agreement, they can move away. Who knows whether it will happen in the future? Much of this will come back to hard disclosure and the impact that potentially has on the market.
Greenhalgh: AXA buying 50-odd brokers was big news, but if you just regard it as pure diversification, it is still an insurer and a broker.
Latham: It comes down to diversification and it becomes another outlet for the insurers. It is one step down the supply chain, which is fine. But to what degree have some of the acquisitions in the market been about potentially safeguarding income streams? Look at the AXA purchase of Layton Blackham and Stuart Alexander, which was a big pot of business. Why did AXA buy Smart & Cook – to keep it out of its competitors’ clutches?
Moors: Who is threatened by insurers buying brokers?
Batty: I see it as an opportunity.
Moors: Following a recent IIB survey, is it the motive of brokers that is in question here, because its member numbers might be reduced?
Latham: In terms of our approach, I see no threat to the independent broker. Should the FSA be concerned about it?
Moors: If the broker is acting independently and treating its customers fairly and in strict adherence to a conflicts of interest policy which is totally transparent, why should it?
Hurt: The market is driven by competition of varying degrees, and while we can all sit here and say: ‘we have a number of insurers, which is good for the marketplace and for competition’, that will remain the case. There is no reason to stifle that.
Linnell: I am sure that companies like Norwich Union and R&SA will be watching the size of their accounts extremely closely to see what happens.
Greenhalgh: Do we believe that these purchases are made purely to control distribution networks?
Latham: Yes, potentially. It is about safeguarding business and opening up further opportunities, but perhaps that is just cynicism on my part.
Tom Broughton, Insurance Times (chair)
Tom Flack, Insurance Times
Allan Greenhalgh, Liberty
Simon Hurt, Groupama
Mike Latham, Manson Insurance Brokers
Mike Drew, Cardwell & Drew
Paul Moors, Bollington
John Batty, Caunce Oâ€™Hara & Co
Andrew Linnell, Xceed Radix