Insurance Times together with our partner, Norwich Union held a roundtable discussion where a panel of experts gave their views on the state of the North East market and the issues it faces.
Leeds has sprung up as a competitive regional financial centre in the last few years, which presents challenges for regional brokers said Illingworth McNair’s Jamie Illingworth.
Steve Dunn, of Thurcroft Insurance Brokers, agreed: “Yes, it is pretty competitive. I am not sure that Rotherham is quite as competitive as Leeds, but I think there is a desire among insurers to increase rates without them having any success in doing it. They can be pushed on rate all the time. Brokers are our biggest problem, in that we just cut each other’s throats, and are prepared to work for far too little. We should be working together to try to get some sensible rating into the market.”
There is also a lack of old-fashioned face-to-face advice, warned Jon Hall of HTC Associates, of Heaton.
“We deal a lot with the professions, of course, and we find that there is a lack of professional people having face-to-face quality advice given to them. We also deal with reasonably sizeable commercial business, and I think that probably is a message we are getting from other clients as well.”
But there is also the problem of new providers offering unsustainable prices, warned Brian Jackson of BIB Insurance, Darlington. He said: “One of the biggest threats to the corporate book seems to be what I term ‘out of towners’ with schemes attacking our client base. There are examples of premiums being taken out of the market by very unsustainable underwriting by some of these schemes.”
Hall added: “The worry is that it is not done right. You really cannot believe how they are getting away with it. Fortunately, the professions are quite educated, so they do realise that to a certain extent. However, a lot of general business people will fall for the low premium.”
When asked whether FSA regulation would help stem the tide of low, unsustainable premiums, Hall said: “Yes, but how far do you want to regulate? The FSA is going on to the principle-based idea now, and I think that is probably a good move, but how far down do you go to check the quotations of these sorts of people? You have to wait for some disaster to happen, where you are getting a lot of claims against these so-called brokers and the FSA has got to step in. Whether it will, I do not know.”
But David Biggs, an IFA from Sheffield, believed that while such pricing problems did exist, they would correct themselves when the economy improved. He said: “When rates are low, you get some very poor broking competition in the market. It is just a bottom line price, almost. I very much believe that the market needs to turn and turn quickly, because the better brokers will shine when the market is tougher.”
The conversation soon turned to the state of the market and the sustainability of current pricing models. Norwich Union’s George Berrie said: “We have this hideous gap between cause and effect in our business. When the rates come down, the profits might still be there, because the lag between the rate and the profit or loss is about 18 months to two years behind the event. That is sometimes why you get an over-correction. Then you find that you start making a profit, but the rate increases are still going through.
“Not only has there been four years of reducing rates, and the compound effect from that can be quite significant, we now have this new situation where inflation is starting to creep up. It does not show any real signs of stopping in the next few months, so we have to factor that in to where rates are going. The pressure is still on to get these rates up, but it is not happening anything like quick enough.”
Richard Sykes, of Marshall Wooldridge, said that brokers have a duty to educate their clients on the dynamics of the market. He said: “We broke into the Leeds market, which is very, very competitive. We pulled out of new business cases because there were three or four other brokers looking at that particular risk. We are trying to educate clients on the back of that saying, ‘why are you going to two or three brokers? You are going to get the whole of the market to decline, because you are just swamping the market with the quotes’.”
The notion of a hardening market also threw up issues of treating customers fairly. Robert Hartley, of Joseph Burley & Partners, Hartley, said: “There is the requirement, no matter how much we would like to support and hold the market, that we have to show we have been treating customers fairly, we have gone out to get alternative quotations at renewal, and that often drives the price down.”
“We have been owned by AXA for 18 months, and I can say, absolutely hand on heart, we have had no pressure at all to put any business with AXA. That is the absolute truth of the matter.
Neil Thornton, Smart & Cook
But Cue & Todd’s Stevan Cue did not see a hardening of the market coming any time soon. He said: “I do not personally see any hardening at all in the general sense of things, not even on the fleet market, which tends to be a barometer. In the same way as others here have said, I have been talking about the market changing probably since the beginning of 2006. We were talking about 2008, looking at 2009, maybe things will change then. I am not terribly convinced at the moment.”
