Insurance Times and Norwich Union held a roundtable discussion where experts exchanged views on the state of the North West market and the challenges it faces.
As the Insurance Times tour of the UK, in association with Norwich Union, enters its final stages, the team went to Manchester to gather the views of brokers in the North West. A lively bunch, the brokers represented a mix of independents, consolidators and nationals – and their opinions were as diverse as their business models.
Given the cross-section of brokers in the room, it was natural that the debate would begin with the merits – or otherwise – of consolidation.
Duncan Woodcock of Reid Hamilton was firmly on the side of smaller firms. “We have seen the disappearance of perfectly good and adequate very small brokers, that in my previous incarnation as a company inspector we used to call on. They were ‘once worked for the Royal, had two part-time staff, never did anybody any harm’ – the insurance equivalent of the corner shop.
“Since I went into business in 1987, I have felt myself running out of a burning building with fire doors slamming behind me – this compulsion that you must grow, otherwise you will not survive.
“That was the driver for us joining Broker Network, which we did three years ago – not because we need nannying, because we do not – but because it buys us wider access to markets and an extra 14 points of commission on average. It has been a very good thing for us and we have a menu of services that we can call upon if we feel that we need help with human resources, websites or all sorts of other things.
“That has been very good for my company, but I have a strong feeling that having independent brokers working within their community areas is a very good thing.
“Probably I am very lucky; we work in Lancaster and we are not exposed to the same degree of competition that some of you boys in the big cities will be. We probably do business on a much more personal level. We probably pay less to staff and less in rent, although we probably do not earn as much in terms of commission. However, I very passionately want to see independent brokers survive.”
Stephen Darcy of regional consolidator CBG took a different view. “You are quite right that there is and will be for a long time a place for the community adviser, but the contradiction was that you joined a network because you needed more clout, more commission, earnings and resources,” he said.
“What does a consolidator do that is different from that? I would think they do provide the resource, because of size and earnings capacity, and so on. Maybe the difference is that in your mind the consolidator takes away what you gave, which is the local, community service. I am not too sure that that is the case.
“With the way the industry is going with regulation, the customers demand a certain level of professionalism. You can achieve that more effectively when you are in a large organisation because of the resources that are thrown at you. You are doing that through a network. You will always have one or two stars that provide that service and will continue to do so, but does consolidation mean it is size that matters?”
For Vaughan Rudd from Bridge, employees were the most important part of the equation. “Consolidation is here and it is going to continue but, irrespective of that, people buy people,” he said. “It is the people on the front line that have to continue to provide that level of service.
“That is the critical point – as long as people keep focused on what it is we are there to provide – a service to the clients – then long will it continue for the independents. That is where we will be different; it will not be outsourced and you will be dealing with people who have an understanding of your business. You can pick up a phone three days later and it will be the same person that gives you the reaction.
“That is where there is a conflict sometimes, perhaps, with the size of operations that you get to, and you lose an element of control. That can be a key issue with clients.”
Alan Drury of Norwich Union (NU) believed the focus should be on the customer. “They are looking for great service, advice and choice. That is why a corporate client visits a broker,” he said.
“As long as you are focused on delivery in those three areas and have the ability to form that local relationship, I am not sure that size matters. Whether you have five, 50 or 500 staff, if you break it down into those three components – the ability to deliver a great service, whatever that means; the ability to provide enough choice for the customer; and that you can give that advice on how they deal with their insurance requirements – then I think the future is very rosy.”
John Lindsay of Willis said size mattered for some clients – but not all. “There is a certain sector of clients that needs a broker of our ilk, where they are international and in strange places. I guess that is where we come into our own,” he said.
“For the larger commercial clients in the UK, I think that if there is a good local service being provided by the broker, the method of being able to differentiate ourselves is quite often not as apparent.
“I know some colleagues who have maybe worked totally within the national segment and always feel they have the strength to be the best. That is often the case but, if there is good service being provided by a local broker and they have the right markets, they love them.”
Jackie Hyde from Stanmore said: “Perhaps that is the main difficulty.” She added that she believed insurers had a part to play in supporting smaller brokers. “The smaller brokers struggle to get the relationships with the insurance companies because they are not big enough to demand the service levels that they need. That is one of the reasons why a lot of smaller brokers join networks, because you are constantly told that your account is not big enough: ‘We cannot service your account, we cannot give you that level.’ You end up two or three tiers down from your bigger competitors. How do you get bigger if you cannot get the deals you need for the clients you want? It gets very difficult.”
Why did consolidation start in the first place, asked NU’s George Berrie. “From about 2000, broker consolidation in the UK really took off. From your perspective, be it consolidator or non-consolidator, what environmental conditions existed then, and what triggers happened, to make consolidation take place to the degree it did?”
Woodcock believed it was down to a lack of succession planning. “I would have thought it was the age of principals of companies, predominantly,” he said.
Jullian Shawcross of Peter Hattersley agreed: “You are actually inheriting the legacy of a skills void.”
CBG’s Darcy said: “That is a big problem. I would not say it was the trigger that set the consolidation ball rolling, but I think it was a factor that businesses looked at and thought, we have an opportunity here, because these guys have nowhere to go. I do not want to say that we bought businesses that were full of old crocks, because we have not, but that is a factor. There are other reasons; there was regulation – a big threat hanging over the industry.”
Paul Moors of Bollington said: “I think circumstances conspired. The number of brokers of a certain age, as Duncan said, coming to their mid to late fifties, nowhere to go. The economic situation was such that new people were coming on to the block, different types of brokers, not necessarily insurance people, looking at financial models … it was the right time to do things.”
