RoundTable: View from the North East

Broker and insurer players, both large and small, convened on 23 November at Elland Road, home of Leeds United football club, to discuss the current and future state of their industry.

Based on their responses it was a fitting venue, with complaints that the Leeds market, while still vibrant, was experiencing a decline at the expense of its illustrious rival across the Pennines.

There was optimism – albeit considerably muted – that rates are showing signs of hardening, although the impact of floods has had less of an impact than some expected.

The attendees suggested that a significant external event could provide the catalyst for change – although not until 2009, they claimed.

The panel was particularly critical of the quality of underwriting among the professional liabilities market, which has seen rates continue to fall this year.

Unsurprisingly, consolidation solicited a range of responses. While there was agreement that the consolidators had both an inevitable and vital role to play in the market, one went so far as to question the sustainability of their business models.

It was the issue of commission disclosure that led to the most heated debate. While the larger players argued that it was undeniably an issue in terms of transparency, one broker warned that disclosure, in offering clients a new bargaining chip, could end up putting the squeeze on smaller players – and could force them to withdraw from key lines of business.

The state of the market

The discussion began with a broad view on the state of the market, which the participants agreed remained challenging, although there was a feeling that rates would harden soon, in some sectors at least.

Nick Pay of Willis thought that it was difficult for brokers to stand out from the crowd in such a soft market.

He said: “The nature of the market conditions – and probably everyone around the table will agree – allow less opportunity for quality brokers to show their true mettle. It is very easy to get a cheap price and a decent deal in these conditions. From a Willis point of view, we are looking forward to the market moving to a harder status to show our true worth.

“I see no immediate change. There are certain sectors where there are signs of the market starting to harden. We are very prominent in the food sector, for example, where there seems to be a reduction in capacity, which will inevitably lead to a hardening of rates at some stage. I would not be surprised to see that happen in 2008.”

QBE’s Pat Wood agreed that brokers were facing a tough time.

He said: “There is clearly lots of capacity in the market. The North East is a very buoyant but competitive market, with three centres – Sheffield, Leeds and Newcastle. It is a struggle for good quality brokers in a softer market because, as Nick says, it is very easy to get a quote on the back of a beer mat without doing too much work. In a harder market, good quality brokers come into their own, in that they do the work, they work with the client, they can have an input into risk management and they can make a real difference and get the deals for clients in tougher markets, whereas they would potentially struggle to make a difference sometimes in softer markets.”

Kevin McParland of McParland Finn agreed that life was tough for brokers at the moment, but did not anticipate any change next year.

He said: “The insurers with the strongest balance sheets are exploiting that position at the moment and driving the market down. It is not held by new entrants. I can only really comment on our niche, which is in professional liabilities. Certainly, the market has been softening since 2000 and I see no change in that over the next two years; certainly, it will be 2010 before I think we see any change. From an underwriting perspective in the provinces, it is totally undisciplined and is about market share. There are new entrants and there are also existing markets opening up in the provinces.

“Quite frankly, it is difficult to see how they are all going to survive. It would take one or two of the major players to say ‘enough is enough’, but I do not see that happening. I think that we will carry on at this level until at least 2010, if not beyond.”

Chris Robinson of the Insurance Partnership agreed that it would take something big to shift the market.

He said: “The market has been remarkably resilient given individual events such as the floods. It will probably take something on a more global scale before rates really start to turn around. They have been bumping along the bottom for some while now and, every time there is a view that they might increase, some new entrant comes in, such as with the solicitors’ market, which brings us back to square one.”

Consolidators

The impact of consolidators has been felt across the country this year, and Insurance Times editor Tom Broughton asked the attendees how they thought it had affected the market.

Neil Tiffin of W Denis was ambivalent, believing the big consolidators were not having an impact one way or the other. He said: “There is room for consolidators. There are still a number of brokers, particularly in the Leeds/North East market, competing for business. Again, that is not a bad thing from our clients’ perspective. I do not necessarily think that they have contributed to it at all; they are just a factor in a market that is changing very quickly and responding to market conditions.”

But others around the table were more doubtful. Chris Robinson said: “One thing that Towergate and similar consolidators have done is to push insurers into the situation where they are investing in and buying brokers as a defensive measure to protect their lines of distribution.”

