The insurance market has changed forever, according to Ernst & Young and the CII. A combination of events – soft market conditions, the availability of investment funds and an uncertain regulatory environment – are combining to accelerate the scale and pace of changes in distribution in the SME market, according to a ground-breaking report released by the two bodies last week. Distributors will continue to take on underwriting duties, through managing general agents, schemes and delegated authorities, radically changing the role of the traditional underwriter. Danny Walkinshaw asks five key figures if they agree, and what the changing market means for their business

Brendan McManus, chief executive of Willis UK & Ireland

“Strategy in Willis [which is looking at setting up a managing general agent (MGA)] is driven by changing customer demands. The move to an MGA is driven by the goal of delivering great customer service that is clearly branded as ‘Willis’ at every touch point.

“Of course there may be some redistribution of margin as these models develop and the issue for many distributors might be that of transparency with their customers. Willis has great credentials with its customers for transparency whereas others still have some way to go.

“The issue for the insurers is that if distribution of insurance to SMEs changes in the way the report predicts, then they might have significant redundant capacity.

“They then will have to decide if they act only as a capacity provider in the SME market or move to a direct distributor. It’s clear that some have already chosen their path and others are hoping that it doesn’t happen.

“I’d like to see the debate focus on the customer perspective, not remain in an internalised industry debate."

Simon Cooter, UK distribution director, Brit Insurance

“The distribution landscape has changed fundamentally in recent years and there will be more change ahead. The easy way to predict the future is to look at the recent past and extrapolate, but this ignores precedent drawn from many industries over time and is overly simplistic.

“In my view, MGA’s will continue to play a role . The strong ones, based on genuine underwriting capability, will prosper, but many

others will find capacity more difficult to come by if their results deteriorate. There is also little doubt that the vertically-integrated model, with some insurers looking to control distribution and distributors looking to control underwriting, will continue to be a feature.

“It will be interesting to see whether broker consolidation continues at the same pace into 2008, or whether a bubble has been created by the proposed changes to capital gains tax in April. Consolidation will continue to be a feature of the market, but will be offset by some fragmentation as key individuals emerge from earn-out periods and the obligation under any covenants.

“In a £20bn+ industry there is room for different models. I believe that we will continue to see increased commoditisation in the commercial market and this will play into the hands of what I would call the 'traditional' insurance broker, ranging from the largest international brokers to smaller independents.

“This will be fuelled by the continued desire from many commercial clients to receive independent advice combined with local service. There is a clear opportunity for insurers to demonstrate to these brokers that they don’t want to buy them and don’t want to compete with them by going direct. Those insurers that make the choice of backing these brokers, by investing in a strong and empowered local underwriting presence with a claims service to match, should prosper.

Stuart Randall, director, Brokerbility

“If distribution of insurance to SMEs changes in the way the report predicts, then insurers might have significant redundant capacity

Brendan McManus Willis

“There is no doubt that the market has changed out of all recognition and is unlikely ever to return to how it was. Many people did not realise that there was a hard trend occurring – the age profile of the majority of independent brokers was nearing 60-65, the retirement zone. This meant that many brokers were seeking to exit and that gave the perfect environment for consolidators to grow. The soft market and the desire for market share by insurers, coupled with low interest rates and plenty of available capital accelerated the growth of a small number of consolidators.

“Once they had attained a certain mass it became self perpetuating and easier for them to continue growing. This has seen a major shift in wealth from the manufacturers (the insurers) to the distributors (the brokers) which is not unlike most industries.

“A natural corollary is work transfer. Consolidators and brokers are seeking to make their operations more efficient and do everything in house, as they have been frustrated by some of the service levels offered by insurers over the years, which have increased operating costs.

“It is possible that the insurers created this spectre themselves, as their rush to get into the direct market, which offered the golden prize of cutting out the broker and their commissions completely, diverted funding away from improving their service levels. Consolidators may then have considered that if an insurer can act as a broker, why can’t we act as an insurer? In gaining sufficient critical mass they were more able to do this.

MGAs are the flavour of the month and sought by many brokers, but I would exercise caution as the crossover, for regulation purposes, gets difficult. I would rather see insurers continuing to write the business and make the underwriting decisions, but improve their service delivery to brokers. There is then no regulatory conflict on the broker. Every business will have to change radically to survive and prosper in the future markets. But in change there is always opportunity.

Eric Galbraith, Biba chief executive

“Future distribution in SME commercial general insurance is a battleground where many factions are convinced that the consumer will be attracted to their offering.

“It is interesting that this report indicates the profit pool within SME insurance is moving towards the distributor. There are however many different ‘distributors’.

“SME business is in my opinion, the province of advice based distribution i.e., the broker. The value of advice should not be underestimated. It is of concern to see a continuing acceptance by the insurance industry, the regulator and many more distributors towards total commoditisation of this commercial risk space as an appropriate response to cutting costs without due regard to the principle of treating customers fairly.

“Brokers are in an excellent position to combine technology and advice to provide cost effective and profitable business solutions which will meet the needs of the customers rather than customers trying to fit into a preset internet offering, many of which are inadequate.

“The good news is that I am beginning to see superior internet offerings combined with advice. I am sure is the way forward.”

Steve Burrows, chief executive, Cobra

“I feel that this change in the market was inevitable as insurers themselves concentrated heavily on larger brokers and provided minimum service to the smaller broker. By suppressing commissions to smaller brokers and publicly stating they wished to deal with fewer agencies, insurers left the market (brokers) with little choice but to consolidate. Perhaps insurers then felt that with a reduced client base they would be able to control commissions and costs more effectively. However, what has happened, is that the efficient networks and the consolidators or large brokers have become more powerful. As rationalisation continues, it could be suggested that insurers will come under pressure to improve deals further. To cope, insurers will have no choice but to pass on costs to the end user or find other methods to reduce internal costs. Perhaps it would be more efficient for insurers to work towards becoming carriers rather than administration machines.

“Cobra recognised this trend change over recent years and not only established a viable network, but also introduced an underwriting arm that provides insurers with consolidated cost savings. The changing market has helped mould Cobra’s strategic planning to accommodate the changes and will continue to develop in line with market needs.”