Insurance Times together with our partner, QBE held a round table discussion where a panel of experts gave their views on the state of the South West market and the issues it faces.
The state of the market
The view from the South West roundtable opened with a discussion on the state of the market. QBE’s Andrew MacPherson opened the debate with a focus on the professional indemnity (PI) sector.
“PI is pretty much towards the bottom of the market cycle,” he said. “There are three fundamentals I think we have to recognise. There is huge capacity out there to write this business. There is also huge reinsurance capacity, and furthermore there is huge distribution capacity. These three factors come together and produce probably one of the most severe soft markets we have seen. I do not believe that it will end any time soon, I am afraid – I think we are looking at 18 months to two years.”
None of the other participants were able to challenge this rather bleak view of the market, as much as they might have liked to. Chris Green, of Arlington Professional Risks, thought that the market was suffering from over capacity. “Everyone is trying to sell themselves to death at the moment. The capacity is there, and the number of underwriters is there. It is not particularly difficult to get new agencies at the moment. To be honest with you, the problem is trying to restrict them,” he said.
Gary Horswell, managing director of Ntegrity, pointed out that the current economic downturn may have an impact on the market cycle that is yet to be felt. “If it is as gloomy as some of the major economic commentators are predicting, I think that will have quite a big impact,” he said. “Insurers nowadays have international businesses, do they not? We are no longer just isolated in the UK market, and things that happen on the other side of the world affect us here, so I think that could have a big effect. But in my career, my experience has always been that when there has been economic downturn in the UK, claims follow shortly after, because accountants get hit with claims for businesses that have failed, and IFAs get hit with investments that disappoint.”
But there was a consensus around the table that, in PI at least, rates were still heading downwards. Ian Burgess, managing director of Jelf Professional, claimed there were horrendous reductions happening, which QBE’s Chris Parker said was just not sustainable.
“But it is a struggle, because there are still some companies and there is still capacity, and therefore people are trying to write to get their targets,” she acknowledged. “That is the biggest issue you have got, people writing for their targets. Certainly towards the end of the year, we always see rates just going completely crazy because it is people trying to get their end-of-year figures. If you have a piece of business that is 31 December, it will go cheaper than one that is due 1 January.”
Karen Brown observed that this reflected a change in the market, and a new lack of underwriting discipline. “That is completely opposite to what we were doing 20 years ago in London,” she said. “When I worked in London, the market had a capacity and often you would find that by October it would have reached that capacity and, therefore, you could not get anything placed in the last two months, it would basically shut up shop and play golf. So you could not have a 31 December renewal.”
Brown and other participants related the lack of underwriting discipline back to a skills problem in the wider insurance market. “There are a number of underwriters that have come into the market where I think their level of professionalism and understanding is perhaps lacking. As a broker, I find myself talking to an underwriter about things I should not really need to talk to him about,” said Brown.
“There is huge capacity out there to write this business (PI). There is also huge reinsurance capacity, and furthermore there is huge distribution capacity. These three factors come together and produce probably one of the most severe soft markets we have seen.
Andrew MacPherson, QBE
Parker agreed, and suggested that it was a symptom of the soft market. “I think that is one of the dangers at the moment, that people are just writing business, again more generally, just on minimal information, because at the moment there are so many people out there who are willing to do that,” she said.
From a loss adjuster’s perspective, John Firminger, of Cunningham Lindsey, agreed that risks were being written on insufficient information. “We then suddenly join in when the claim occurs, and the amount of time that we spend trying to rewrite policies or to get an understanding of what the policy, or what the intention would be if we were to, is massive. From the claims perspective, it is a sad day that we do not do underwriting as we used to,” he said.
MacPherson concluded this section of the debate by arguing that, if insurers put the proper programmes in place, they could avoid such problems. “From QBE’s point of view, we have tried on a number of occasions to introduce quality assurance programmes across professions, because the softer the market the more difficult it is to persuade them. As you were saying, there has to be a carrot and stick approach, but it is difficult. We successfully backed in our quality assurance programme to our solicitors’ book but we could do that in that particular market because we are the third largest insurer. In other sectors, where we do not have the same proportion of business, it is more difficult. Therefore, we have to find a way of incentivising people to do what we want in order for them to get benefit, not just for their business and for their bottom line in terms of the premium spend, but also from our point of view as an underwriter,” he said.
