Davey's Blog: The 400lb gorilla

Cautious optimism suggests a feint glimmer of light at the end of a very long tunnel. Blind optimism suggests that the economic decline is over and that we are seeing the first green shoots of the recovery;

• signs of a tentative recovery with retail sales up by over 4% like-for-like in April
• mortgage approvals up 4% and surveyors reporting increased interest in house purchases
• in the insurance market there is evidence that rates are beginning to harden (albeit with the spectre of dual pricing on renewal and new business rates)

Although cause for some future optimism, particularly if rates do harden, brokers remain under pressure as in general clients are still ceasing trading, cutting back on insurance cover (or cuts in wage roll or turnover are reducing premiums) and there is increased shopping around.

However all this ignores the 400lb gorilla entering the office - that against the current economic backdrop, brokers are going to have to plan for increasing claims frequencies and therefore work.

We are all aware of clients that are ‘sweating their assets’ by making their plant and machinery last just a little bit longer, replacing fleets later, grinding every last little bit of value out of their assets. Add to this the tendency for training and maintenance budgets to be amongst the first things to be squeezed in recessionary times and we have a potentially lethal cocktail that history tells us will lead to increased claims frequency. Add to this the probability of increased fraudulent claims, often significant fire claims and brokers now face the additional pressure of servicing greater volumes of claims on policies on which the income has already been taken.

With some insurers making redundancies and cutting costs, there is concern that the claims process will be impacted further, leading to service issues for brokers and their clients, particularly when the complication of fraudulent claims can slow down insurer claims processes even for legitimate claims.

In an increasingly disintermediated world, brokers must continue to differentiate on service in order to compete and add value. Predicting and coping with increased claims work is an essential part of this. Additionally many brokers now charge fees to commercial clients and often the detail of what that fee is for is vague or not as clear as it could be. Perhaps now is a good time to ensure that there are no ambiguities and that clients’ expectations are clearly managed.

It is important that brokers get the balance right, making sure they are servicing the right clients and not over-servicing others, remaining commercial in respect of work outside fee agreements and also maintaining their focus on winning new business.

As a keen campaigner on the resilience of brokers there are causes for optimism but brokers will need to continue to keep a close eye on costs and service levels and ensure that they are prepared for the inevitability of a gorilla stepping into the office.

Jonathan Davey is a director at SSP.