Caught in the net

The broker market is reported to be dominated by 50-year-olds with grey hair and one eye on their retirement. If this is true, are they the reason why networks continue to flourish at the expense of the smaller broker?

Broker networks have grown dramatically over the past 10 years. Insurers themselves may have indirectly stimulated the demand by reducing their agency panels. Or is it more to do with the shift in market dynamics?

Traditionally, the local high street broker was seen by an insurer as the distribution channel. Its unique selling points (USPs) included: personal service; specialist knowledge; knowing and understanding clients' needs; a flexible product offering; and knowing that local presence was a key differentiator.

But then direct writers and the internet opened up new horizons. Brokers found themselves on the back foot, unable to compete on price for personal lines business and at the centre of media campaigns which encouraged consumers to "do away with the middleman".

Increased competition and the prospect of greater regulation resulted in smaller players forgoing their independent status and selling out to entrepreneurs, who were keen to consolidate their market share.

Potential network members were offered financial inducements and assurances that common issues would be addressed, such as: insurers' service levels; restricted access to products and markets; shrinking commission rates; common IT platforms; resourcing; compliance regulations; and succession planning.

For many brokers, these issues were resolved, but at what cost? Networks continue to grow at an alarming rate, swallowing up brokers and gaining greater control over the distribution channel and prices.

And it's not just in the personal lines market where brokers face increased competition. Insurers, through their direct marketing of SME products, are in many cases, squeezing commercial brokers out of the equation.

Consolidation is creating a market of 'super brokers'. At this year's Biba conference, 24% of brokers said they thought the formation of the 'super broker' was as much a threat as direct writers and the internet.

Cornell Consulting estimates that out of the 3,750 brokers currently operating, around one-third will join larger firms (who will no doubt join a network) by 2010.

Independent brokers are quick to point out that the pros of joining a network do not necessarily outweigh the cons. While many smaller firms cite "compliance peace of mind" as a key driver for joining a network, it's worth noting that the FSA is putting networks under greater scrutiny - namely because the economies of scale means that each member will not have a compliance officer on site.

Working practices
Independent brokers share my views. Not everyone wants to be compliant with another company's business model. Not every business has identical working practices and resources. So it's hard to see how one business model can effectively be squeezed into another.

The same applies to IT. Yes, a common platform is to be applauded, but these systems can be accessed without having to be a network member.

A number of networks insist that before they accept an application, the potential member must use a particular system or have a staff training programme in place for it. This is certainly an imposition.

Also network systems will not be particularly bespoke to a business - and this is the nub of the matter. For an independent to survive, I believe it has to become a specialist, especially as networks turn its members into generalists.

In its fourth quarter 2005 survey, Insurance Times reported that 94% respondents viewed service as critical or very important when it comes to differentiation and second on the list (67%) was being a market specialist.

While it is widely recognised that network members may receive preferential rates from insurers, I counter that an independent status allows us specialists to secure equally preferential rates.

Consider the premiums offered by British Insurance. Why does it regularly top independent consumer comparison tables and internet sites? 'Go it alone' brokers will be the first to advocate that insurers tend to focus on them as independents, which is better than being viewed as part of a bigger set-up.

Securing a good rate is all down to the relationship you have with your supplier. Members of networks will not be able to have such strong individual insurer relationships as they do not have a large share of the negotiating voice.

How can networks promote the development of individual insurer relationships? Members can never be specialists. What if a member has an idea that takes the firm away from the network's business or compliance model? Having been identified as entrepreneurs a few years ago, networks are now responsible for stifling that entrepreneur spirit.

Almost half of the commercial lines brokers responding to a Datamonitor survey this year said they were either definitely, or maybe, planning on acquiring another broker in the next 12 to 18 months. Only 1.6% said they were planning to join a broker network in the next year.

While networks are losing their appeal to sizeable brokers, I can understand why smaller brokers may be keen to jump ship and gain access to a wider portfolio of products, services and resources. The ability to offer employee benefits, risk management and health & safety services is sorely tempting, but the price to pay for this increase in your portfolio will be your identity.

A change in the market dynamics and regulation have all played their part in the demise of the independent broker, but the opportunity is there to embrace those USPs that gave brokers the leading edge all those years ago, without having to resort to a sell out.

Personal services
Embrace those market drivers that caused the shift in dynamics in the first place, use the internet more as a sales tool and respond to customers' current frustrations with call centres and offshoring by promoting the bespoke services a broker can deliver. Customers are crying out for that personal service.

I believe that over the next 10 years, the independent broker will thrive again. Networks have dominated the sector, but independents are not only 'standing their ground' but gaining momentum. There are a number of younger players emerging, keen to embrace technology and working to a different business model.

It's heartening to hear that 80% of brokers in the Insurance Times survey plan to address their succession planning by developing and promoting from within, rather than preparing their business for trade sale. So even if those 50-year-olds do have one eye on retirement, at least they're paving the way for a new generation.

It appears brokers are becoming less keen to give away their intellectual property and allow competitors to become partners - after all, who wants to be part of someone else's business model? IT

Simon Burgess is managing director of britishinsurance.com