Presenting a professional front

Simon Lockwood, NU

Jon Simpson, Ao

Julian Edwards, MC

David Partington, Marsh U

David Curry, Miller Insuranc

Lynn Harris, Groupam

Claire Hayward, Mansion Hous

Hala Melcon, JL

Chair: Elliot Lane, Insurance Time

Chair: To begin with, the idea of stringent rules being placed on brokers in their dealings with insurers post-Spitzer. Is hospitality just part of the job?

Julian Edwards: Well hospitality, by the nature of the beast, is there to stimulate business. It is a vital part of our business life, although I agree there has to be some level of capping or some rules in place.

Claire Hayward: I think it should be a relationship builder, but I don't think it always is. I think to reward people for the fact that they have placed business with you is not necessarily the wrong thing to do.

Chair: Would you consciously think, "Well that person I know really likes expensive restaurants and that guy likes a bit of golf?"

Hayward: I think you tailor it to the person if you can, yes definitely. That adds more value to it. Taking somebody to Wimbledon if they're not interested in tennis really is not that fascinating for them.

David Partington: The key issue now is that there are FSA rules about the appropriateness of inducements, so the debate is about is it appropriate to the local customer or local courtesy? Essentially we act as a procurement function for our clients and most of our clients have very very clear rules about the points at which you can accept hospitality. So all we're really doing is following the lead that the procurement industry has taken.

David Curry: The fact of the matter is it's not going to be any good if I don't deliver the appropriate cover, and it's the same with my dealings with insurers. They might take me out, but I'm not necessarily going to put business with them if their cover is not the most appropriate to my clients.

David Curry: Hospitality has been going on for donkey's years in all aspects of financial markets, not just insurance. I feel it's a necessity in our industry and I think people need to just find a balance with the levels of hospitality that they provide. To be honest, most hospitality, whether it's taking someone to a cricket match or a tennis match, is available to everybody. Obviously it's all a question of balance. But I think the problem is that a lot of people are now becoming a bit too paranoid about this.

Simon Lockwood: Again, hospitality is a part of how you communicate with your customers, and this is a people business and people have to be comfortable with each other, so hospitality is a forum with which you get people together. In terms of how much you spend on a particular event, I think that's a cost and conscience issue for a company. I think where there is a need for strict rules is in the gift area, because a company giving a gift is not enhancing people talking to other people.

Jon Simpson: I think one of the greatest strengths of the insurance industry is its social aspect, I think it makes it a good place to work, I think it makes people like us want to stay in the industry. And there is a line I think between building a relationship and where you're offering an inducement or a bribe.

Chair: From a common sense point of view, did you feel it was quite patronising, being told what's sensible and what isn't?

Simpson: I don't think you can rely on common sense in every area of business. I think by setting the $100 limit, as Aon has, is unambiguous. Within Aon there have been no bones made about the potential for what happens if you breach the $100 cap. So there's no ambiguity any more. I think we've got to remember that many of us here are insurance brokers, we're not the client, and if an insurer chooses to entertain the client, then that's fine. The FSA is really trying to drive home this best advice idea and I think it contradicts what the FSA is trying to do if I am seen to be going out with a particular insurer nine or 10 times a year and not going out with another insurer at all.

Lynn Harris: The message has to be consistent from the CEO right down to the staff on the ground. I think insurers and brokers will have to introduce some sort of capping but again it must be consistent. Groupama will soon issue one document for the whole group which will offer guidelines to staff but common sense must rule the day.

Hayward: If insurance is an industry where, in order to transact large commercial business you need to have a relationship with the underwriters and the brokers and the risk management and all the people that are part of the process in order to underwrite that business, and for the client to have the best cover, you need to understand the market properly and have relationships with all the appropriate people.

Simpson: I think the idea that to build a relationship involves expensive meals, or huge nights out in the pub, is not the case. You do not have to do that to build relationships, and I think Aon has set a reasonably sensible cap at $100 a per head. That's a damned fine meal, even in London it's a damned fine meal, I would suggest there's something more than relationship building when you start to go above that.

Hayward: I don't think anyone's suggesting that there's a monetary cap on how you make a relationship, what I'm saying is that just because you get to £70 for one particular event, doesn't mean that that event is not going to be building a relationship, just because it's less than £70 or more than £70. I don't mean that there shouldn't be levels, I just mean I don't see how you can set a limit of, say, £70 as the level at which you produce the relationship.

Partington: It's very important to separate hospitality from relationships. You build relationships with your clients and your underwriters 99% of the time by sitting down with them in an office environment.

Edwards: Yes, and obviously the

subject of hospitality is a lot bigger than simply Aon, and here we've talking a lot about broker/insurer relationships with the odd mention of the client.

And if we just think about personal lines insurance and particularly affinity schemes, you hear of some incredible inducements - some people would say unfair inducements - to the key decision-makers.

Now, if they are unfair, how is the client's best interests being handled there, because the manufacturer or the affinity may be picking a particular broker or insurer.

Hayward: I agree with you, I don't know how you separate hospitality from relationship building in terms of how you build a policy. It's very difficult to split the two.