And McParland questioned the sustainability of the business model. He said: “One has to ask if the earlier consolidators’ business model, without being specific about any one company, has run its course. I think we may see more problems if that model ceases to work, which it could, for instance, if insurers stop being so compliant to consolidators’ demands or if there is a hike in interest rates. There are a number of issues that could adversely affect these earlier models. It would be interesting, as a small broker sitting on the touchline, to watch how this unfolds.”

Pay believes that consolidators, like networks, have emerged to fill a market need. He said: “It seems to me that it is just filling a gap that was there in the market. These consolidators only came about because of the compliance regimes that were imposed on us by the FSA. Insurers want to deal with their distribution channels better. In the same way, the networks popped up and Willis’ network operation is hugely successful. It has only been created because the desire was there.”

So what is the future for the independent broker? According to Tiffin: “You reach a stage, sooner or later, when those brokers who are important regional players – and I include us in this – are totally committed to being independent. We see consolidation from a board level as an opportunity for us, however the business model works. Nobody, in a new business meeting with any of our clients, could question our independence or succession planning. You might reach a level where you have the consolidators with a business model that works for them and you are left with other good quality brokers that have the size to negotiate locally with all the insurers, who are probably then comfortable with the regime as it is. It creates opportunities, removes some of the competition and underlines some of the core values that we have as an independent business and how we move forward.”

Commission disclosure

Regulation and the role of the FSA can be a major headache for brokers of all sizes,

and conversation soon turned to the possible introduction of mandatory commission

disclosure.

Nick Pay was an enthusiastic supporter of the move. He said: “My own opinion is ‘bring it on’. Bring commission disclosure forward rapidly and increase regulation – that is my view, because we become a more professional part of the insurance sector if we do that. We just should not be ashamed of what we earn. The reality is that our clients do not begrudge us earning for what we do.”

However McParland cautioned that the technicalities could be tricky. He said: “Our terms and conditions comply with the FSA in that, if you wanted to know what we are earning, you can ask. If it was to be made mandatory, the nature of the disclosure would have to be carefully worded as to what was meant by ‘commission earnings’. Is it the ultimate handling fee, what you are getting from your MGA or what you are getting from wholly owned subsidiaries that take nigh on 50 points out of the market in some instances? If you are not going to have full disclosure, there is very little point.”

Robinson doubted whether the general public would even be interested in such information. He said: “I wonder whether, with the average buyer of household and motor insurance, the concern about getting the price and cover right needs to be added with the concern about what the intermediary is earning.”

Wood agreed, but thought the situation differed in commercial lines. He said: “In the commercial sector, it adds to the professionalism if it is a very transparent transaction. Disclosure, whether fee or commission, is the way forward.”

“The North East is a very buoyant but competitive market. It is a struggle for good quality brokers in a softer market because it is very easy to get a quote on the back of a beer mat without doing much work. In a harder market, good quality brokers come into their own

Pat Wood, QBE

But Tiffin reiterated the warning that full disclosure could have unforeseen, and unwelcome, consequences.

He said: “Full disclosure across class and all premium ranges is a big ask because you will find that, if they are given the opportunity or not to reduce pricing to remain competitive, it is something else that a large percentage of clients will use as part of their negotiations with their broker. They may not renew after they have had a problem claim or a £20,000 premium that you could have charged out as £10,000 and get it in fees to assist them, but they may well do on every other piece where, perhaps, the behind-the-scenes work has not been so in-their-face.

“It would be difficult, but we would have to be robust in at least maintaining the commission that we pay. I fear that it would be something that clients would use as part of the negotiation which may lead to questions around whether a quality broker could survive with the right quality staff in the right roles to respond to the times when they need them if their margins were squeezed further that way.”

Pay believed the debate touches on a fundamental issue about the way brokers are perceived by their clients. He said: “Unless we believe that we are worth it, we have absolutely no chance of convincing our clients. That is why we are not a profession at the moment. We have to believe this. We provide a fantastic, high-quality service to our clients, and I believe that our clients think that we are worth it.”

Prospects for 2008

Finally, the attendees took a few minutes to look to the future and discuss what changes they expected to see to the market in 2008.

Grant Lister, of Marsh, was prepared for the soft market to continue. He said: “In professional indemnity, I see no change at all. We just have to live with that. A soft market has the same challenges as a hard market. To try to change it, you just need to work around what it is. Insurers out there are saying they are quite happy with the current position and are gearing up around those conditions too.”