But NU’s Berrie said the insurer was bucking the trend with its pricing strategy. He said: “I take some heart that for a significant number of months our commercial fleet and commercial motor book is showing modest increases month on month. There has been a little price to pay on that on retention so we are going to carry that trend on. Early indications are that for the motor book, it is starting to work, but that is just for us; I cannot speak for the rest of the market. All the evidence would suggest it is not happening elsewhere.”
Berrie said that NU’s position as the largest insurer carried a responsibility to lead the market, but added: “As the largest insurer in the UK, we have probably got a bit of responsibility to lead this anyway, provided we do not take a bath in the process. We are being very sensible about it, gently, gently increasing the rates, and so far it is working. Again, the further up the premium food chain you go, it becomes very difficult. ”
The struggle to renew business was another important element that the panellists saw as having an effect on maintaining the soft market. Tim Austin, of Dobson & Hodge, brought up the conundrum brokers face of whether to retain customers at the expense of profit margins. He said: “It is like the old towel that you wring water out of. You get good rates the first year, a bit more the second year, but there is a limit to what you can do the third year, because the claims are coming up, the premiums are coming down, and you are going to meet in the middle.”
Clive Thurston, of W Denis Insurance Brokers, put this down to oversupply in the market. He said: “The market itself is basic economics: supply and demand, simple as that. Unfortunately, at the present time, there is just too much supply of capacity. That is driving the rates down. Until the point comes when that capacity starts drying up, then we have this very competitive environment which is just going to continue.”
Thurston added: “Insurance company failures – well, that in itself would just reduce capacity. In some respects, as a broker perhaps you want to see that – not the very important names, but some of the fringe players, once they start getting into financial difficulty; that is music to our ears to a certain extent.”
The debate then moved on to the contentious issue of brokers’ ownership structures and whether brokers owned by insurers could ever be impartial. Smart & Cook’s Neil Thornton, whose firm is owned by AXA, came under the spotlight from other brokers.
Thornton’s reply to the issue of impartiality was unequivocal. He said: “We have been owned by AXA for 18 months, and I can say, absolutely hand on heart, we have had no pressure at all to put any business with AXA. That is the absolute truth of the matter.”
NU’s Berrie said that the insurer watches closely the business going through brokers that have insurer owners. He said: “All I do is look at the numbers. Any broker that is wholly owned or partly owned by another insurance company, I look at the numbers very closely every month, in great detail. We have stuck barometers and thermometers in every account just to make sure that we are not seeing anything odd.”
But Berrie reminded delegates that NU was on hand to help smaller brokers if it helped them remain independent. He added: “We are prepared on occasion to lend an independent broker money to forward their aims, so that they can achieve their aspirations to remain independent. That is part of our strategy. We are not really interested in taking broker stakes in volume at all. We might, on very rare occasions, if it stacks up, take a small minority stake, but never to the degree that it would influence the day-to-day running of that brokerage. We do not think that is our business.”
But what about networks? Is there a conflict of interest there? Dunn did not believe so, citing no additional pressures from their network to place business in that specific market. He said: “Being part of Willis Network does not exercise any pressure on us at all. We like to put as much business into the network markets as we can, but we are completely free to use whatever markets we need to use. It is like any independent, really.”
But Thornton countered the notion that networks are independent. He said: “People will join networks, for a reason. That reason is to increase income. Dress it up in lots of other areas, but the principle motivating reason is to increase income, which is supporting certain markets.”
“We are being very sensible about it, gently, gently increasing the rates, and so far it is working. Again, the further up the premium food chain you go, it becomes very difficult. We tend to go up more often than down.
George Berrie, NU
Thornton said there was also an element of trust that is required when insurers have a stake in a brokerage. He said: “The only thing that we could say was please judge us on our actions. If we let you down, then come and beat us up. But if we do not, if we are true to our word that we are independent and that we will place business as an independent broker, then there should be no problem. All I can say is that over the past 18 months we have not had a problem with any insurer at all.”
