Insurance Times together with our partner, Groupama, held a round table discussion where a panel of experts gave their views on the state of the Midlands market and the issues it faces
Marvyn Amphlett, K Drewe Insurance Brokers
Martin Cantor, James Hampden Insurance Brokers.
Matthew Southall, Southall Harries Insurance Brokers
Simon Hurt, Groupama Insurances
Matthew Clatworthy, Broker Network
Douglas Young, JCL Hansen Young
Andrew Linnell, Xceed Radix
Chair: Let’s start by looking at the nature of the soft market and how we can actually turn that around and get the rates up?
Martin Cantor: I am not at all sure there is a huge amount that brokers can do in the short term about getting rates up. Clearly it is driven by the insurers, by their desire to hang on to market share, and indeed to grow it. Until such times as the insurers see the need to change, and possibly also understand some of the pain that is being caused out in the broker community, I do not see much change, certainly not in the short term.
Chair: Do you think that is why there has been so much consolidation in the broker market?
Cantor: There are a number of reasons for that. Clearly the soft market is a driver, it drives the imperative to cut your costs and to keep your books of business intact. It is a factor, but it is not by any means the only one.
Andrew Linnell: The reality is, and I hate to say this but that until insurers feel some pain in their underwriting results, and at the moment lots of insurers are still making pretty good returns on capital, we are not going to see much change in the market.
Douglas Young: The other issue is the amount of capital that is about, the market has too much capacity at the moment. There is a lot of interest in the insurance market, and consolidation is driven by controlling distribution. This is the original mantra of [Towergate chairman] Peter Cullum: distribution, distribution, distribution. And what are we getting now? We are seeing it demonstrated as Groupama, AXA and Zurich all buying up distribution. The interesting aspect of this is the movement of foreign insurers into the UK market. People now are not realising what has happened to our domestic market. Whereas Norwich Union and its predecessors traditionally was our biggest company, there are now major European players operating in the UK market. We have also seen people like Insurance Australia Group coming in, who are huge players now. So I cannot see rates softening in the short term, while there is this surfeit of capital.
As Andrew says, it is about the profitability; when the insurers feel the pain, the rates will go up. The good brokers who are taking care of their costs, offering good service and are determined to offer good service, will hopefully survive.
Matthew Southall: Brokers cannot turn this around. We are having to really concentrate on keeping hold of the business that we have. A lot of brokers are keen to write it, and they know they can get competitive costs from insurers. We are concentrating solely on retaining our existing booked business. So until there is an approach made by an insurer that says this is our walk-away price, things probably will not change. Well, that is what I have found, certainly since setting up Southall Harries in the past eight months.
Matthew Clatworthy: I am very much of the same opinion as Douglas. There is over-capacity in the market. Pricing is driven by the insurers, but is not totally controlled by the insurers. Whether the brokers control rates, I think if we actually acted as a community as a whole and took responsibility for ourselves, possibly we could have a larger influence on it. Insurers generally provide quotations that they require to secure business. If there was a general movement by the broker community not to resort to the lowest possible cost base, we could draw a line in the sand and say ‘look.’ I know it is very controversial and it will probably never happen, but not to just blame the insurers outright for controlling the pricing. You do not always have to go to the lowest common denominator with regard to it.
Linnell: That is quite an interesting point, because this is back to what I said about the soft market that we all talk about. Sometimes I think that we talk in a way that drives our own behaviour, in the sense that we all talk about the soft market. We always think that we have to do an awful lot of marketing, and think that we have always have to run with the cheapest price, when actually if you do some analysis of your book, and what goes on within that book, I wonder how soft it really is.
Southall: That is how we have been successful in growing our business to date. I have colleagues, who work for other brokers, who have a totally different view on the way in which they broker their own client business. There are some guys out there who actually think they are under attack on every case.
Marvyn Amphlett: We have a very solid relationship with our insurer, which we have used for many years. One of the things that we do quite constantly is we are always getting management to include statistics. We will go to the underwriter if we feel that we are dropping short somewhere or if there is a danger we might be losing some of the market. Then we will say we need to change this range. To be fair we have quite a lot of influence on that basis because of the expertise that we have in our line of business.
Linnell: Another part of the soft market question is, perhaps, what role do underwriting agencies play at the moment in actually .olt
Simon Hurt: What we are hearing is very true. It is important that it is a global industry now. Insurance is now a commodity, and everybody who is involved in it is playing on ‘ ‘ the world stage. It is cascading down to make the soft market last longer than it ever has before. Regarding the business of renewal, from an insurers’ perspective it is good to have consistency of business, two, three, four and five years with the client is good for us. And that is obviously where definition costs are to be reduced. Wholesalers are very much the thing of the moment; they are all over the place and there are more and more coming in. Is it sort of underwriting wholesale overkill? I do not quite know at the moment, but there is only so much capacity in the marketplace that they can take on, before insurers say: ‘We have no more capacity to give you’. I am not sure whether we are at the point yet, but I suspect that we are not that far away. It is just another route into the same market place, and I think it is cutting the cake even more. Many of the same insurers are playing the same game, right in the business that they could have got with a 20% more premium, when they write it through and underwrite it at 20% less. It needs insurers to make a bold decision and say: ‘We have enough of these outlets, we will stick with what we have got.’ Or they should write the business at profit.
