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 South East market and the issues it faces.
Kevin Young of Argyll Insurance Group, which has recently been acquired by Jelf, opened the debate with a personal view. He said: “I think consolidation is slowing down a bit, having been pretty busy over the past 12 months for various reasons. One reason is the change in the capital gains tax, but I have to say that that had little bearing on my decision [to sell]. We were already talking before the Chancellor had made the announcement. It probably brought forward the completion date, but was not actually the catalyst that made me look to sell to Jelf.
“Jelf certainly is continuing to look at acquisitions, but is being more discerning than perhaps it was a few years ago. I think the prices have probably hit their peak, and are starting to fall backwards. But if the fit is good, consolidation will continue to happen. It is very important that the fit is good, both for the consolidator and for the consolidated. I can see it slowing up; there are fewer businesses out there anyway. Certainly my brief, within the South East, is to continue to look for opportunities and to continue to grow Argyll within Jelf.”
Coming from independent broker Blackmore Heath, Ian Gosling had a different perspective. He said: “We are almost fiercely independent, we believe we can survive as an independent intermediary. We do not see the need to join a consolidator, we are not even convinced there is a need to join a network. I think the South East was Towergate’s home patch. They started off and did a lot of consolidation. It is interesting that Argyll, Jelf and others are beginning to show an interest in this part of the world, almost to fight back against the original consolidator, yet numbers available have grown fewer and fewer, therefore the consolidation activity will, by nature, be less. It is interesting we are starting to see people like Swinton come into the area and buy some commercial brokers. I agree that consolidators will still be active, but they will be very discerning as to who they go for. I still think they will pay good prices for the right people.”
Networks were also represented at the table, offering something of a third way. Howard Lickens of Clear Insurance Management, a member of network Brokerbility, said: “Scale is so important, and we were growing reasonably fast on our
own, but we have never had enough scale, with enough insurers to have enough bargaining power. We had no interest in joining a network, because we felt we were too strong for that, but we joined Brokerbility a couple of years ago. That is an alliance of strongly independent brokers that enables us, by working together and pooling sovereignty and some resources, to compete on a much more level playing field than before. It has been important to us and, funnily enough for us, acquisition activity has never been as vibrant. We have more opportunities now than we had a year ago.”
With consolidators, established independent brokers and networks dominating the landscape, start-ups are few and far between. Darren Box of One Business Insurance Solutions said: “I do not really know if it is a market for a start-up business now; the regulation that we find ourselves in makes it difficult for anybody to actively get involved. What I would suggest is that if you were to try it you would need some decent backing from a few insurers. Again, the insurance companies now are looking for quite a lot of upfront commitment to get into that.”
“There is a place for personal lines brokers, but they are a different breed from commercial brokers. They may as well have a different title.
Howard Lickens, Clear Insurance Management
Gosling saw a cyclical pattern, and ended the conversation with a look to the future. He said: “If you go back a few years we had a wave of consolidation; now we have a wave
of networks. We are going on a cycle here. What comes after the networks? The consolidation cycle has taken a few years, it has not run its course, but is slowing down. We are seeing a lot more network conversations, and ideas – including Brokerbility. What happens after that? Where is the shakedown following that?”
Regulation was another hot topic – not least because of the impetus towards consolidation it has provided. But unusually for a room full of brokers, there was a general feeling that it had been a positive development.
David Newberry-Martin from Lovat Insurance Brokers said: “I think regulation is excellent. You have to embrace it. As a business we have spent a fortune on it, and we have found that we have got rewards. I admit at the start I was very concerned about looking at the balance sheets and how much this was costing. Actually when you really embrace it, and make your staff embrace it, it produces a far better business, and far happier staff. If you have a happy staff and a happy business, you make money.”
ABC Insurance’s Mike Crane agreed with this optimistic point of view and argued that regulation should be integral to a business. He said: “Initially it was seen as a bolt-on, an extra layer sitting almost outside the business. It was resisted by many, although it was inevitable. I think that those that have embraced it, and embedded it within their businesses, have seen it becoming a lesser burden – and that they can get value out of it.”
Darren Box added that the main beneficiaries of regulation had been the consumers, as had been intended. He said: “We have invested heavily in training all our staff to get them to the level that we needed them to get to. The only people that are benefiting now are the consumers; beforehand you could not necessarily say that the right level of qualification and technical ability was there to advance the clients correctly. Again, we were slightly sceptical, but I would say it has improved our business no-end from where we were originally.”
“To whose benefit is commission disclosure? Absolutely no ones as far as I can see. The consumer makes a decision based on the quality of the product, the quality of the person, the security of the insurance.
David Newberry-Martin, Lovat Insurance Brokers
Kevin Young took a slightly different tack, arguing that the industry had been behaving professionally for years, but before the onset of Financial Services Authority regulation, had failed to document it. He said: “We were doing it right, we have all grown up through the business, if we had not been doing a lot ‘ of it right we would not have succeeded and lasted as long as we had. What was good about it was that it made us actually sit down and write regulatory business plans. Things like that are terribly boring, but when I sat and read ours, I was very proud of it. I thought this does actually say something quite good. As far as I am concerned regulation, as frightening as it was when we knew we had to do it, has been one of the best things that has happened to the industry.”
