Barton/Reid warn of 'excessive consolidation at inflated prices'

Consolidation has long been a feature of the broking landscape, with successful brokerages being snapped up by their larger competitors as a way to fuel growth and provide a quick boost to profits.

But in recent years the prices paid for these young and growing brokerages have rocketed, and Phil Barton and Stuart Reid, the duo at the top of new broking firm Partners&, believe that the multiples now being paid to acquire these businesses are beginning to damage the broking profession.

“The multiples that are being paid for broking assets today are simply unsustainable and aren’t justifiable,” Barton says. “Insurance broking is inherently a long-term single digit growth business. Its strength is it has a fantastic annuity income stream, but it doesn’t justify some of the multiples being paid, but that’s only the beginning of the problem.”

Barton says that this “excessive consolidation at inflated prices” has driven an attitude of short-termism in broking as consolidators search for fast profits to satisfy private equity backers and make their inherently flawed business model work.

It is this approach to doing business that he says is the root cause of an emergence of characteristics in the market that act to the detriment of the customer, namely “ever-spiralling administration fees, excessive profits on premium financing, and constrained placements, not because the placements satisfy the clients any better, but because it enables brokers to command a greater premium and commission from a carrier”.

“Some of those practices are symptomatic of an industry seeking to make profits at the expense of clients rather than by serving them,” he adds. “Overlay that with a reduction in claims capabilities and service, the lack of learning and development and the incessant dumbing down of the advice process in our sector, and you get to a sector that is knowingly itself, not in the best interests of its clients, but in order to satisfy its own financial measures.”

Reid agrees, and says that while he and Barton could be considered as “authors of some consolidation in the past”, he sees the market today as being “markedly different”.

“You are talking about businesses that started from the ground up three or four years ago and sell for hundreds of millions of pounds,” he says. “If you are growing at that pace, and one of your main ambitions is the price you will get at the end of the day [when selling the business], then what investments are you making in the business? Why are you different to anyone else out there?”

Premier League money, but not Premier League service

Fundamentally, Barton and Reid both feel that the flow of capital into the broking market has largely worked to the detriment of the consumer, and only benefited a small number of entrepreneurs and their private equity backers.

Barton likens this to the vast amount of money that flowed into football as the Premier League era took hold, with big name players taking home big money, and football agents taking an even bigger slice of the pie.

“A wall of money came into the sector, and it broadly flowed through the market participants and ended up in the hands of some very wealthy players, some lawyers and a lot of agents,” he says. “But is the experience of football today any better than it was? I doubt it.

“The broking industry is the same. A wall of capital flowing through the clients and advisers into the hands of private equity, a few entrepreneurs and a lot of lawyers. But the client experience isn’t any better, and I would say things have actually got worse – they have to pay higher fees, for less servicing and less of a claims proposition.”

A catalyst for change

And that is why Barton wanted to do something different when setting up Partners& in order to correct the direction the broking profession was headed.

“I feel that the market is heading in the wrong direction and I seriously think we need a correction,” he says. “Some of the worst practices in the industry lay us open either to regulatory sanction or a disruptor.

“I want to call that out and for Partners& to be a catalyst for change and put clients and advice back at the front of the industry, rather than lost in the weeds as it appears to be when you look at some of the behaviours that go on.”

And Reid says that this philosophy and the way Partners& wants to approach doing business was shaped by the lessons he and Barton had learnt over the course of many years in the broking industry.

“ and I have known the good and the bad over the years, and it gives us the opportunity to create something from what we saw was good, and that doesn’t mean being the biggest and it doesn’t mean pressurising insurers for the higher commissions,” he says. “It also doesn’t mean placing business and clients where they don’t fit, but it does mean creating a place of business where people are happy to work, rather than somewhere they have to work.”

To this end, Barton has highlighted partnerships as the “golden thread” that will run through the business, whether that be with clients, insurers or service providers.

This philosophy also applies to Partners&’s employees, and every member of staff receives a share of profits, as well as the same benefits programme and holiday entitlement, irrespective of role or seniority.

To help Partners& attract the best talent into the business, the broker has been set up as a series of specialised verticals all with a very clear focus, something that Barton says will differentiate the broker from its larger competitors and help it better manage the ups and downs of the insurance market.

“If you are a large broker, then you are inherently generalist so your business will follow what happens in the economy,” he says. “If we move into recession your business will dip, and if you move into a growth phase then your business will grow.

“We think we can outsmart that and so we are very much doing analysis on which sectors will succeed post-.”

This analysis is carried out by two graduates dedicated to finding these high growth sectors, and supported by a recruitment strategy targeted at specific niches within the insurance world.

