The best of times and the worst of times

Around this time, we traditionally reflect on the year that has gone and look to the 12 months ahead. This time last year, I had four main predictions for 2009.

First, broker consolidation looked set to reduce. It clearly has done, with the steady deal flow of 2007 and 2008 slowing to a trickle.

Secondly, I expected the commercial market to harden across the board. In reality, it has happened in some sectors but not in all. The final quarter of the year has seen a noticeable backward step in some sectors.

Thirdly, I expected e-trading to continue to take off in the micro-SME market. There is no doubt that this has been the case, and momentum is building all the time.

Lastly, I thought that by the end of 2009 the number of broker start-ups would start to increase. The reality is that, so far, we have seen very little activity.

Of all these ‘predictions’, I felt most confident about the overall market hardening. Insurers were talking a good game, about a willingness to sacrifice top line to deliver bottom line. After five or six years of a soft market, with a country in recession and investment returns suppressed, there seemed to be a clear recognition that controlled rate increases were essential to avoid much more swingeing increases – like we saw in 2001/02 – later on.

On the positive side, we have seen some movement in the right direction. Motor fleet rates have been increasing for two years and SME business has seen modest increases. For much of the year, there were signs that rates were heading up across other commercial classes.

In the last quarter, however, some parts of the market seem to have entered a ‘silly season’, with end-of-year sales in full swing and insurers falling over each other to gain top line. At times, it seems as if the rule book has been thrown out of the window!

The situation seems to defy logic. Investment conditions remain challenging and the reasons for the market needing rate increases 12 months ago haven’t gone away.

Looking to 2010, it is difficult to call rate developments with absolute certainty. Many customers are feeling the squeeze and demanding savings. When I talk to brokers, they tell me that even some long-term, loyal clients are seeking alternatives because needs must. Competition remains intense and insurers are lining up to have a play in the commercial market. This will only be the case while capital providers think they can achieve their target returns, but they will retreat as quickly as they appear once they notice that this may not be a path to sensible, sustainable margins.

Overall, though, it is difficult to escape the conclusion that the market cannot defy gravity indefinitely and that the activity we are seeing today is a ‘blip’. I do expect to see rating conditions slowly improving throughout 2010.

One part of the market that is seeing significant rate movement is private motor, but there have been other well-documented forces at play here. Put simply, the market is broken. The current dynamics involving insurers, brokers, aggregators and credit hire operators is not sustainable. It will have to change fundamentally.

People movements should also pick up in 2010. In particular, the movement of teams and individuals between brokers is likely to intensify, accelerating a trend seen this year.

The tough financial conditions made it very difficult for broker start-ups in 2009 but activity should pick up as finance becomes more readily available. The fly in the ointment is lingering uncertainty about the economic outlook post the general election. Whichever government is elected, we are entering an era of austerity, increasing taxes, reduced public spending and a resultant low-growth economy – at best. In this environment, the best new businesses can and will prosper, but many will find it very tough.

I also expect to see more broker consolidation in 2010, which could include one or two major transactions, but also a number of medium-sized independent brokers on the acquisition trail.

Overall, 2010 will be a year to focus on the basics. That means good underwriting, it means brokers and insurers working with clients to manage risk effectively, and it means focusing on margin. Most of all, it means understanding what is important for customers and providing the best service at the lowest cost. We have to be increasingly intolerant of inefficient business models and duplication. Insurers and brokers need to work together to address the fact that overall distribution costs are too high. Brokers can blame insurers for high expenses and insurers can blame brokers for high remuneration. The bottom line is that, between us, we have to offer the client value for money.

Last, but definitely not least, the recent floods in the Lake District provide a timely reminder of one feature of the insurance market that must prevail: our role in supporting individuals, families and businesses that have been affected by events like this. Our claims teams on the ground experience first hand how devastating floods can be. Whatever else we do, we must never lose sight of the main reason we exist: to help our policyholders to recover as quickly and painlessly as possible after events like this. I hope that in the weeks ahead we can reflect on the best possible job done, not by individual insurers, because it isn’t a time for point scoring, but by the insurance industry as a whole in helping these communities on the road to recovery. IT

Simon Cooter is UK distribution director at Brit Insurance.