Grant Ellis reveals why the networks will consolidate in 2008, and why the influence of the broker consolidators is bad news for insurers looking to cut commissions
Though he is used to the spotlight, Grant Ellis has been in the news even more than usual of late. His company, Broker Network, is understood to be in the concluding phase of talks with the 140-member broker alliance, Westinsure.
Though he won't comment on the specifics the deal, Ellis argues that given their key strategic role in the ongoing 'distribution war', networks will soon start to buy each other.
"I think this year you will see things starting to polarize. You have got three or four big players out there.
"The debate has moved on from 'shall I join a network?' to 'who shall I join?'. That's great for us. I'm predicting that 80 per cent of brokers will be in networks by 2013."
Ellis identifies consolidation, commission rates and commission disclosure as his key three issues at Biba - even if no one is talking about the third.
"Nobody has mentioned [commission disclosure] to me," he observes. "I get the impression people are weary with it, and are resigned. It's a bit bizzare."
"Broker consolidation seems to dominate conversations," he adds. "But a lot of it is gossip."
Soft markets, soft targets
Much less speculative is Ellis' assertion that broker commissions will not be falling any time soon.
"Commission coming down has always been a soft target for insurers," he says.
"If the broker community were making excessive profits, it would be a legitimate target. But the reality is it isn't.
“I think this year you will see [the networks] starting to polarize.
"We should be concentrating on rating on the one hand, but also costs. We're a still a very inefficient industry when it comes to our cost of distribution.
"I'll very happily cut commissions as long as I can still make the same profit. But in order to that, I have to be cutting costs. But right now, I can't do that."
As a result, he says, brokers won't budge on the issue.
"This time around we have a far fewer, much bigger distributors who - let's face it - are in a much stronger negotiating position. ... The days of the old cottage industry of smaller brokers and big suppliers dictating terms are gone. This time, saying we're going to cut commissions is not as easy as it sounds. That's why MGA's are becoming much more popular."
Commenting on private equity's heightened interest in the sector that has resulted in some of the smaller players getting big in a hurry, Ellis suggests that eventually consolidators must start buying consolidators.
"That's got to happen," he says. "That might give one or two people a bit of indigestion in terms of the amount of capital they are going to need."
"I'm surprised we've had so much [investment] so quickly," he adds.
"It has to stop at some point, because there aren't the targets out there. So by the end of 2008, I see the interest of private equity in the sector to be tempered a little bit."