Options for the mid-sized

Aon has bought Gallagher Re, Thompson Heath & Bond purchased PWS International and Towergate is buying smaller brokers like there’s no tomorrow. And we’ve even seen speculation about Willis buying Marsh.

Consolidation has been the trend for the first quarter of 2008 in the broker market, but this leaves questions. Where is it all going to end? Why are all these acquisitions taking place and what is going to happen to those left behind?

The drivers for consolidation are well known – the soft market has created a need to find new sources of revenue and brokers are under pressure to drive down costs. One way to achieve this is to acquire and benefit from synergies, rationalise systems and strip out cost.

But consolidation causes a real problem for those that are neither buying nor being bought. The market capacity is pretty consistent, so the consolidators are building up their market share rapidly, leaving the rest with a smaller portion of the market.

This is probably fine for very small specialist brokers that operate in niches, where the big boys don’t or can’t compete. But the mid-sized brokers have to decide pretty fast how they are going to respond to the consolidation around them.

Doing nothing is not an option. Clients require service and they will go to the broker that can best meet their needs at the most competitive price.

The biggest players have the resources and the clout to provide high quality services at realistic prices – and in any case major clients want the reassurance that they are partnering with top quality, well-resourced suppliers. This means that new mid-market players – those that used to think of themselves as upper tier, and have now been pushed down the pecking order – need to change their approach and become more specialised if they are to attract and retain quality clients.

There are two options here. One is that they can become better at their core offering by providing better value for money, adding new functions and capability, or providing fee-earning consultancy services.

“By moving fast, mid-market players can jump ahead of their bigger rivals in specialist areas by using IT to enhance their capability.

The other option is to move into new markets. This is more dangerous, of course, requiring significant investment and carrying the risk of erratic returns while market share is built.

Both options require brokers to increase their skills in specialist areas, so they are either going to need to hire top quality talent, or resource their new functionality through niche outsourcing.

The new mid market has a real opportunity right now. The consolidators will be concentrating on bedding in their new acquisitions, understanding what they have bought, looking for savings and rationalising legacy systems. Senior management will also be distracted by the demands of putting two businesses together.

By moving fast, mid-market players can jump ahead of their bigger rivals in specialist areas by using IT to enhance their capability, ‘insourcing’ new functionality or becoming leaner by outsourcing laborious back office functions.

There are already clear signs in the market that some mid-market brokers are responding. We have all heard recently about new claims initiatives, the introduction of online portals, massive innovation in the aggregator market and increased specialists in areas such as flood or weather-related risks, to name but a few.

Others have not been so quick out of the blocks. These are the ones that need to worry. Doing the same old things with a smaller market share and no real innovation is a recipe for disaster.

The risks they face are a loss of clients, further loss of market share and eventually no doubt being snapped up by a bigger rival.