Lockwood: Also, we talked a lot about inducement and acting in the client's best interest. Within an organisation there will be people who don't advise the client, they're there to manage the business, so should you have different rules for them.

Partington: Relation managers basically spend their time on the golf course and they're there to make sure that things are smoothed over as a deal nears completion.

Edwards: So they're there to stimulate business again, so it's not actually that far removed.

Hayward: It concerns me though, because every profession, every trade, whether they're builders or suppliers of bricks, have a form of relationship building and hospitality.

Lockwood: Hospitality is a means of communicating with your customers, if you're not there you're not communicating with them. I think as long as there's a moral underpinning, then your intentions should be guided by that and the rest is down to cost and conscience.

Partington: But why do you need a Beef Wellington to do that and are we looking at insurance through rose-tinted spectacles about how it used to be and missing the way that it needs to actually be going forward.

Hayward: No, what I mean is that business the world over transacted like that. I don't think insurance is any different from banking or building or painting, I don't think it's fundamentally different in terms of how the business is transacted.

Partington: I think you have to be able to demonstrate completely transparently to your client that there has been no bias towards any particular supplier.

Chair: I mean when people saw the Aon story they were very surprised - mostly because it wasn't Marsh. But Marsh hasn't gone this far. Is that because Marsh feels it has done enough?

Partington: I think Marsh has got a very clear policy in line with the FSA rules, and that's our stance at this point in time.

Simpson: I don't think I would be surprised if others followed Aon's lead in the not too distant future. I think if you're a small company and you've got a managing director and a small number of employees, you can control things quite easily. When you're a sprawling organisation, you need to be very black and white and maybe this is overdue and should have been done a long time ago.

Partington: How are you going to deal with the situation where, say, there's a golf course that has private membership, so you cannot get on, so there is no market value, how are you going to actually measure the market value of that?

Simpson: There are instances where common sense will have to be applied because, like you say, you cannot measure the market value of the corporate membership and somebody's going to have to take a view on that. What I really liked about the policy was that it is a blanket policy.

Lockwood: One of the benefits of Aon coming out and giving that statement is that it's made everybody talk about costs.

Chair: And shareholders, I'm sure, will be soon asking these questions across AGMs.

Volume before profi

Chair: Shall we move on. Axa's statement that, "we're only looking at volume, not profit", is an interesting one. This is driving the market towards a soft market, which again will have an impact on how you deal with your clients and how you deal with your competitors. So when you heard that, did it shock you?

Edwards: I can only comment on our particular segment of the market. I think 'ridiculous pricing' is a very strong phrase. Yes, we're in a soft market, but ridiculous pricing is a completely different end of the spectrum, and we've certainly seen a lot of that carried through into our books of business and we are probably under more pressure now on our delegated and scheme business to produce a profit.

Chair: And from the volume perspective, we hear that Axa is offering blind capacity to certain brokers? Have you been offered this?

Edwards: No, I've got a lot of respect for AXA, particularly on their bike book, they've made some serious changes to harden their rating and criteria. On their bike portfolio, they're trying to drive more profit out of the book.

Hayward: 'Ridiculous pricing' is a lovely phrase, I wish somebody would give me a ridiculous price for some of my

insurance. I think the problem is that it makes us, as an industry, look unprofessional because one year we're asking them to budget for a large amount, but this year we're actually going to reduce this for you, but next year it is going to increase again. There's no stability.

Partington: There's always going to be a dynamic market and that's one of the great things about the market, it's constantly changing and fluctuating and it is a completely free market. Ultimately people have the ability to quote whatever price they want for whatever risk. I think the frustration, from my personal perspective, is when there is no differentiation between the quality of the risk.

Curry: Well when I read the article about this in Insurance Times I just thought, "here we go again". We're a great industry but we tend to be our own worst enemy. Yes, I had a case that I re-marketed about 18 months ago. Eighteen months on I decided to do another market exercise and the premium it renewed at was pretty much in line with everyone else. They had grown about five-fold over in the 18 months, but someone quoted 20% less than they were paying 18 months earlier. Now, it's great news for the client, but he actually was frightened off by it. My immediate concern was that they're just going to buy business in, and that goes back to what David said, they're not going to differentiate between a poor risk or a bad risk, and that really then lowers our professionalism, broking and underwriting.

Melcon: I think when these insurers go for volume they're obviously working on the expectation that they're going to end up with profit, but at the moment I see that there's a lot of capital out there and in order to service that capital underwriters are having to write more business. By doing that they're obviously wanting to see their trend go upwards year on year, and there are people they need to satisfy, you've got shareholders and business analysts, and they only like to see things going up, not down.

Chair: From a reinsurance perspective, does it matter whether they've got volume work?

Melcon: I think it's always volume for anybody, whether you're an insurer or reinsurer, they always want to be seen to have big books of accounts.

Lockwood: In terms of volume of profit, any company, especially a quoted company, has to deliver profit to the market. Every year group head office has to go to the City and demonstrate that the major parts of their business are demonstrating a return on capital.

Harris: Insurance cycles will always exist. There will be major events every year of some form which will change the face of the cycle. I think new entrants into the market have affected the cycle at the moment. But overall we could all sit around the table as insurers and talk about making changes but in the end, events would take it out of our hands.

