There was every chance that 2002 was going to produce the first industry underwriting profit for many years. But then came 11 September. However, the fundamentals of the UK market have not materially changed - in fact the outlook is even brighter.

Reinsurance costs will increase, but for the larger players this represents less than 1% of costs and a doubling of rates will mean only a 1% increase in premiums. Lower interest rates mean reduced investment income, but conversely investors should expect lower returns on capital.

The reduction in capital adequacies is being replaced by new money with every chance of surplus capacity returning by 2003/4, especially if returns are above 15%.

Undoubtedly, there will be a period of extreme volatility from now until the end of the first quarter 2002, as plans are revised and strategies rethought, but after that a stable pattern should emerge.

Premiums will rise, especially in the property and liability classes; lines on capacity risks will reduce; it will be difficult to place poor quality and unusual risks and there will be withdrawals from the market.

However, these should not produce meltdown and an overall increase of 15% to 20% in premiums for businesses would seem to be the consensus. This makes the UK market very attractive and will transform the profitability of provincial brokers.

Provincial brokers are mainly remunerated by commission and have certain strengths which make their businesses attractive to insurers. They can control costs easily and have a virtual monopoly in the SME sector.

They have strong relationships with their clients, and most of their business is well spread.

In view of this, premium increases should feed straight through to the bottom line. Any commission reductions will have a limited impact as, unlike the last two years when increases were confined to the low commission, motor classes, premium increases will be in the higher commission areas.

Most brokers who are performing to industry benchmarks should see a doubling of net profit - 30% returns on revenue should be the norm.

It is, therefore, vital that brokers plan to capitalise on this bonanza. They will have to work hard to achieve this especially in a chaotic market.

In particular, they must review strategy and business plans. The prime strategy must be retention of business. Other strategies such as acquisitions, marketing-led growth and diversification should be followed only if there are surplus resources.

It is also important that brokers improve client communications, keeping them advised of the market situation so there are no nasty surprises, and they can adjust their own budgets and pricing strategies.

New insurer relationships and access to markets are key to success. If this is not possible, joining a business network may be advantageous.

And when there are surplus profits, consider investing them in such infrastructure as new technology.

Above all, delay selling. Take the profits. It is unlikely purchase prices for brokers will reflect the new rosy future.

The payback years for provincial brokers will be 2002/3. It is the time to harvest all the rewards after the tough times of the 1990s, but focus is vital.

  • Tony Cornell is an independent consultant at Cornell Consulting.

  • Topics