Linnell: Why do they do it then, Simon? Why do you think your direct competitors actually support people who are competing with them in the market?
Hurt: It is the fear of losing out in what is perceived to be a growing market place. A lot of the acquisitions that are occurring, and have occurred in the market, are driven by this desire to control distribution. Underwriting wholesale is another desire to control distribution. With the recent acquisitions, it may well be that wholesaler underwriters will be the next target for acquisitions. Small, medium-sized sort of salesmen may be the next target, who knows? It is another route of distribution and distribution is very important.
Southall: AXA might be supporting 70% of an underwriting agency, yet they are competing against AXA-held business. Things are a little bit ridiculous, as far as I am concerned, and all they are doing is driving their own prices down.
Chair: Groupama has followed that route in buying brokers because, as Douglas has suggested, the distribution is such a crucial area.
Hurt: Yes, Groupama, like a lot of insurers, is European-based. It has experience of the distribution route in its various guises in Europe. Maybe it sees that it is the route the UK needs to go, albeit not quite as far, and the route to distribution is via acquisition of intermediaries around the UK. Other players are doing it in a bigger fashion, but there is obviously some merit in what people are doing at the moment.
Chair: The European and foreign invasion angle is quite an interesting one, because a lot of our readers send in letters saying British brokers should be British, and British insurers should be British. What does the panel think of that?
Young: We have global British players as well, and we did not take the attitude when the shoe was on the other foot. We are in the European Union; we abide by the Insurance Intermediation Directives, so we have to have a level playing field. The big European insurers provide important capacity in this market that our own companies were not capable of sustaining, for various reasons. Some of the mergers that took place undermined their own position in the marketplace. That has been taken over by ambitious pan-European insurers. It is actually good for the consumer, that is another way of looking at it.
Southall: I agree with Douglas entirely, but until we just say the word ‘consumer’ we had missed out on thinking about what they really want. We have had some fun and games over the last few months with insurers in general, and perhaps when we have competed with other brokers it has not actually been the consumer that has been thought of.
Young: People have short memories, because the big British insurers in the early 2000s cut down the lines of business they were doing, the biggest one actually cut down to a specific number of products that it offered.
Linnell: It came down from three hundred and something to 65.
Young: There was a huge reduction in the number of products that were being offered. That capacity has been filled by other people. Other insurers have come into the market. Marine was one area, and people have picked it up. We have to look back when we mourn the passing of British capacity, we had mergers in the late 1990s and the early 2000s that, some people would say, were not a great success. Huge British names were taken out of the equation, but we are left with two, really.
Linnell: But out of that we have
created some world-class players. Around the world Norwich Union is a world class player.
Young: Aviva is. The other phenomenon, which I think is interesting for the regional market, is the advance of the historical Lloyd’s vehicles into insurance companies, offering products in their own right. You have five or six of them who are very big players, competing with the traditional composite insurers.That is a change that has taken place over the past few years.
Linnell: Does the broker market generally recognise how big some of these players actually are, in comparison with some of the more common names in the market?
“A lot of the acquisitions that are occurring, and have occurred in the market, are driven by this desire to control distribution
Simon Hurt, Groupama
Young: We do not want to plug any, I would not want to plug any specific Lloyd’s companies, but many of them have capacity well in excess of a billion.
Southall: There is a big difference in the way in which you broker things now; certainly we have a Lloyds broker which we use, and certainly you have to tell them who you are going to direct. As soon as we started we had quite a lot of them knocking on the door saying, we are looking to deal with you direct. I imagine that does frustrate the Lloyd’s brokers a little bit, but at the same time providing when we are sending something to them, we tell them who we have approached direct. They are not going to waste their time and we are not going to waste our time.
Chair: Is the Lloyd’s market something that should be exploited a lot more by regional brokers?
Young: Well, I said Lloyd’s vehicles, I was not talking about the Lloyd’s market. Lloyd’s as a market is for specialty risks, but what has happened is that capacity has developed in the forms of insurance companies sitting side by side with a Lloyd’s syndicate. They are actually producing products for the regional market. It is very interesting, some of them have done very well, the high net-worth market is cornered by two big ones, one is a Lloyd’s vehicle and one is an international group.There is an aspect regarding the soft market that has not been mentioned, that is the question of service to the client. People have insurance for when there is a claim. There is a lot of dissatisfaction in sections of the broker market about the way insurers handle claims, their capacity to handle claims and the capacity to accept responsibility for claims. And that is an important aspect, as that in a true broking sense, that is the most important role of the broker, to make sure, for the client, that if they have a claim that the claim is met.
