The middle men

Continued consolidation in the London wholesale market has resulted in a landscape dominated by the ‘big three’ broking houses – Aon, Marsh and Willis. Sitting directly beneath them are just a handful of mid-sized international players. With the sector facing many challenges – including an uncertain regulatory future, the continued pressures of reform, low investment yields and competition from emerging markets – just how important is scale?

Insurance Times spoke to Arthur J Gallagher International chief executive David Ross, Miller Insurance Services chief executive Graham Clarke and JLT Specialty chairman Jonathan Palmer-Brown. We asked how their firms are planning to stand out from the crowd in a bid to break the stranglehold created by their larger competitors.

How has the London broker market changed over the past decade and what challenges does this present?

Jonathan Palmer-Brown: The last decade has seen quite a bit of consolidation, with Aon and Marsh, and to some extent Willis, snapping up companies across the globe. We’ve seen them taking out competitors and making acquisitions as part of their strategies for growth.

One of the real issues they face is how to grow organically. The approach they seem to be taking is one of trying to improve the process and believing they have the power and strength of scale to win the business. That is an opportunity for other firms, because as much as there are companies being gobbled up, there are also firms growing and being established. And the people are perhaps more important than the process.

Graham Clarke: There has been huge consolidation on all fronts – including internationally with major tie-ups in the retail and reinsurance brokerage space.

That has had a major impact on the London market brokers because many of them had wholesale arms and we’ve seen the number of them significantly contracting.

This is directly connected to a challenge that we all face – where to find growth – and presents even more issues for those brokers with models that are aimed at being “all things to all people”.

Does size matter in the broking community?

David Ross: Yes, size definitely does matter. The problem is that a number of firms have big ideas, but lack the requisite scale to execute them. The cost of being in business is now infinitely greater than it used to be, because the talent you need to hire to comply with regulations and run a professional business is increasing.

The number of people involved in making our company professional is probably 10 times what it was seven or eight years ago – that is a benefit to the business in terms of its professional performance but obviously comes at a cost in terms of its profitability.

I wouldn’t want to be a small firm right now, trying to cope with that burden of raising its game professionally, having to invest heavily and wondering where I was going to derive the production from to pay for it.

What are some of the advantages of being a medium-sized broker right now?

Ross: With the big three, you’re talking about such enormous enterprises that they’re effectively widget manufacturers.

In those large environments, scale has become attractive for the people in the boardroom but it’s become too unwieldy for the people on the shop floor.

The clients no longer feel like they’re special, but they’re not going to leave a firm like that and go to a two-man firm on Fenchurch Street.

However, practitioners such as Gallagher, JLT and Miller can come in and provide the balance sheet security that’s required and everything that comes with scale, while managing to feel like a small firm in terms of service and relationship.

Palmer-Brown: The difficulty for firms is to be large enough to compete for the large risks while being small enough to be nimble, and it’s having the good fortune to be in that good situation. If you look at the key ingredients, the clients want more choice, the market doesn’t want to be dominated by one or two firms, individuals want opportunity and flexibility as to where they work. When you add these together, it’s clear there is a stack of opportunity for medium-sized firms to grow and prosper.

And equally it’s very difficult for the largest firms to hold on to their people and their business and grow organically – how does Willis grow to compete with the big two?

Or do they take a different strategy – by breaking themselves down and floating as three separate businesses with the sum greater than the current value? Do they get bought by Marsh? I believe in the repetitive nature of history, which says that empires are built and then destroyed or broken down.

So this is the right time to be with one of the medium-sized brokers?

Clarke: For the larger brokers, they are looking to acquire businesses, leverage their current business as much as they can, including through contingency commissions, and are also keeping a very careful eye on their costs. That presents an advantage for us as we can demonstrate that our full focus and resources remain on our client and their needs, as well as working to make their interactions with us efficient through clever use of technology.

The economic climate and soft market conditions mean everything is working against the one-stop shop model. The big brokers’ other problem – which most of the independents don’t have – is the legacy that comes with acquisition.

We recently sought some feedback from buyers and it was unanimous that they wanted choice. They don’t necessarily believe in the one-stop shop, and the other thing they’re clearly saying is they want transparency. I find the arrogance of our industry stunning – that some can ignore this message and continue doing what they think is right for them and their shareholders.