For many brokers, the burning issue remains consolidation, and this group was no different. With independent brokers and consolidators represented, there were different perspectives to really get the debate going.
Martin Thomas of SBJ, recently bought by AXA, opened the conversation with his views on what being acquired can mean for a broking business. “There are two ways to look at it. First, the consolidator almost wants to mould the people that it acquires into its own way of dealing with business. Second, the consolidator buys them for the specific tasks – the expertise that it has as a brokerage – and it leaves them relatively autonomous. That is the key difference between the two,” he said.
Thomas added that he believed SBJ would remain firmly independent. “Certainly, the autonomous side is the way I think our company will be going. That is what we have been told and that is what I hope we will do, because the person who has bought or invested money in a company has done so for a specific purpose – one would hope that it was for the expertise that that new acquisition can bring to the table of the consolidator,” he said.
Insurers may have a different perspective, because when a broker is acquired by a consolidator, the commission it charges the insurer will probably rise. QBE’s MacPherson said: “The power of the consolidator is real and is present. Commission levels will cause insurers difficulties over the next year or two as we look at our bottom line and costs. It will have a serious impact on what we do. In a funny way, it could be another area that forces through a slightly harder market approach, because it will reinforce the difficulties we already have in terms of rates.”
Horswell, himself an independent broker, suggested that the current regulatory climate could have implications for the consolidators. “There has to be a danger over the course of this year if the FSA’s current deliberations on hard disclosure result in us going down that route,” he said. “I imagine that would force all consolidators to re-examine their business models. That could be quite interesting because, obviously, it will be much harder to justify the levels of commission that are rumored to be paid.”
“If your books do not balance and you are not making the money that you should you really need a financially strong insurance broker to withstand some of the pressures that we are suffering in the market. Without that, the FSA will probably take a very close look at you
Karen Brown, Lockton
However Horswell declared himself a fan of consolidation. “I personally think that consolidation is great because it is clearing market space very nicely for real independent brokers, and there are a few coming back,” he said. “What is likely to happen is the scenario that you saw years ago in estate agents, when they were gobbled up by banks and building societies. They were taken on board, the business models did not quite fit over time, the principals served their restricted covenants, they left and started again, bought their businesses back – sometimes at a song – and kicked off again. Now we are seeing the emergence of new entrepreneurs coming through and saying, ‘No, we do not want to be big – big is not beautiful. We think there is a different way’. However, you need some big operators out there to create the benchmark and create differentiation between other methods of handling them.”
The economic downturn
With a strong bias towards PI professionals in the room, conversation soon turned back to that market, and specifically to what impact the current economic climate would have on claims and rates.
Green believed the claims would soon come flooding in. “The availability of money is one point. The main thing that we are going to see, as the credit crunch bites, is more companies failing. With the failure of businesses and the lack of money within the economy, professionals do tend to be an easy hit. Justifiably or not, the fact remains that the professional is in the firing line as, if you like, a potential payer. We have all heard and seen stories where the accountant gets a phone call or a letter that says, ‘I do not want to sue you but I know that you are insured – this is not personal’. When the economy is growing and awash with cash and money, you never get claims like that,” he said.
A number of brokers around the table said they had already started to see such claims coming through. Brown predicted there would be many more fraud cases in the months ahead. “It is not so much personal – ‘Fred, I know you and I am going to sue you’ – but there is this professional aspect of coming in to pursue a claim. Trustees’ liability, for example, is going to be big,” she said.
For brokers of all sizes, regulation remains a bugbear. There were worries in the room that the FSA may become even more active, particularly in the financial security of brokers as the credit crunch bites.
“If your books do not balance and you are not making the money that you should, bearing in mind all of our percentages have dropped, you really need a financially strong insurance broker to withstand some of the pressures that we are suffering in the market. Without that, the FSA will probably take a very close look at you,” predicted Brown.
But Horswell believed that small businesses were not at a disadvantage when it came to managing the regulatory burden. “Personally – and some may think that I would say this – I think [the financial security of the broker] is less important than the security of the insurer with whom the risk is placed because, ultimately, the contract of insurance is between these guys and the end consumers. It is important to know that these guys are going to be around in five years when the cheque has to be written. It has a bearing as far as the broker is concerned because the broker needs to be around as well, ideally, to make that settlement happen.