QBE’s Colin Railton agreed. He said: “As insurers, we need to rise to the challenges of a soft market for the next couple of years. It will not turn until about 2010.”

Neil Tiffin continued the consensus and highlighted the importance of IT. He said: “The issues I see are a soft market, more consolidation, increased reliance on IT and increased importance of the right level of investment in the right level of IT. There will be tough times but it will make us more efficient. Our company is not the largest broker in the country but is of a good regional size with low gearing, so we are in a good position to withstand a soft market for a long period of time. It will be tough, but we can work through it.”

Kevin McParland pointed out the importance of the global economy to the market. He said: “There is far too much fickle capacity in the market at the moment. It makes you wonder whether investors really understand the long-tail nature of the professional liability business and the impacts on insurers. I can see no change in 2008 or 2009, and we will be lucky to see any real change, unless there is a major incident which sucks out billions of premium.

“We are a global industry now. I was in London a few weeks ago and one insurer was saying that, last year or the year before, a hurricane just missed Houston. Had it hit Houston, it would have written off the reserves of the insurance industry. I am not suggesting that that happens, but it would have to be something of a large magnitude to harden the market before 2010.”

But Pat Wood took a different line. He said: “I am an eternal optimist so I think the market will stabilise next year. I hope it is like the stock market where everyone says it will happen but it is different now in that the market can see some sense and stabilise towards the end of next year or early 2009.

“From our point of view, we will continue to try to remove people from this hard/soft market cycle – that is certainly our aim.”

Martin Spenceley, of Eastwood & Partners, saw a strong future for independent broking despite the challenges. He said: “We are still stuck with the same climate and we will be there for a while to come.

“There will be a lot of challenges for national brokers and for independents. The independents have tremendous strength. Their agility to change direction and move quickly will be very important to them in the future. There are fantastic opportunities within that environment and the insurance industry generally.”

Marshall Sugden, from Smart & Cook, closed the afternoon with these words: “Next year and thereafter, there will be a distinction between service-led broking, which definitely has a place, and lower-end, commoditised broking. That gap will start to appear because the consumer will demand it, so just beware of it and do both, neither or one or the other.”Broker and insurer players, both large and small, convened on 23 November at Elland Road, home of Leeds United football club, to discuss the current and future state of their industry.

Based on their responses it was a fitting venue, with complaints that the Leeds market, while still vibrant, was experiencing a decline at the expense of its illustrious rival across theThere was optimism – albeit considerably muted – that rates are showing signs of hardening, although the impact of floods has had less of an impact than some expected.

The attendees suggested that a significant external event could provide the catalyst for change – although not until 2009, they claimed.

The panel were particularly critical of the quality of underwriting among the professional liabilities market, which has seen rates continue to fall this year.

Unsurprisingly, consolidation solicited a range of responses. While there was agreement that the consolidators had a role both inevitable and vital to play in the market, one went as far as questioning the sustainability of their business models.

It was the issue of commission disclosure that led to the most heated debate. While the larger players argued that it was undeniably an issue move in terms of transparency, one broker warned that disclosure, in offering clients a new bargaining chip, could end up putting the squeeze on smaller players – and could force them to withdraw from key lines of business.

The Panel

Marshall Sugden, Smart & Cook

Martin Spenceley, Eastwood & Partners

Neil Tiffin, W Denis

Grant Lister, Marsh

Chris Robinson, Insurance Partnership

Kevin McParland, McParland Finn

Nick Pay, Willis

Pat Wood, QBE

Colin Railton, QBE

1. The State of the Market

“Unless we believe that we are worth it, we have absolutely no chance of convincing our clients
­

Nick Pay, Willis

The discussion began with a broad view on the state of the market, which the participants agreed remained challenging, although there was a feeling that rates would harden soon, in some sectors at least.

Nick Pay of Willis thought that it was difficult for brokers to stand out from the crowd in such a soft market.

He said: “The nature of the market conditions – and probably everyone around the table will agree – allow less opportunity for quality brokers to show their true mettle. It is very easy to get a cheap price and a decent deal in these conditions. From a Willis point of view, we are looking forward to the market moving to a harder status to show our true worth.

“I see no immediate change. There are certain sectors where there are signs of it starting to harden. We are very prominent in the food sector, for example, where there seems to be a reduction in capacity, which will inevitably lead to a hardening of rates at some stage. I would not be surprised to see that happen in 2008.”