Simpson: I echo a lot of the comments raised. I think it does reflect badly on the industry when you see these huge peaks and troughs that suggest that we're not able to maintain a good business model. There will always be a cycle, to an extent, and even perhaps the soft cycle we're in now hopefully will not be too severe and therefore not followed by as severe a hard cycle. But talking about new entrants earlier, they certainly make things difficult because they're buying in business. Price reductions aren't always a bad thing because they can be driven by the right reasons, but certainly it's long-term madness to write for volume and not profit.

Chair: To go back to the point about killing our industry, should there be much more operational control for underwriters at the moment? Do you think that underwriting discipline is out of control?

Curry: It seems to me they're almost saying: "We're going to throw the underwriting book out the window." And if you're just going to give an underwriter permission to do whatever he wants at whatever price, they're going to come unstuck.

Hayward: Yes, part of that though is driven by shareholders getting a fantastic return one year and wanting as good, if not better, return the next year. And the way they look at it is the only way to get as good, if not better, return is to have more business.

Edwards: But I fail to see how it would actually kill off our industry, because whether the customer likes it or not, insurance is a requirement that they have to have. Yes it's going to be difficult for them to budget, but they're not going to be able to operate without it.

Partington: I don't entirely agree with that. There are statutory classes where that is the case, but for a lot of insurance there's alternative options about the extent of cover you buy, the level of retention that you take, and the industry will therefore have to remain competitive because the alternative is not to insure.

Hayward: Can I just ask a question to anybody who advises clients? Do you spend time talking to them about the fact that it might be a good idea to keep this money for two years time or anything? How do you explain to them that the market will change and they might need to re-address their budget in three years time? Do you talk to them on that basis?

Simpson: If somebody wants to take a huge saving, then they may need to be prepared for prices to go up in two or three years' time. I think it's interesting what David said earlier about having a client who, when offered a 20% reduction, actually said "doesn't feel right", and I think a lot of the corporate clients, if you help them to understand how the market works, a lot of them are much more interested in stability that they are in making a quick buck.

Chair: At the moment, it seem that everyone's going for the mid market, Marsh's new business plan is to build on the new market and mid tier, and everyone keeps banging on about SME. How much more business is there in the SME market? And the other aspect is that everyone wants to be in high net worth. These seem to be the trends, as well as the bike sector. Is it frustrating to see your peers chasing these trend sectors when they don't really know what they're doing. And, to echo Jon, it is quite nice to hear that a client said "doesn't feel right".

Curry: Well as Jon said, I had a long relationship with this guy, but it's because the saving was so ridiculous. He had projected annual premium, obviously based on five times what he paid 18 months earlier, and someone was coming in 20% lower than what he paid 18 months earlier. And it just put him off.

Hayward: Was it a credible insurer?

Curry: Yes.

Chair: I heard about this in professional indemnity, particularly with architects, where they were paying £500,000 in premium and being offered £50,000 one year later, when nothing had changed.

Hayward: It's difficult as well, I guess, because a lot of client relationships are with the FD, and if that FD has then got to justify to their MD that they've not accepted a £400,000 saving.

Partington: I think the educated clients recognise that insurance spend is only a relatively modest proportion of the actual cost of risk in their business, and in periods when the market is driving pricing down, they'll actually recognise that and use that saving to manage risk in another area to actually make some of the insurance pricing decreases more sustainable in the long term.

Chair: Yes, long-term stability, is that what we would all like to see in this market, in the renewal season.

Hayward: It's difficult in a competitive market to contain it totally, I don't think you could, because then it wouldn't be a competitive market, you would be a 'this is our price' market and we would be back to tariff again. I think you can probably control it more than we do. But it's very difficult to do.

Simpson: I think one part of the broker role is to control price, and I think we have every right to push the price down in the best interests of our client, subject to everything being okay with the security, the insurer, the policy terms and conditions and what's right for long-term stability. So in terms of pushing the price down, absolutely, I think it's my job to push the price down as far as is reasonable and in the interests of the client.

Hayward: I accept that, because that's the role of the broker. As a broker you may push the premium down and essentially probably take the same fee, so your profit may not change at all by the action that you take. I'm not saying it's not right for you to make the right suggestions if you've got an alternative price. But equally if you then push pricing down, effectively what happens is insurer profit margins drop, so later on insurer profit margins need to go back to the right level, so prices go up dramatically. So if there's no control from both sides, if the recommendations are that you go with a reduced price every time, then essentially insurers are playing their part by reducing the price, but brokers are playing their part by recommending the price, so there has to be professionalism on both sides.

Simpson: I think if you're talking about trying to stabilise the market and trying to control the market cycle, what you really need is for your top five, top 10 insurers to make a stand and focus on profitability and sustainability for the long term. And I think it's the responsibility of the larger insurers in the UK to actually take a stand and say: "Well we recognise that these new entrants are here, but actually we've got a better product and we're going to be here in 20 years time, we're better security." They've got to sell all the benefits of that and convince the broker community that they need to recommend this. IT

Key point

Hospitality

Volum