Clatworthy: But as a community of brokers we are being complicit in driving the prices down, through the saving of resources by insurers while handling the claims. If we always go for the lowest common denominator, or do not point out to the consumer that the reason that there is a price differential between an insurer and another insurer is because there has to be a difference in the service provided.
Cantor: Absolutely, the acid test of that expertise is only when a claim is made. Also I believe that the broker market and the insurance market have been guilty of allowing itself to be seen as merely a purveyor of commodities, and it should try to reposition itself as a professional services provider.
Linnell: We have the chartered brokers scenario developing through the Chartered Insurance Institute at the moment, which is another step forward in helping the organisation to be seen as a more professional business. It is not the letters that you have behind your name that count, it is what you are actually seen to be doing for your client.
Clatworthy: I can guarantee that nine out of ten of your clients, when you ask them who they are insured with, they are insured with you, not with Norwich Union or Royal & SunAlliance. The perception is that you are the provider, which again goes back to this point that if we get commoditisation on a purely cost driven base. We are here to provide a professional service and if we are complicit with always choosing the lowest common denominator, all we are doing is robbing from ourselves.
Hurt: You go in any supermarket now, and at every checkout there is life, health and motor. Everything you want to buy you can buy from a supermarket. That really confirms the consumers’ opinion that insurance issues are like buying bread. You just phone up and get a quote and that is it, everything is hunky-dory and I am away.
Chair: Is mandatory commission disclosure a good thing?
Clatworthy: The only point of view that really should count is that of the consumer. The FSA’s remit is to look after the consumer. It then leads to the argument that if that is the case then their own market research shows that commercial clients are not interested in mandatory commission disclosure. We work in an indemnity-based industry. Whether an intermediary gets 10%, 20%, 40% or whatever the commission may be for the value of the added value that they are giving, it has no effect on the indemnity that is being provided to the client. Therefore, what relevance does it have for the protection of the consumer? It is already built into our regulations. If the consumer wishes to know what the commission level is, he simply has to ask and we will disclose it.
Cantor: I do not personally understand quite what the driver of this is. There is no consumer clamour for it, as we know, and none of us probably have ever had anybody saying, ‘what are you earning on this?’ However, there do appear to be industry figures who are complicit in supporting the proposal. I do not quite understand what the true driver is.
Linnell: Some of the pressure coming through the FSA is because of the European Commission. It has done a report on transparency in the market and is concerned about it. Airmic represents risk managers in the very big insurance buyers; they have expressed concern about transparency, which impacts mainly on the Willis’ in the marketplace. What is interesting is the absolute silence, by and large, from insurers about where they stand on the disclosure argument. There is very little being said by any of the insurers other than ‘transparency’, ‘fair playing field’, but we do not get much from them.
Hurt: What you are saying is very, very true; there is no clamour for disclosure. From an insurer’s perspective, we are not particularly pushing for it to be disclosed. We understand the reasons why the FSA is pushing for it, but there is no clamour for it to happen.
Chair: What do you see as the reasons why the FSA is pushing for Hurt: It goes back to transparency. The FSA is obsessed with transparency and everything stems from transparency. The driver for it in anything you read is a transparent environment, and it sees this as being another way of having a transparent environment.
Chair: As Matthew said, it comes back to the history of what has happened in life and pensions, does it not, and that is being pushed onto the general insurance industry.
Chatworthy: The whole basis for the driver is when the commission that is paid to the intermediary has a direct value, in the life and pension field, to the value of what the consumer is purchasing. We are an indemnity-led policy field. It makes no difference. ‘Terribly sorry, you have used that intermediary, he has been paid X amount, which means we are going to pay you 10% less on your claim.’ It does not work like that. The consumer buys a product; and is not interested, according to the FSA market researchers. I speak to a great number of brokers and I cannot remember the last time a broker said to me, when you ask the question, ‘oh yes, that client asked me.’ To whose benefit is it? The consumers say it is not to their benefit. The FSA is there to look after the opinion and what it feels is best for the consumer. If they do not want it, what is the point?
Linnell: Part of what we need to think a little bit around that is that we do have Biba lobbying and talking to the FSA quite strongly in this area, so there is no doubt it is putting the views of the broker in the community to the FSA. One of the questions to consider is if it happens, how does the broker market begin to adapt to that environment?