QBE’s Pat Wood agreed that brokers were facing a tough time.

He said: “There is clearly lots of capacity in the market. The north-east is a very buoyant but competitive market, with three centres – Sheffield, Leeds and Newcastle. Again, it is a struggle for good quality brokers in a softer market because, as Nick says, it is very easy to get a quote on the back of a beer mat without doing too much work. In a harder market, good quality brokers come into their own, in that they do the work, they work with the client, they can have an input into risk management and they can make a real difference and get the deals for clients in tougher markets, whereas they would potentially struggle to make a difference sometimes in softer markets.”

Kevin McParland of McParland Finn agreed that life was tough for brokers at the moment, but did not anticipate any change next year.

He said: “the insurers with the strongest balance sheets are exploiting that position at the moment and driving the market down. It is not held by new entrants. I can only really comment on our niche, which is in professional liabilities. Certainly, the market has been softening since 2000 and I see no change in that over the next two years; certainly, it will be 2010 before I think we see any change. From an underwriting perspective in the provinces, it is totally undisciplined and it is about market share. There are new entrants and there are also existing markets opening up in the provinces. Quite frankly, it is difficult to see how they are all going to survive. It would take one or two of the major players to say ‘enough is enough’, but I do not see that happening. I think that we will carry on at this level until at least 2010, if not beyond.”

Chris Robinson of the Insurance Partnership agreed that it would take something big to shift the market.

He said: “The market has been remarkably resilient given individual events such as the floods. It will probably take something on a more global scale before rates really start to turn around. They have been bumping along the bottom for some while now and, every time there is a view that they might increase, some new entrant comes in, such as with the solicitors’ market, which brings us back to square one.”

2. Consolidators

The impact of consolidators has been felt across the country this year, and Insurance Times editor Tom Broughton asked the attendees how it affected the market in their view.

Neil Tiffin from W Denis was ambivalent, believing the big consolidators were not having an impact one way or the other. He said: “There is room for consolidators. There are still a number of brokers, particularly in the Leeds/North-East market, competing for business. Again, that is not a bad thing from our clients’ perspective. I do not necessarily think that they have contributed to it at all; they are just a factor in a market that is changing very quickly and responding to market conditions.”

But others around the table were more doubtful. Chris Robinson from the Insurance Partnership believed that: “One thing that Towergate and similar consolidations have done is to push insurers into the situation where they are investing in and buying brokers as a defensive measure to protect their lines of distribution.”

And McParland questioned the sustainability of the business model. He said: “One has to ask if the earlier consolidators’ business model, without being specific about any one company, has run its course. I think we may see more problems if that model ceases to work, which it could, for instance, if insurers stop being so complaint to consolidators’ demands or if there is a hike in interest rates. There are a number of issues that could adversely affect these earlier models. It would be interesting, as a small broker sitting on the touchline, to watch how this unfolds.”

Pay believes that the consolidators, like the networks, sprang up to fill a market need. He said: “It seems to me that it is just filling a gap that was there in the market. These consolidators only came about because of the compliance regimes that were imposed on us by the FSA. Insurers want to deal with their distribution channels better. In the same way, the networks popped up and Willis’ network operation is hugely successful. It has only been created because the desire was there.”

So what is the future for the independent broker? According to Tiffin: “You reach a stage, sooner or later, when those brokers who are important regional players – and I include us in this – and totally committed to being independent. We see consolidation from a board level as an opportunity for us, however the business model works. Nobody, in a new business meeting with any of our clients, could question our independence or succession planning. You might reach a level where you have the consolidators with a business model that works for them and you are left with other good quality brokers that have the size to negotiate locally with all the insurers, who are probably then comfortable with the regime as it is. It creates opportunities, removes some of the competition and underlines some of the core values that we have as an independent business and how we move forward.”

3. Commission disclosure

Regulation and the role of the FSA can be a major headache for brokers of all sizes, and conversation soon turned to the possible introduction of mandatory commission disclosure.

Nick Pay was an enthusiastic supporter of the move. He said: “My own opinion is ‘bring it on’. Bring commission disclosure forward rapidly and increase regulation – that is my view, because we become a more professional part of the insurance sector if we do that. We just should not be ashamed of what we earn. The reality is that our clients do not begrudge us earning for what we do.”