“You notice with the people sat around the table, for example, that once you are in the Bristol market you usually do not move. You stay in Bristol.
Martin Thomas, SBJ
“Funding is an issue but it is also an issue for big firms. Who would have thought Barings would fall years ago? Who would have thought Bear Stearns would fall out of the tree overnight? No one is insulated from this, unfortunately, and anyone who thinks that they are is kidding themsef. Size is not a guarantee of future proofing for any business. So many more businesses are global businesses now that an earthquake on the other side of the world can have detrimental effects.”
Green said that brokers large and small have little to fear from the FSA, because its attention is currently focused on the banking sector. “Let’s face it: the FSA would be hauled over the coals if it had another Northern Rock or large union or if one of the big boys actually went down,” he said. “The vast majority of brokers around the country – I am not talking about the large city brokers here – are probably not even on the FSA’s radar. As long as we play within the rules of what the FSA has laid down, I think that is probably acceptable to it on the basis that it just does not have the means to check every insurance broker and every insurance company in the country. Really, its targets are going to be the big players.”
The South West
With all the guests residents of the South West, and passionate advocates of the regional market, there was plenty of conversation about local affairs.
QBE, which is on the verge of opening a Bristol office, was keen to hear the brokers’ views. Parker opened the conversation. “We have looked at how we feel about Bristol as an area and we believe there is tremendous potential, which is why we are opening up the office to all the other classes of business that QBE writes. Hopefully, it is fairly obvious that we would not be doing that if we did not think the potential was there. The real challenge for us is going to be identifying brokers and really getting brokers to deal with us,” she said.
“Everyone is talking about how much capacity is out there and it is not just on PI – it is on every single class. With the best will in the world, QBE can walk into a broker’s office and say, ‘Here we are’, but it does not mean that any broker is going to say, ‘Fantastic, we will just transfer this whole account to you’. From our perspective, the challenge is going to be finding the right people, who have the relationships, and then, hopefully because of that, building up relationships with brokers.”
So is there too much capacity in the Bristol market? Maybe, according to Brown, but MacPherson was keen to point out that businesses based in Bristol were operating on a national and even global scale. “Do not forget that the business of most people around this table is not local business necessarily. It is national business,” he said. “ I believe the market can actually support brokers if they are looking across the UK. If it was the other way around and I was simply looking at local businesses, Bristol is an important centre for business – it might be the ninth largest city in the UK but it is the fifth largest in terms of GDP, so there is potential here. The nature of the beast is that you guys are dealing across the UK. I believe it is an exciting time to come in. It is difficult but it shows an investment in a marketplace on a long term basis and you do not put money in, as QBE is going to, if you are going to do it just for this year and next year. It is a long term process.”
There was a consensus in the room that the major difference, for a broker, between placing business in their home region and in London was personal relationships.
According to Brown: “The regional perspective in placing business means that they can look at risks very differently. If you are talking about some larger placements, we were appointed on quite a large case – an international US and Canadian risk – that we needed to place in the London market – that was absolutely right. But the UK operation, and indeed the rest of the world excluding the US and Canada, places locally in the Bristol market. We did that because we could mix it and the expertise in Bristol is fantastic. If we had placed that US and Canadian risk in London they would have put a completely different twist on it because they would have seen it as a London market placement and added a cost to it. I felt it was the right place to deal in the local market only because
the expertise was here to be able to understand the risk and place it, as it was a regional business that happened to be transacted locally.”
Conversation soon turned to the personal benefits of working outside the capital. Thomas summed it up with his words: “You notice with the people sat around the table, for example, that once you are in the Bristol market you usually do not move. You stay in Bristol.” IT
Ellen Bennett, Insurance Times (chair)
Karen Brown, director Bristol, Lockton
Ian Burgess, managing director, Jelf Professional
John Firminger, Cunningham Lindsey
Chris Green, Arlington Professional Risks
Gary Horswell, managing director, Ntegrity
Lauren MacGillivray, Insurance Times
Andrew Macpherson, senior underwriter, PI, QBE
Chris Parker, commercial manager Bristol, QBE
Ian Peacock, PI, Bond Pearce Solicitors
Martin Thomas, divisional director, SBJ