Berrie questioned whether the time was still right. “The reason I asked about the environment and the triggers was that I wonder if these triggers and environment are still around,” he said.
“If you go back to Duncan’s point, a lot of it was driven by broker demographics; they were getting older, they wanted to realise their capital and get out. The second thing is that there was an environment where there were quite a lot of low interest rates available; that was the case until very recently. There was also a lot of freely available capital, coupled with those low rates and a demographic time bomb, almost.
“That coincided with the hard market coming after 9/11 and the Independent collapse. There were enough triggers there to move away from a soft to a hard market, so back to Jullian’s point about insurers seeing it as an opportunity to grow. That was a time when additional commissions could be paid, in the light of the hard market, to attract quality business and make a profit. That is exactly what happened.
“The environment is significantly different now. We do not have capital freely available; interest rates are not low. However, the demographics are still there, there is no question about that. People still want to get out and realise their capital, so the need for it is probably still there, but the environment is not conducive to it.
“Going back to Jullian’s point, the maths needs to be looked at. If value is created and everybody makes money, really there is not an issue. However, if the maths does not work out, you have to call it out and say, ‘This thing used to work, but it is not working now.’ There are discussions going on, as you probably know, to try to address that so that we have the right size commissions for some arrangements. That will continue to happen until we get the levels right.”
There were several network members around the table, and conversation soon turned to the benefits of the various models. “Aged 55, I am at the point, owning my business, where I start to think seriously about where it is going to go,” said Woodcock.
“How am I going to exit, what shape and form does the company need to be in? I think I am fairly lucky, touch wood, in that we will have this downturn and then it will be back up again. Probably we will see our way through it. Most of us who drifted into private ownership of brokers did so coming from insurance company backgrounds. We might be pretty good insurance men, but a lot of us are lousy businessmen.
“When you look at your large company with all its resource and look down at the little guy at the bottom, sometimes we need to be able to draw on a bit of outside help. Good networks – and personally, I value what we have had back from Broker Network – give you that resource for nothing.
“My membership of that organisation costs me nothing, because what I pay them is outstripped several times by the additional commission earning that we get. I genuinely think it has consolidated the way that we can now look forward and develop our business.”
Lance Rigby of Howden said: “You focused on the benefit for the brokers as part of the consolidators and networks, but the benefit to insurers is not just distributional. They provide a very valuable agency management capability. If you look at the different challenges that FSA regulation presented, getting access to expertise has been difficult, training has been difficult and a lot of the broker networks have provided a very valuable service. Insurers have invested not just in their distribution but in managing the supply chain, which is tough, and in enabling their brokers to cope with regulation where the cost of that, to do it properly, is significant.”
Moors posed a question to the insurers. He said: “I do not know the answer, because I am not a member of a network, but do the insurers, in exchange for the extra 14 points of commission you have mentioned, get the same kind of additional benefit from networks?”
Berrie replied: “It is a good question. The ultimate measure of it is when you look at the financials. Has the account grown, but more importantly has it grown profitably? A growing account does not really mean much these days – it has to make profit and profit for our industry is largely based on the earned claims ratio. Over time, and it can be as short as two years, we have a good measure of whether the earned claims ratio is making the right return to satisfy our financial needs. If it makes the right return then fine; everything in the garden tends to be rosy, and you recognise that.
“The best way to recognise it for the broker is by way of a contingent commission, so the broker wins and the insurance company wins. If it is not recognised in the financials over time, you have to call it out. We are at that stage right now.”
Moors said: “Surely the network will have a number of different brokers in it, of different size, scale and strategy, different types of business? For you to just pay,
willy nilly, a higher commission to the network, rather than the individual broker, must be a very difficult way to manage a business.”
But NU’s Drury pointed out: “They are all very different as well. To talk about the networks per se, it is quite a general term. They vary enormously, from the mighty Willis commercial network through to some of the smaller regional networks. The degree of value add that we get for the additional margin paid will depend on the extent of the network proposition and the service the network provider offers to us.”
Hyde said: “Even within a network you end up with tiers of levels of service. It used to be that when you joined a network – we joined Broker Network before we became part of Brokerbility – you could demand the
same level whether you were big or small. As time changed, that changed again, so it depended on your commission levels and how big you were within that organisation.
“You were a small independent broker with one insurance company, then you suddenly end up in a network and the tiers came there. You end up wondering what you are doing there because you are no better off than you were before.
“‘OK,’ you say, ‘we have support on FSA and other things, but we can buy that in anyway, if we really needed to.’ Where are the benefits? What are the consolidators telling the insurance company? What can they demonstrate and how can they make all these brokers do what they say they are going to want them to do?
“We are all quite independent, strong individuals; that is why we are in business in the first place. It is very difficult, if you are not all thinking the same way, to be able to say ‘We are going to do this’ to an insurance company and deliver it.”
George Berrie, Norwich Union
Alan Drury, Norwich Union
Eleanor Banks, Insurance Times
Ellen Bennett, Insurance Times
Stephen Darcy, CBG Insurance Brokers
Jackie Hyde, Stanmore Insurance Brokers
John Lindsay, Willis
Richard Lloyd, Marsh UK
Paul Moors, Bollington Group
Lance Rigby, Howden Insurance Brokers
Vaughan Rudd, Bridge Insurance Brokers
Jullian Shawcross, Peter Hattersley & Partners
Duncan Woodcock, Reid Hamilton & Co