Southall: The broker market has adapted in the past from the viewpoint that we do deal on a fee basis with clients, so those clients are fully aware of the income that is earned. From my own personal point of view, I have had a number of my buyers ask me what the commission level is. It is in our terms of business. If they want to ask, fine, I have no problem with it and that is where we should leave it. Douglas made a valid point earlier when he said about making a reasonable profit. That is perhaps the only reason why anybody is lobbying for it: they think that brokers are not earning a reasonable level of commission, they think they are earning too much from it. That is the only reason that I can think of for those who want it to be disclosed. Perhaps they think it is an opportunity for them to get that business if they are taking it on a lower fee. That is the only way I can think of that it is going to benefit brokers.
Young: We do not want our regulator to create a tariff industry. That is extremely important, if people start talking about what is excessive and what is not. It is what the market can afford. It is what insurers can afford to pay; it is what the consumers ultimately will pay for the product. More intervention on the structure of commission is not the role of the regulator.
Cantor: My view is that people talk about transparency, well, transparency to what end? Clients have a very transparent view, because they know what their premium is. Taking Douglas’ point, we do not ask Tesco the profit margin on a can of beans. Does it advance the customers’ cause if they know what the commission element within a premium is? I do not think it does, so the idea that transparency is somehow a good thing in this particular context, I do not quite see that. I do not see that it serves a purpose.
Young: Where we have transparency, if you take credit cards and the banks, that has not brought the rates and the amount people are charging down.
Amphlett: From the consumers point of view, I do not see any benefit really. They are just going to look at the bottom line. I do not think they are really that bothered. However, you also have to look at what cost that is to the broker as well if you consider enforcing that in terms of software. From a software house point of view, they are going to be rubbing their hands, because they possibly have to add an extra module on to systems and so forth. We saw that with contract certainty. There was quite a bit of work that had to be done by software houses to make systems so that brokers could show that in terms of management information and so forth. Therefore, looking at it from that point of view as well, there is going to be an extra cost to the broker and what benefit is there? I do not really see a lot of benefit.
Clatworthy: What you also have to bear in mind is it is not just compulsory commission disclosure, it is compulsory income disclosure, so you are then looking at profit shares, volume overriders, work risk transfer rates. You are looking at a scenario, if you are using an underwriting agent that has the same parentage as you, of having to
disclose their incomes. You are then looking at, as a tool to be used where you have direct writers, where they have nothing to disclose on that basis. So you are not comparing apples with apples, you are comparing apples with pears. Therefore, it is just another element that is going to confuse the consumer who is there to be protected.
Chair: The FSA wants to give the consumer more transparency and yet it could add confusion to the mix and the consumer ends up being more confused rather than clearer about the situation.
Cantor: If it does happen and becomes mandatory, that will lead to further consolidation in the market. It will lead to less consumer choice. It will give much greater power to the bigger operators, the national consolidators and bigger brokers who can sustain a price war. Therefore, ultimately consumer choice would be hampered and certainly reduced.
Clatworthy: It would be more than that. It would be, I would suggest, the insurer-owned brokers possibly who would benefit, as opposed to the large consolidators, because the cost of certain things that you would have to disclose as income disclosure as an independent broker falls away to another resource that is outside of the grasp of what needs to be disclosed.
Young: It certainly does not guarantee that prices will come down for the consumer, because if it is controlled as part of the premium cost established by a consumer, that is the price. We were hearing earlier that the trigger over the last eight or nine years for insurers to change their way of doing things was looking at their own internal costs, the acquisition cost of getting new
business. The distributors have been very, very clever at finding slick ways of getting the business to come
to them and the insurers have
benefited from it. Distribution and the people who have higher rates of commission have forced insurers to address what an insurance company is there for, not to live off its investment income, but to have true return on capital and underwriting profits. We have seen the whole market transformed by distributors over the past 10 years such that we have a healthy insurance market that, we hope, is making an underlying strong underwriting profit and return on capital.
Linnell: I thought we were in a soft market at the moment.
Young: We are in a soft market, but I am just saying that it is the distributors who have brought this about, not the insurance companies.
Hayward: With any other professional service provider – you deal with your solicitor, your accountant – you know exactly what their added value is. Why are we different? Why is the insurance industry different? Is disclosure a threat to a broker? Is there a problem with it? Is it an issue?
Clatworthy: There is no threat and no issue to it, because if the consumer wants to know it is disclosed to them. The difference is it is a piece of information that I want to know as an end consumer because it will influence where I place my business and what value I perceive the broker is giving, as opposed to a smack in the face with a wet mackerel and giving the end consumer more information than they know what to do with. The biggest level of complaint that comes in from end user customers, and you guys are commercial insurance brokers, is the amount of paperwork and documentation. All of those things, yes, are absolutely necessary, but your client then says, ‘look guys, what is the bottom line and what does it mean? How much am I paying for what I want to pay?’ We have an open and vibrant broker marker and, at the end of the day, if they are unhappy with the price that they are paying they can vote with their feet.