As new regulatory and financial influences take shape in the broking world, it’s more difficult than ever to predict what the coming year will hold
New government means new bureaucracy. In the wake of the economic crisis, the newly installed coalition has decided to radically overhaul the way the City and its financial institutions are regulated.
The economy will remain a huge concern for the insurance industry, with customers still price sensitive and margins therefore inevitably squeezed, but it is regulatory change that brokers will be keeping their beady eyes on over the next 12 months.
In June, chancellor of the Exchequer George Osborne confirmed plans to abolish the Financial Services Authority. The FSA had been widely criticised for its failure to properly police the City in the risk-taking days that led to the start of the credit crunch in 2007.
Brokers have until October to voice their opinions in a Treasury consultation document on exactly what form the new system will take.
Although the FSA will not be abolished until 2012, it is over the coming year that the details of its successor bodies will be fleshed out.
It is not yet settled whether broking will fall within the remit of the Prudential Regulatory Authority – which will become part of the Bank of England – or be the reponsibility of the Consumer Protection and Markets Authority. The latter would make more sense, because it is likely to include hot topics such as the alleged mis-selling of payment protection insurance (PPI).
Either way, broking should receive greater and better quality attention from regulators since it will not be lost among many issues overseen by one overbearing FSA.
“We would like to see more broker-centric regulation,” argues industry body the Institute of Insurance Brokers’ chief executive, Barbara Bradshaw. “Brokers have felt that in general the FSA is a great big melting pot that’s in with the insurers and the banks.”
The knock-on effects of the PPI scandal are expected to become even more acute. Already some brokers have found their levies to the Financial Services Compensation Scheme (FSCS) increasing by 800%. And with 6,000 new claims expected this year – up from barely 600 in 2008/09 – those costs could get worse.
The deep and widespread concern felt about this increase has sparked Insurance Times’ Fair Fees campaign.
Although few believe brokers should bear the brunt of this cost, given that hardly any companies in the broking community profited from PPI, it may well be the sector within the insurance industry that suffers most.
Bradshaw believes that “quite a few brokers” could end up bankrupted by the exorbitant costs. “How are they going to manage further [FSCS] increases when the market is so soft?” she asks.
Andy Watson, head of UK retail at Belgo-Dutch group Fortis Insurance, agrees. “Brokers in particular have been hard done by,” he says. “The increased FSCS fee has been, and will continue to be, material and have an impact on [Fortis’ subsidiaries] RIAS and FIS.”
The backdrop for the increased FSCS levy is the ongoing weakness of the economy. Bluefin chief executive Stuart Reid says there is even “a chance of the situation getting worse”.
Bluefin found much of the pressure last year was felt by small and medium-sized businesses, but cost-cutting could spread to larger corporate customers as they become just as price-sensitive when shopping for policies and advice.
The new coalition government certainly faces its own pressure this year – to find some way to relieve the financial misery that spills into the insurance sector. IT
Bubbling under: who’s knocking on the top 50 door?
A few years ago, business insurance and commercial finance portal Xbridge’s 2009 figures would have secured it a place in the Top 50. If it continues its current rate of growth it will surely appear in next year’s table. Xbridge has made significant progress in 2009, with top-line growth of 39% as it moves towards profit. Breaking new ground is not easy and trying to emulate the online processing models of the personal lines market in the commercial sector has proved challenging.
But this is not the only business to have been making progress. Lloyd’s broker Lonmar Global Risks will almost certainly emerge in the Top 50 next year following its buy-out from Bluefin. We are awaiting Lonmar’s 2009 accounts but are confident it will enter the Top 50 alongside Xbridge.
The Allen & Allen Group, an established non-standard motor broker that has broadened its business into other personal lines, has long been a possible Top 50 contender but we have struggled to analyse its accounts to compare them with other brokers. Unlike many brokers it presents its account with a cost of sales figure, which has traditionally been interpreted as being premiums payable to insurers. But it is apparent that with changing business models, brokers with high acquisition costs are classifying these as cost of sales rather than operating expenses. We expect to see A&A in the next Top 50.
Insure & Go is another example of a broker that treats acquisition costs differently, but with further examination of its details we also expect it to feature in next year’s Top 50.
So what about businesses that are just plain doing well, whose development is steady rather than spectacular. They are the unsung heroes, held back from the Top 50 by the recession in 2009, which we believe will pick up in 2010 and 2011:
• Norwich-based Alan Boswell Group, which has achieved steady growth across all areas of business, including personal lines, while maintaining good margins and not straining its balance sheet. Being dominant in a geographic market has its rewards.
• Aston Scott, which continues to achieve steady growth with a mixture of organic development and acquisition of businesses and teams. What differentiates it is that having made acquisitions it concentrates on them and builds them out so that they start to fulfil their potential before management move onto their next initiative.
• Academy’s growth, slowed by the recession, keeps it in the up-and-coming group. With renewed growth and increased activity as the economy starts to grow again, we expect its performance to pick up and gain it a ranking.
• CBG, the AIM-listed broker, whose business underwent reorganisation and retrenchment in 2009. Expectations for 2010 and 2011 are that it will be moving ahead again.
• F Wilson, which has achieved steady growth in the personal lines sector and could easily break into the Top 50 in 2011.
• Agria Pet Insurance, acquired in 2007 by Swedish insurance group the Länsförsäkrings Alliance, has maintained steady growth in its specialist sector and could enter the Top 50 in two or three years’ time.
James Simpson, IMAS