I am an unashamed free marketeer, so why am I worried that the industry big guns are getting bigger and more powerful? If you accept free market economics you have to let the market find its own level – this means competition and free access, with no barriers to entry and (ideally) perfect information. Surely, that’s what you expect in unfettered markets. That would be OK if that was what is actually happening.
At the risk of sounding like an old fogey, I’ve been in the insurance market for more than 35 years. While I move with the times,
I am desperately unhappy about what the over-powerful are doing to our market.
We have a corporatist government – one that sees the economy as being made up of powerful interests – big business, unionised labour, the mass of the people (“hard-working families”) and government. In this world, if you are big you have power and you are listened to. If you are small – an individual, business, entrepreneur or just an employee – you are dispensable. Witness the redundancies we are now seeing again in the insurance market. I started my own business 18 years ago because I was fed up with being on the receiving end of broker acquisitions, with the resultant uncertainty and even unemployment.
Big brokers continue to merge into bigger and bigger global organisations, competing for the honour of being “the biggest broker in the world”. This is the rarefied atmosphere in which whole accounts change hands with the stroke of pen. The model is ingenious but dangerous for us all. Consolidators have exploited market share to squeeze higher commissions from insurers, so the model has been self-financing. It has done well so far and I’m not knocking it for doing so.
What worries me is that in the long run a few consolidators could corner the market in specialist insurance products and acquire an effective monopoly (more than 30%) of the provincial insurance market, feeding business only to their in-house facilities. If not a monopoly, we could well end up with oligopoly (a market dominated by a small number of similar organisations).
Neither of these market models is good for consumers because large and powerful organisations have a tendency to inefficiency and oligopolies tend towards concerted action, usually to the detriment of the customer.
Then there is the regulator. The fact that 40% of brokers have sold up since the FSA took over regulation must say something. It also coincides with the consolidators’ acquisition trail. If so many have left, it must mean there are fewer new entrants. So between them the big brokers, the consolidators and the FSA are squeezing the market into fewer and fewer big boxes
over which they have more control.
The FSA is the government incarnate and has presided over the continued decimation of the independent broking sector. You may ask why this should concern it. After all, if there are fewer organisations to regulate, life gets simpler and it’s just a natural market process. But is it?
“The FSA is the government incarnate and has presided over the continued decimation of the independent broking sector.
The FSA is focused on rules and controls, but government has missed the point that what really protects consumers is not reams of detailed rules and obscure conceptual initiatives such as Treating Customers Fairly (TCF), but choice and competition. TCF is supposed to be a substitute for the prescriptive rule book, but at least you know where you stand with prescription – the woolly thinking behind the TCF initiative is indicative of a regulator that is more accustomed to the investment market and has yet to properly connect with the commercial broking sector.
If brokers are forced into mandatory commission disclosure for commercial customers it will simply drive business to the direct writers, which don’t give advice, and can only really sell standardised products.
The complexity of regulation engenders a tick-box mentality like never before. The cost of compliance means only wealthy people can be sure to get advice on their personal insurances – small premium business has become uneconomic for advised sales, so packaged products and online sales have become more dominant, and will eventually take over.
All of these factors are coming together and are leading towards more commoditisation. This means less consumer choice and the concentration of market power with those that can afford to market the commodity, rather than the service.
It should not be the role of the FSA to shape the market, nor should it tell us how to look after our commercial clients. Its role should be scaled back to one of ensuring financial stability and probity in financial markets. At the same time, any further major acquisitions by consolidators or one of the big brokers should be referred to the Competition Commission.
So we have powerful big brokers, consolidators and a powerful regulator – it is this conjunction of power that is potentially toxic for general insurance brokers and in the long run for their customers. I realise this is revolutionary talk, but if we do not respond to what is happening, we will wake up one morning to find that we all work for one of them. The market will then no longer exist.