Mike Williams says independent brokers are facing many threats but professionalism will help to secure their future
?The broker landscape has changed dramatically since I vacated the chief executive’s chair at Biba some four years ago.
The biggest change has been in regulation. On 1 July 2003, parliament formally approved the legislation that brought mortgages and the selling of general insurance into the scope of statutory regulation by the FSA.
Statutory regulation of general insurance was introduced to satisfy two EU Directives – the Insurance Mediation Directive and the Distance Marketing Directive. The government chose to give the new responsibility to the FSA rather than amend the self-regulatory regime overseen by the old General Insurance Standards Council.
This brought a seismic change to the industry – and the tremors continue to reverberate around the market to this day.
Brokers discovered that the demands of regulation placed a heavy burden on their businesses in terms of complexity, cost and time. Some struggled to cope and looked to compliance-support providers for help.
Others decided to throw in their lot with a network or consolidator. This move to join networks, coupled with the growth and expansion of the aggregators and the impact of a soft market which has now lasted for four years, has been a key reason for the 20% reduction in the number of independent GI intermediaries since I left Biba.
The rapid rise of the insurance aggregator is something I would not have predicted when working in the organisation.
There is no doubting how successful the model has been, using the leverage of size to hammer out great commission deals from insurers, but it has come at a price. That price has been the independence of member firms. That has been the one real change that has caused me some concern. Whereas in the past networks were happy to function as membership outfits, now they seek to buy brokers and take full control, enabling the network or aggregator itself to control vast swathes of distribution.
The consolidators seem intent on buying out all the little guys operating in personal lines. Smaller firms are under real pressure because they struggle to obtain access to markets or competitive terms and so lose revenue.
At the same time costs are rising, partly because of regulation, and many principals are getting older. They face tough challenges but they have options.
They can sign up to a network that offers access to new markets, but will not look to strip them of their independence by seeking to buy their businesses.
If they can remain independent, the outlook for smaller brokers is brighter than it was several years ago.
“The consolidators seem intent in buying out all the little guys operating in personal lines
Back then, insurers were actively culling agencies with smaller brokers, believing it was impossible to write profitable business with them. That has all changed.
The smaller players are now flavour of the month because they deliver better margins, with less client churning, are easy to service and do not expose insurers to huge, potentially costly risks.
At the same time, the medium to large brokers have become more empowered and are often able to dictate terms with insurers.
However, the trend for insurers and aggregators to buy brokers has meant greater concentration of power in some parts of the intermediary marketplace, which is bad for the sector’s independence and possibly bad for the client.
There have also been welcome moves to improve the professionalism of the insurance intermediary.
This includes The CII’s chartered broker status and Broker Academy. This has helped boost the reputation of the broker, which is now much higher than four years ago.
But we need to concentrate on leveraging this properly by proving the benefits that professionalism delivers.
What has been disappointing is the failure to embrace technology. There appears to have been little or no cost saving to brokers that have invested in new software.
When I left Biba there were around 5,500 independent GI intermediaries. Now the best estimate is around 4,500.
With new challenges in the pipeline in the form of conduct of business rules and principles-based regulation, as well as insurers and aggregators training their sights on the commercial marketplace, how many will be around in another four years’ time?
Mike Williams is managing director of UKGI