The time for resting on laurels has long since past. The brokers that take steps to add value and diversify may find they boast a growing business while those around them struggle. Katie Puckett reports
As the recession drags on, brokers are leaving no stone unturned in their search for new business. Some, like Jeremy Pace, are even looking in their own bathrooms.
Pace, managing director of general insurance firm Pace Ward in Stoke-on-Trent, successfully pitched to his own builder for work, as part of his quest to find new clients who are managing to survive the downturn.
“If you don’t ask, you don’t get,” Pace says. “People are still spending money in some areas. Anyone who’s changing their business model is doing well. This client used to install bathrooms for new-build housing, but now they’re doing them direct for the public. The numbers aren’t huge, but they’re starting two new jobs a week, they’re booked up until the end of June, and the average spend is between £8,000 and £15,000.”
Across the sector, brokers are all too aware of the pressures facing their clients. According to Biba, half of all small and medium-sized businesses are cutting their insurance spend. And despite Ernst & Young’s forecast, published last month, being more optimistic than many others, it still predicted no upturn until next spring. By that time, many more businesses will have folded. So what does this mean for brokers?
Innovate to accumulate
As clients go under or their turnovers and wage rolls shrink, brokers’ commission or fee income is dropping. Survival strategies fall broadly into two categories: winning more business – in niche areas or through existing clients – and cutting back on costs through better use of technology or joining with other firms or networks. Some firms have to reconsider their business models completely.
Graeme Trudgill, Biba’s technical and corporate affairs executive, believes brokers must work harder than ever to demonstrate the value of their services. “Clients are cutting back,” he says. “They’re buying the ‘need to have’ rather than things that are ‘nice to have’. Companies’ wage rolls have reduced, so premiums have reduced, and so commissions have reduced. It’s very, very competitive out there.”
But diversifying can help brokers buck the downward trend. For example, Pace Ward’s income was up 14% for the first six months of this year versus the same period last year. “We’ve increased our marketing spend quite significantly,” Pace says. “We’re targeting niche areas where we’ve been quite successful, asking existing clients for referrals.”
The firm has done well in the car sales market and with traditional manufacturing businesses, which are themselves branching out, like that bathroom fitter. Pace has also taken out advertising in magazines aimed at the high net worth market. “They’re quite valuable clients. A family fleet policy might be worth £3,500 to £4,000, for instance, but it’s still just one policy for us to administer.”
He echoes Trudgill’s concerns about brokers demonstrating the value of their services. “Brokers are traditionally good at what they do, but what they’re not good at is telling people what they do. If we go and see clients and give a presentation, what they don’t see is work behind the scenes, the dialogue when we’re describing their business risks to half a dozen underwriters.”
It’s not just recession weighing down on smaller businesses: there’s a greater regulatory burden too, and it’s driving some of them to drastic changes.
WH&R McCartney in Motherwell, Lanarkshire, is a family-owned business that has changed little since it was established in 1932. Third-generation director Graeme Robb says it has been driven to modernise fast.
“We saw the way insurance was going, so we’re trying to drive our business on to a more professional set-up, for want of a better word. It had to be done,” he says. “How we were operating was very old fashioned. We didn’t know how to delegate and we were completely overloaded at the top of the business.”
Now, instead of clients having a single point of contact within the firm who would deal with every aspect of administering the policy, they have several. Tasks are split across the team, freeing up valuable management time.
With so much personal lines business now done direct or via the internet, commercial lines now make up 90% of the firm’s work, which is more than ever before. Robb is also chasing new opportunities in specialist markets such as charity and social welfare.
“We’ve been targeting clients instead of just waiting for business to fall our way, which we had been guilty of,” he says. For the last three years, this strategy has seen the business grow between 7.5% and 10%, though this year growth will be flat.
Some brokers believe networks are the best way to help them access new markets. Both Pace Ward and WH&R McCartney are members of the Broker Network, and attribute that to at least part of their success.
Pace Ward joined nine years ago, and Pace says that it has only been able to serve some of its new specialist clients because of that. “We can approach more niche insurers that not all brokers can, and we have bulk buying power, so we’ve got a very broad market we can access. On our own, they wouldn’t maintain an agency with us.”
But while networks may have given brokers greater clout with insurers in the past – Broker Network’s total gross written premium is more than £500m, compared with £3.3m for a minnow like WH&R McCartney – the tide appears to be turning.
Insurers, wringing the cost of their distribution channels, are either starting to rebel against the higher commissions demanded by the networks, or are setting up their own quasi-networks to reclaim control of the market.
This is putting off some brokers from joining. “We can see both the benefits of it, and potential downsides,” says one company director, who has chosen to remain independent. “Insurers are starting to react against networks and what they see as bully-boy tactics in terms of driving commissions up over the years.”
“They’re reacting badly to what they see as being forced into business dealings they might not otherwise have done,” he continues. “We have stood or fallen on our ability to grow accounts with underwriters and negotiate the most favourable terms that we can without having to use the might of a network to do that.”
Networks are only worthwhile for smaller brokers, believes Robin Lucas, managing director of Lucas Fettes & Partners, which has nine branches and 200 staff. “We are a profitable and acquiring business – why would we want to join a network when all it means is sharing responsibility? I think networks are for smaller brokers who don’t have all of the agencies or critical mass to ask for terms that are competitive.”
“Start-ups have a good place in networks, before they’re big enough to fly on their own,” Lucas adds. “I think of a network as a nursery: it’s a good place to start; it’s not a good place to finish.”
The other benefit to networks is that they offer centralised services to cut the burden of administration, marketing or, most importantly, regulation on small businesses. Pace uses Broker Network’s services to create marketing materials and target potential new business via telemarketing. And if his firm didn’t use Broker Network’s compliance services, he says, this would take an employee three days of work every week, rather than two a month.
Meanwhile, Trudgill suggests the decision to join a network is often a case of personality as much as anything else.
“We have many members who like to be independent; they don’t want to answer to anybody and they have strong opinions of where they want the business to go. Others like to be part of a community. Being independent means you can react to things faster and you’re not spending money being part of a network, but if you do, you can get a higher commission rate on business and there are benefits you can lean on in a recession.”
But some brokers may not survive the recession at all. The pace of consolidation in the broker market may have slowed down considerably in the past year, as finance became scarce, but Trudgill expects it to continue. “Smaller brokers might merge with each other so they can have a full-time marketing person, a full-time IT person, a full-time regulation person,” he points out.
For Robb at WH&R McCartney, organic growth is preferable, but he has earmarked a few acquisition targets. “We’re talking to local brokers, where maybe people are due to retire over the next three or four years.”
Meanwhile, brokers acting as managing general agents, underwriting policies on behalf of insurers, have already been shunned by major insurers including Norwich Union (soon to be Aviva) and Axa.
Trudgill believes this trend will continue: “In recession, everyone talks about getting back to their core business. Insurers will be focusing on traditional underwriting rather than competing on price. They want to bring back control.”
But it’s still too early to tell what permanent changes the broker sector might undergo. Trudgill says: “It’s still an unknown out there. Brokers are certainly spending very carefully. There’s pressure on everybody.”