Andrew Holt reports on the true state of the broker market, after an in-depth study reveals brokers’ hopes and fears

As intermediaries, insurance brokers occupy a particularly vulnerable place in the food chain, exposed to changes in climate from both insurers and customers, not to mention competition from rival brokers.

Never has this vulnerability been more keenly felt than at the present. Brokers find themselves in a market experiencing a phase of genuine evolution: a period of rapid and fundamental change.

With this in mind, Insurecom set out to examine the changing climate of the insurance industry and its implications for brokers.

It invited 100 leaders from the largest broker firms across the UK to share their hopes and fears for the industry over the next five years.

Not surprisingly brokers have a lot on their minds. Namely, consolidation, costs and communication.

Adapting to changing market pressures seems to be uppermost in their concerns. Well over half of senior managers characterised the immediate future for the industry as a case of ‘adapt or die’.

Continuing market consolidation is causing fear and expectation in equal measure. Growth through mergers and acquisitions remains a key business opportunity.

Yet, at the same time, being undercut, or even snapped up by ever-bigger fish poses a significant threat to the vast majority of large brokers.

These turbulent times are reflected in the concerns currently exercising the minds of business leaders in large brokers.

The majority (57%) of brokers interviewed by Insurecom characterised the prospects for their industry over the next five years as a stark case of “adapt or die”. A worryingly small number – just 14% – expressed optimism over the outlook for the immediate future.

Among the market developments forcing the need to adapt is the continuing consolidation of brokers, a trend which is clearly on brokers’ minds: over half (57%) believe that the small broker no longer represents a viable business model.

Merger and acquisition (M&A) activity is creating expectation and fear in equal measure among major brokers. Given their unique position in the food chain, it is clear that brokers do not have a black and white view of M&A activity in the industry. Consolidation is seen simultaneously as a key growth opportunity and a critical threat to their businesses.

More than three quarters (76%) of senior managers identified growth through M&A as a key business opportunity for the coming five years – with as many as a quarter (25%) seeing consolidation as a significant opportunity.

Yet consolidation loomed equally large among the same respondents when asked about the critical threats facing their businesses.

Over half (59%) are living in fear of takeover from major consolidating brokers, while an overwhelming 90% expressed concerns over competition from larger, more acquisitive rivals.

When brokers are not scanning the market for prey or predators, where do they see the operational growth opportunities over the next five years?

The answer lies in a combination of improved communications, reduced costs and product and service innovation.

Brokers were almost unanimous in identifying improved business communications with insurers (98%) and enhanced electronic business channels for customers, insurers and other brokers (96%) as key growth opportunities. Over 40% of brokers saw each of these as a significant business opportunity for the coming five years.

Crucially, business leaders believe that improving ebusiness communication channels for customers would make their businesses up to one fifth more productive (20%) – a potential productivity gain worth a staggering £1.56bn each year to an industry worth £7.8bn annually.

Improving communication channels with the industry – for instance via access to trading portals such as Imarket – would result in an additional 20% productivity uplift, according to brokers.

Enhancing and extending product and service offerings to customers is another key priority for large insurance brokers.

The overwhelming majority of brokers identified developing the provision of advisory services (88%), improved product innovation (84%) and establishing or enhancing underwriting services (84%) as key business opportunities for the next five years.

Of course, product innovation and diversification alone will not fuel business growth, unless brokers are able to successfully market their new and improved offerings.

With this in mind, brokers almost unanimously identified the need to improve cross-selling of products and services, with 96% signalling this as a growth opportunity, and nearly two thirds (65%) citing cross-selling as a significant growth opportunity.

The eternal battle to strip out costs, a constant and critical challenge for all businesses, also looms large on brokers’ agendas. Nearly all respondents (94%) cited cost reduction through improved back-office technology as a key growth opportunity.

With the exception of the consolidation conundrum, brokers would seem to have a clear view of where the market opportunities lie for their firms. So what is getting in the way of exploiting these to achieve their growth objectives?

The greatest barrier to growth is the legacy of the last major wind of change to blow through the insurance industry – the burden of FSA compliance.

Since the new regime for general insurance came into force on 14 January 2005, brokers have largely come to terms with the rigours of regulation by the FSA and the compliance processes and procedures that this has imposed.

However, brokers are still struggling with the impact this has on their business resources.

Brokers identified meeting FSA compliance requirements as the greatest barrier to achieving business growth, with three quarters (75%) of major brokers citing compliance as a major obstacle to growth efforts.

Significantly, a look at brokers’ main bugbears when it comes to FSA compliance sheds further light on this frustration: nearly three quarters (71%) bemoan the large volumes of documentation to be produced in order to demonstrate compliance, while over half (57%) expressed frustration that valuable business resource is being taken up by FSA reporting procedures.