As ever when brokers get together, regulation was a hot topic – with commission disclosure at the top of the list. Thornton was vocal on the need for smaller brokers to take the lead. He said: “National brokers have got their act together on commission disclosure. They are lobbying and they have got slick marketing campaigns. They are marketing to MPs. The independent brokers, of which I am one, have not got our act together at all.”
Thornton, who sits on the board of Biba, cited the lack of collective action from brokers as contributing to this malaise. He added: “Biba has 2,500 members, and what it is saying is, ‘look guys, we cannot put words in your mouth. You have to give us this feedback so that we can then take it to FSA and lay it in front of it’. No one responds.”
Biggs questioned the need for commission disclosure. He said: “The public do not require commission disclosure, particularly in this market we are in at the moment. A lot of people just look at the bottom line. They are not really that bothered what we make out of it.”
But Hall believed professions are adopting a different approach. “We do find it in the professions – they want to know the commission.”
Andy Green, of Norwich Union, added: “The key thing is the price to customers would very rarely change. Their premiums are the same.”
But Thurston believed this might change if the premium reached a high level. He said: “Around this table, there are probably market forces that drive an account being converted from commission to fee if the premium goes above a certain level. In some respects, you cannot get away with charging the commission; the market will drive it, again.”
Aggregators and the rise of technology brought a mixed response from brokers. With most of the attendees dealing mainly in commercial lines, they tended not to perceive aggregators as an immediate threat. Hartley said: “I do not really see the aggregators as a threat to us, certainly not motor and the very small package type businesses. It is not our market. Obviously, if it got a lot bigger, then we would be more concerned.”
Yet Thornton was far more wary of aggregators’ increasing scope and the challenge they pose to the broking community. He said: “I think the aggregators are a real, genuine threat to broking. We have to be careful not to say, ‘well, if it is just personal lines or the small commercial stuff’, because it will just creep up and up and they will take more of our market. I do think the aggregators are a threat.”
Hall agreed, citing the potential aggregators have with professional indemity (PI). He said: “It works around PI as well, because PI is one policy. It is not like a combined policy where you do not have to take a lot of factors into account.”
But Berrie believed that ultimately brokers remain king on complex quote requests. He said: “There is a world of difference between getting a quick quote from a few questions and giving professional broking advice to that client, because a car is a car, for the most part.”
There is a lot to be gained by doing things the old fashioned way; at least that is what the brokers representing the North East were recommending when it comes to meeting clients face to face. And they are absolutely right. Brokers thrive by giving good advice. Simply put, spending time with clients is good for business. I was surprised (and impressed) therefore, that the brokers at this round table event were not slow to criticise their own industry for less-than-perfect performance from time to time. Examples were, presentations that were lacking in detail or accuracy and even leaving gaps in cover for the client they were trying to win. Reducing brokers value by only taking the cheap approach might win a client in the short term, but all it really does is create churn and push up brokers admin costs. The view around this table was that there is still a huge opportunity to pick up new business if brokers stick to the professional approach of sitting down with their clients to discuss what is right for them. Peace of mind first, price second. If the client does not have the former, the latter is surely a waste of money.
I am sure this approach also helps to fend off the threat to some brokers from the out of towners; a phrase used by one North East broker to describe large brokers muscling in with schemes priced at unsustainable levels.
Listening to brokers at these events and learning how Norwich Union can influence or do things better is one of the reasons why we wanted to bring you to the table. Today, I have learnt that we should be reprimanded for dual pricing. That is to say, the difference between our new business and renewal prices is not helping the market to harden. It is a fair criticism and one that we are beginning to address. However, not allowing me to eat all the humble pie was Steven Cue, managing director of Cue and Todd, who said: It is a lesson for us all, but a hard one to execute.
Another topic that entered the discussion was the distribution of small business insurance. Should it stay with brokers or should it go? We at Norwich Union hope that it will stay with brokers. But although opinion here was mixed, there was one theme that everyone agreed about; simplify the process and reduce the transactional costs and it just might stand a chance.
Getting together like this is very worthwhile, there is always a new insight that can only be gained through discussion and debate. Thanks to Insurance Times and all those brokers that came along and took part.