However McParland cautioned that the technicalities could be tricky. He said: “Our terms and conditions comply with the FSA in that, if you wanted to know what we are earning, you can ask. If it was to be made mandatory, the nature of the disclosure would have to be carefully worded as to what was meant by ‘commission earnings’. Is it the ultimate handling fee, what you are getting from your MGA or what you are getting from wholly owned subsidiaries that take nigh on 50 points out of the market in some instances? If you are not going to have full disclosure, there is very little point.”

Robinson doubted whether the general public would even be interested in such information. He said: “I wonder whether, with the average buyer of household and motor insurance, the concern about getting the price and cover right needs to be added to the concern about what the intermediary is earning.”

Wood agreed, but thought the situation differed in commercial lines. He said: “In the commercial sector, it adds to the professionalism if it is a very transparent transaction. Disclosure, whether fee or commission, is the way forward.”

But Tiffin reiterated the warning that full disclosure could have unforeseen, and unwelcome, consequences.

He said: “Full disclosure across class and all premium ranges is a big ask because, in much the same way as the insurer, you will find that, if they are given the opportunity or not to reduce pricing to remain competitive, it is something else that a large percentage of clients will use as part of their negotiations with their broker. They may not renew after they have had a problem claim or a £20,000 premium that you could have charged out as £10,000 and get it in fees to assist them, but they may well do on every other piece where, perhaps, the behind-the-scenes work has not been so in-their-face. It would be difficult, but we would have to be robust in at least maintaining the commission that we pay, but I fear that it would be something that clients would use as part of the negotiation which may lead to questions around whether a quality broker could survive with the right quality staff in the right roles to respond to the times when they need them if their margins were squeezed further that way.”

Pay believed the debate touches on a fundamental issue about the way brokers are perceived by their clients. He said: “Unless we believe that we are worth it, we have absolutely no chance of convincing our clients. That is why we are not a profession at the moment. We have to believe this. We provide a fantastic, high-quality service to our clients, and I believe that our clients think that we are worth it.”

4. 2008

Finally, the attendees took a few minutes to look to the future and discuss what changes they expected to see to the market in 2008.

Grant Lister was prepared for the soft market to continue. He said: “In professional indemnity, I see no change at all. We just have to live with that. A soft market has the same challenges as a hard market. To try to change it, you just need to work around what it is. Insurers out there are saying they are quite happy with the current position and are gearing up around those conditions too.”

Colin Railton agreed. He said: “As insurers, we need to rise to the challenges of a soft market for the next couple of years. It will not turn until about 2010.”

Neil Tiffin continued the consensus and highlighted the importance of IT. He said: “The issues I see are a soft market, more consolidation, increased reliance on IT and increased importance of right level of investment in the right level of IT. They will be tough times but they will make us more efficient. Our company is not the largest broker in the country but is of a good regional size with low gearing, so we are in a good position to withstand a soft market for a long period of time. It will be tough, but we can work through it.”

Kevin McParland pointed out the importance of the global economy to the market. He said: “There is far too much fickle capacity in the market at the moment. It makes you wonder whether investors really understand the long-tail nature of the professional liability business and the impacts on insurers. I can see no change in 2008 or 2009, and we will be lucky to see any real change, unless there is a major incident which sucks out billions of premium. We are a global industry now. I was in London a few weeks ago and one insurer was saying that, last year or the year before, a hurricane just missed Houston. Had it hit Houston, it would have written off the reserves of the insurance industry. I am not suggesting that that happens, but it would have to be something of a large magnitude to harden the market before 2010.”

But Pat Wood took a different line. He said: “I am an eternal optimist so I think the market will stabilise next year. I hope it is like the stock market where everyone says it will happen but it is different now in that the market can see some sense and stabilise towards the end of next year or early 2009. From our point of view, we will continue to try to remove people from this hard/soft market cycle – that is certainly our aim.”

Martin Spenceley saw a strong future for independent broking despite the challenges. He said: “We are still stuck with the same climate and we will be there for a while to come. There will be a lot of challenges for national brokers and for independents. The independents have tremendous strength. Their agility to change direction and move quickly will be very important to them in the future. There are fantastic opportunities within that environment and the insurance industry generally.”

Marshall Sugden closed the afternoon with these words: “Next year and thereafter, there will be a distinction between service-led broking, which definitely has a place, and lower-end, commoditised broking. That gap will start to appear because the consumer will demand that, so just beware of it and do both, neither or one or the other.”