One of the major regulatory changes on the table is the idea that brokers could be forced to disclose the amount of commission they receive upfront to commercial clients. Unsurprisingly, this was far less popular with the brokers. David Newberry-Martin said: “To whose benefit is commission disclosure? Absolutely no one’s as far as I can see. It certainly is not to us as a brokerage, and I do not see that it is of any benefit to the consumer. The consumer has a choice: he can come to me – or anybody – and turn around and get terms for his insurance. He can then make a decision based on the quality of the product, the quality of the person, the security of the insurance. The factor of me telling him that I am going to be paid 20% by Norwich Union or 30% by ABC, what difference does that make?”
Ian Gosling believed mandatory commission disclosure would result in a price war among brokers. “It would ultimately cut our margins, which would mean we have to find other ways of increasing income; it means profit levels will go down, which will put pressure on the businesses. Does the client actively benefit from our having to cut staff as our income levels decrease? Will they get the same technical level of service that they have before?”
Kevin Young agreed, and suggested that the pressure to introduce mandatory commission disclosure was not coming from consumers, but from global brokers who have to disclose their commission elsewhere in the world.
He said: “Somebody asked the question, ‘Who would it benefit?’ I think the obvious answer is people like Marsh, who caught a cold in the first place. Those brokers that were caught up in Spitzer are now looking to force a level playing field. I think they can obviously whip up a lot of interest within the Association of Insurance and Risk Managers (AIRMIC), but most association members would know what we are earning anyway. If anybody is big enough to have a risk manager who is a member of AIRMIC then it is probably going to be fee-based. I cannot see that that is really an issue.”
Norwich Union’s Janice Deakin gave an insurer’s view. “My personal belief is that commission disclosure is not the answer, I think it will burden more the smaller independent broker, and potentially drive more consolidation as you move the burden. The higher ends of commission are not all profit, and the challenge is that a lot of the models that have evolved over time need quite high levels to sustain them. I have done loads of acquisitions, not only in the broker industry. Normally a massive driver for acquisition is taking out costs synergy. That has been done on a very limited basis on acquisition in this market. Therefore they are needed to sustain the high-cost model that acquiring – and not taking synergies out – drives. That is part of the balancing acts on what is going to happen over the next three or four years.
“Some of that is going to be under pressure. If you are a venture capitalist investing in this industry it is one of the places you go to extract value for the money you put in. That is one of the dynamics that has not played out yet, and it will be interesting to watch. When you do play it out you stress the most valuable part of what you have bought – the relationships.”
“Prices have probably hit their peak and are starting to fall backwards. But if the fit is good, consolidation will continue.
Kevin Young, Argyll Insurance
Many of the brokers agreed that a lack of investment in IT had held back broker businesses, despite consumer enthusiasm for internet-based sales.
Howard Lickens said: “A lot of investment in technology is needed. An awful lot. All the great ideas for standard platforms have not resulted in anything.”
Ian Gosling agreed. He said: “As an industry I think we missed a major trick in IT. Someone at some point a few years ago should have grabbed hold of the insurers, and software suppliers, sat them down in a room and said ‘just think about this before you run off on different tangents. We are all going to be dealing with pretty much the same people, doing the same things. There will be nuances between us, but is there a platform and a way that we can go forwards where the insurers agree to a common set of questions on proposal forms.’ I think this is one of those that will never get resolved.”
Several delegates talked about the boom in aggregators, or price comparison sites, and queried whether brokers still had a viable role in distributing personal lines.
Howard Lickens believed they did, but cautioned that they should operate in a different way to commercial lines brokers. He said: “It is dangerous, how many people around this table go to a travel agent to book flights? They are now purely a commodity, you go on to a site, and compare it and the price. The brand behind that makes a very small difference. There is very little differentiation now. The majority of us are keen to support commercial insurance, because we think there is still a place for advice and still a place for differentiation. The more commoditisation we get at the bottom end of commercial, the more difficult it is going to be for brokers. There is a place for personal lines brokers, but they are a different breed from commercial brokers. They may as well have a different title.”
Ian Gosling took an optimistic view. He said: “I think brokers will look more closely at what their personal lines are booking. Are we going to encourage volume quoting, volume of calls and work the numbers game? Or are we going to focus on our existing client bank, where we have relationships with people, in looking to do the whole package for the customer? From our perspective most of our personal lines business is long standing or linked to others. That has got to be the way we go, if we want to try and compete with some of these people. Economies of scale mean that we will not be able to do it. It is just going to make us think a little bit more closely about our business, and what we are trying to achieve. This is not a bad thing.”
Kevin Young added that there were still customers out there who valued advice as much as price. He said: “Our personal lines book has not actually dwindled as much as I thought it would, we are still 90:10 in favour of commercial, but have still got a good personal lines book.
“It is about flat: we lose a few, but we put probably the same number on each month. I think most of those people are probably not saying ‘If I can save 75p I will’. They are people that actually still want to go through a broker, and do not want to spend their time looking at aggregators on the internet.”
Sponsor's word: David Wolfe, trading manager, Norwich Union, Brighton
As a trading manager I know how valuable it is to develop trusting relationships with the decision makers of brokers based locally.
(Norwich Union is the only insurer with a local trading office in Brighton, because we see local trading as the backbone of how we work with brokers.) I was pleased, therefore, to have this confirmed by those brokers who came along to this latest round table discussion in Brighton, with Kevin Young, chairman of Argyll Insurance Group telling us that: Our relationship with Norwich Union is absolutely first class. Norwich Unions trading teams really do understand local trading conditions and, as a result, are best placed to help brokers make the most of opportunities. Todays event has further highlighted the importance of close trading relationships.