“Over half (59%) are living in fear of takeover from major consolidating brokers

Consequently, major brokers believe that their firms could enhance productivity by close to a tenth (8%) on average with more efficient compliance procedures equivalent to over £0.5bn in additional output across the industry.

A shockingly high proportion of brokers – some two thirds (65%) – identified complacency in the industry as a whole as a critical barrier to business growth, the third greatest barrier facing broker firms.

However, a closer look also reveals a range of internal failings among brokers. According to respondents, firms’ own inefficiencies are also holding back efforts to achieve growth objectives.

Significant numbers of business leaders identified cumbersome reporting features (69%), inefficient working practices and workflow processes (65%), a lack of business performance visibility (63%) and a lack of uniform procedures across their company (55%) as significant factors holding back business growth.

The impact of this on business growth is clear: close to two thirds (61%) of respondents bemoaned a lack of ability to exploit new business opportunities in niche markets – this in an industry which lists product innovation and diversification among its key growth opportunities.

Technology has a clear role to play in driving efficiencies, improving ineffective working practices, and ultimately enabling brokers to focus resources on achieving growth: more than half (55%) of major brokers listed poorly adapted and ageing broker software applications among the barriers to growth faced by their firms.

While eyeing opportunities for expansion and struggling to overcome growth hurdles, major brokers are also keenly aware of the threats to their business inherent in the market environment in which they operate.

But apart from consolidation, what exactly is it that brokers are being forced to adapt to? What are the trends and developments driving market evolution?

An overwhelming majority of business leaders in major brokerages – some four fifths (79%) – identified changing business models, and the need to adapt to these, as a critical threat to their businesses, representing the greatest threat after consolidation.

Among the trends worrying large brokers in this respect are the presence of direct insurer products, a threat signalled by nearly three quarters (72%) of brokers, and the commoditisation of commercial insurance lines (61%) – trends which threaten the intermediary business model itself.

These developments are all the more disconcerting in a market devoid of customer loyalty – an eternal problem for the insurance industry, and one cited as a threat by over two thirds (69%) of brokers.

Equally worrying in a market which demands new business models is brokers’ apparent inability to commercialise new product lines.

Perhaps unsurprisingly, regulation raised its troublesome head once more when brokers were asked about the threats facing their business, with three quarters (75%) of major brokers listing the cost of FSA compliance among their key concerns.

The inefficiencies revealed are also adding to brokers’ worries, with close to three quarters (71%) citing inefficient working practices and workflow processes as a threat to their business.

A brokers’ software application represents a major investment. The technology deployed plays a critical role in the efficient day-to-day running of all aspects of a broker’s operations, and has a fundamental impact on the company’s ability to adapt in line with market needs.

There is a clear role for technology to play in helping major brokers minimise the threats and realise the opportunities facing their businesses: the majority of brokers questioned pointed to the damaging impact outdated applications are having on their efforts to achieve growth.

Business leaders in major brokers estimate that improved automation could enhance their firms’ productivity by close to a tenth (8%) – equivalent to over £0.5bn additional output for the industry as a whole every year.

In addition, better-adapted software would strip away close to one fifth (17%) of back-office costs.

Yet this research reveals that the technology currently in use in the industry simply isn’t delivering these benefits, or supporting brokers’ requirements as they strive to keep pace with market evolution.

Less than a quarter – just 22% – of managers are entirely satisfied with the overall benefits their software application provides. Fewer still (16%) expressed total satisfaction with the value for money their application represents.

When analysed directly against the opportunities and threats brokers said their businesses are facing, current technology fell just as short. The research found that:

• Less than one fifth of major brokers (18%) are entirely satisfied with their current software application’s ability to easily integrate with other systems, for example following a merger or acquisition

• Just 14% expressed total satisfaction with their application’s ability to evolve with their business needs by providing feature innovations and software updates

• Only a tenth are ‘very satisfied’ with their system’s ability to support product innovation and enable the deployment of new schemes

• Just 12% are entirely happy with the ability to drive cost efficiencies and contribute to back-office cost reduction

• Only 14% believe their broker software application fully streamlines FSA compliance tasks

• A mere quarter (25%) expressed total satisfaction with the ability to deliver end-to-end workflow automation and reduce the burden of documentation

• Less than a fifth (18%) of brokers believe their system delivers reporting features that are fully adapted to the needs of their business.

In this light, it seems unsurprising that an overwhelming three quarters (74%) of brokers are calling for a radical technological shift from software providers towards full end-to-end process automation.

In much the same way as brokers themselves, the technology at their disposal needs to evolve if it is to support brokers’ needs in the twenty first century.