Are networks the best path?

It is the year of the network. Every week, there is a new network acquisition or golden handshake scheme, with network chiefs extolling the virtues of their particular offering long and loud. But as the consolidation of the broker market enters its final phase, and the networks remove the gloves in the fight for the remaining brokers, what have they really got to offer? What is the truth behind the hype?

While the networks themselves are ready to promise the world, it is the view of the insurers that really matters. The majority support networks and agree that they cut distributions costs, creating savings that can be passed on in the form of commissions. But there are some doubts about how much of these benefits are passed onto the individual brokers.

The major networks include The Broker Network, Cobra, Layton Blackham Business Solutions, Willis Commercial Network and the Purple Partnership. Westinsure and Brokerbility are considered alliances due to their different business models, but have similarities to networks.

Combined, the groups control between 600 and 700 brokers in the UK, which is around 10% to 15% of the broker market. Despite a large number of brokers falling into the hands of consolidators, the networks still have huge potential for growth

So far this year, networks have taken steps to increase their appeal. Broker Network launched an associate membership for brokers to experience the benefits before committing to full membership and is expected to have more than 40 associate members by the end of June. Willis launched its N2 offering for small brokers and the Purple Partnership announced a club membership to allow brokers to use its products while serving a notice period at a rival network. Last week, Cobra announced plans to buy small stakes in brokers in return for network membership.

The pressure is on for those brokers who have not yet sold up or joined a network to do so. The credit crunch is biting, rates still linger in the doldrums as insurers threaten to clamp down on commissions, and the possibility of a mandatory commission disclosure regime is looming large.

Grant Ellis, chief executive of The Broker Network, has predicted that 80% of brokers will belong to networks by 2013. Many have also said that only two or three networks and alliances will control the broking market in the coming years, with the future already beginning to take shape as The Broker Network closes in on a deal to acquire Westinsure.

But Chris Hanks, general manager of Allianz Commercial, argues that while networks are a good solution for some brokers, there are limits to their value.

“They add another mouth in the chain,” he explains. “In times when there is pressure on expenses it is unhelpful to have another mouth feeding off them [brokers].”

While networks do command greater commissions it is not always their brokers which benefit, he says. “There is a real challenge for networks to add greater value and if you are a small broker on your own you can probably get a bit more commission by being part of a network,” he adds. “But by the time the networks have taken their cut it may not be better than what they would get individually.”

On the other hand, Ellis argues that networks are crucial to protect brokers from being restricted by the bigger players. “The only way that those guys are going to be able to compete for insurers’ attention with the top 20 firms, who will be massive, is to be in networks,” he said. “For the vast majority, networks will make absolute economic sense.”

“The only way that brokers are going to be able to compete for insurers attention with the top 20 firms, who will be massive, is to be in networks. For the vast majority, networks will make absolute economic sense.

Grant Ellis, The Broker Network

He continues: “If the insurers apply their resources to the accounts they can get the biggest returns on there will be lots and lots of small brokers clamouring on their own for a voice and they will find it extremely difficult. The only practical way to get a seat at the insurers’ table is to join a network.”

Insurers agree that networks can save them money on distribution. John Kitson, Norwich Union (NU) sales and marketing director, says it is a modern way of doing business. “It enables us to talk to a small number of people and it can be more straightforward to place distribution and products out,” he says.

“It certainly can lower the cost of distribution by providing access to a large amount of brokers in a cost effective way.”

Kitson dismissed suggestions that networks will become less attractive to insurers as they get bigger and demand higher commissions.

“They will probably grow,” he admitted. “Networks are there as the market consolidates and shifts.”

But Simon Cooter, distribution director at Brit, said that insurers will have to consider the financial benefits of working with networks.

“The challenge to the insurer is when the network has taken its cut and the broker has taken theirs, do the numbers still add up and is it a reasonable number over all?” he said.

The future of networks depends heavily on how consolidation plays out. If insurers become more inclined to deal with consolidators, then independent brokers could be forced to turn to networks.

Grant Ellis said networks can build bridges between brokers and insurers: “We are their trade union; we act on their behalf when we are dealing with insurers.

“It is a collective voice, representing the interests of your members.”