“Understanding which of the economic sectors are going to grow more rapidly and then specifically attracting the best talent and expertise in those sectors is our strategy,” Barton says. “That is a very different recruitment strategy to most other broking businesses.”

“We already have a big presence in the life science market and that is in excess of 20% ahead of prior year,” he adds.

The Partners& ecosystem

The partnership theme has also led to Partners& creating what Barton calls an “ecosystem” of like minded professional services firms that extends the broker’s capabilities in servicing their clients.

“Our policy is not to seek recompense for that,” Barton says, “it is simply to deliver an added value service and build on the long term relationship we create with our partners.”

This ecosystem also includes the broker’s insurer partners, and Barton says this is another area where the broking market is crying out for some re-invention.

“The relationship between broker and insurer has become incredibly adversarial, driven by the incessant demands of distribution wanting higher and higher revenues for the service they provide,” he says. “We thought that was coming to an end, but -19 has brought that into sharp focus.

“It is very clear that when you look into what has been going wrong [in the wake of the pandemic] that the buck stops with the insurer. They are carrying billions of pounds worth of risk, but the distributor is taking away the major prize in the value chain.”

“Our model is designed not to need that sort of recompense, and our relationships with insurers are created on the idea of mutual benefit,” he adds.

Reid agrees, and says that the harsh reality of the pandemic could act as a wake up call to many in the broking market, citing the example of RSA boss Stephen Hester lamenting how insurers had grown lax on policy wordings.

“The larger brokers that have had that power are going to find things change somewhat, and they are not going to be as successful at banging their fists on the table to demand those higher commissions,” he says. “The relationship will change, and if it doesn’t, insurers will continue to run risks they aren’t aware of and clients will continue to suffer.

“How many insurers are going to allow brokers to write policies on their own wordings nowadays? That’s just an example of where the power has shifted.”

Reid says that the crisis will also serve to educate consumers about the effectiveness, or otherwise, of insurance policies, making the role of the broker even more important.

“[After Covid -19], clients now will be a lot more acutely aware of what they are buying, and asking those questions,” he says. “Clients will be a lot more educated when it comes to policy wordings and cover, and are those brokers who have been paying those multiples for the businesses they bought going to have the time while they are integrating these great big monoliths and changing their culture to spend time with their clients and find out what they do need from a policy.”

Barton says that by staying away from consolidation, Partners& will be able to “re-engineer” the traditional broker financial model, which will allow it to spend more time with customers and achieve its goal of building long-term, sustainable and profitable growth. 

“If you don’t participate in the overinflated acquisition activity that the market has become accepting of then you have space in your value chain to the economics,” he says. “If you are creating income and profit in a more efficient and sustainable way, then you do not need to make such pressing demands of your insurer suppliers, and you can reinvest in the client proposition and the environment and culture for your people.”

Barton says this then feeds into “a virtuous circle” where the business has the financial headroom to invest in the learning and development of its people, allowing them to offer tailored advice and consultancy aimed at building “mutual understanding for mutual benefit” that ultimately leads to client growth and long-term success.

“We just think the industry has fallen from that path, and we just need to realign the economics. You do that, and everything else falls into place,” he adds.

Fighting back against

Barton also sees this fresh approach as a way to fight back against the “broker-driven” that has dogged the insurance market in recent years, whereby “the broker packages up bundles of broadly business in order to sell it on to the highest bidder”.

“Insurance advice is a complex vehicle, and does amazing things when it is supplied correctly, and yet brokers are trying to simplify it,” he says. “Broking is going in exactly the opposite direction to most markets where they are trying to create value – we are dumbing down a complex instrument, and everyone else is trying to make a simple instrument more complex.

“This means brokers aren’t looking at the nuances of the individual client’s circumstances, they are looking at it through their own financial lens.”

Barton says that this needs to change, and for underwriting and broking to come back to the fore of insurance.

“By starting with advice you can tailor a solution, but too much today the broking and underwriting skills are subdued in the knowledge that any issues or challenges will be picked up at the claims stage, and that is why there are so many contentious claims,” he says.

“What the market should be doing is bringing that capability to the front of the process, so before you are seeking to underwrite, get the programme established on the right business. That’s what clients think they are paying for, but the market has become incredibly lazy.”

Reid agrees, and says that Partners& is acutely aware of the importance of giving its customers what they need, not just what is easy to supply.

“It all comes back to the financials – the is there because there is a financial return from packaging that business together,” he says.

“Clients should get what they need, not what brokers think they need. If you have that relationship with a client and the information coming in, it is no longer a question of squeezing jelly into a mould.”

---

Read more…Premier League poised for kick off, but insurance concerns loom 

Not subscribed? Become a subscriber and access our premium content