How do you offer something different in a bid to win new business?

Ross: People ask: “How do you describe Gallagher?” and I say: “I’ll tell you what we’re not – we’re not Marsh, Aon and Willis,” and it’s extraordinary how many people nod their head because they suddenly understand. There are clients out there – many of them – who want to be with a company that is on the up and where they’re an important element of that company’s business. The fact is that many clients of the bigger brokers end up feeling like they’re just a cog in a machine.

Clarke: The problem for clients is that the alternatives to the ‘big-two-plus-one’ are few and far between. I would say it’s never been easier to differentiate yourself, especially for Miller as an employee-owned business with a strong balance sheet and no debt.

We don’t want to be a mini Aon or Marsh. We have no interest in that whatsoever. We want to have a scalable, but manageable, business, focusing on areas where we can deliver real expertise and value to clients who want a viable alternative.

Does the London intermediary market still have an entrepreneurial spirit?

Ross: We’ve been offered a large number of acquisition targets in the UK and London and many are brokers in fear of their future. In the 1980s and 1990s, the great play was ‘get into a small private firm, get some equity and wait for someone one day to tap you on the shoulder and buy you’.

Now those firms feel stuck because there aren’t that many buyers out there. They come with legacy issues and that is not a straightforward thing to resolve – so you don’t hear currently about that many transactions in the City of London, because most bear a health warning.

Palmer-Brown: There is plenty of room for entrepreneurialism to continue, but within the structures and frameworks that everybody is trying to adopt, which is about reducing costs. That means improved technology and improved process for all firms.

Where I think the entrepreneurs of today’s market would look to focus is where they’re given some freedom and flexibility to paint on a bigger canvas. That’s perhaps more difficult for the larger companies and their more limiting corporate structures.

Tell me about some of the challenges facing the broking sector?

Ross: One of our biggest concerns is that the market is contemplating a change where the regulator for the insurance company side will possibly be different from the regulator on the insurance broking side. We face an increased burden of compliance, which requires the hiring of appropriate talent to manage not only current demands, but also our future interaction with an ever-changing regulatory framework.

Clarke: Issues affecting global business, including the current economic climate and loss of investment income due to flat interest rates, are challenging for everybody, as is the effect of insurance cycles, and our current soft market. There are challenges around regulation, technology and how some companies have grown through consolidation and with a lot of debt on their balance sheets.

The uncertainty around regulation and what is going to happen post-FSA represents an issue for smaller brokers in particular. The FSA, by its own admission, has not really put the spotlight on those firms. The barriers to entry into the insurance market are also huge when compared to even five years ago.

Palmer-Brown: As a marketplace, we’re about to participate in a new regulatory scenario with the CPMA [Consumer Protection and Markets Authority]. That in itself is going to be a change and we don’t yet know whether the structure of our new regulator is going to follow the FSA’s approach to principles-based regulation or whether there is going to be a return to a more rules-based regime. And with the Bribery Act, there are potential question marks over the intermediary role and commissions, although it wasn’t designed to do that.

One of the big problems with these changes is that doing business tends to end up costing more. How far you go with that and at what cost to the business? Typically what’s occurred in recent times is that the regulator has concentrated on the larger firms, clearly because it believes there’s a greater potential for difficulty if they fall into problems, so some of the smaller firms hardly ever saw the regulator.

What we want to do is make sure that London remains a centre of excellence. Collectively, the London market is seeking to reduce costs and become more efficient and that makes it easier to sell to our worldwide clients.

What is your strategy going forward and did the loss of Benfield to Aon create any opportunity?

Clarke: We’ve recruited nearly 40 people from Benfield. In its world of reinsurance, it was one of the four, and four became three, so it does give others an opportunity to try to take that space. We think there will be further consolidation and a lot of our opportunities will come as a result of the fallout from that.

Palmer-Brown: The issue for the insurers and for the clients must be choice. They don’t necessarily want more of the same. From that perspective, we’re looking to grow our reinsurance business as an organisation because we believe the acquisition of Benfield has created a gap – and that’s a gap many insurers would like to see filled by a reasonable-sized company.

We wouldn’t have to go out and buy companies here and there necessarily – and that’s not to say we won’t do that to grow our business. But we can grow organically at a continuing rate for the next five or 10 years without worrying about that, provided we have the right people. IT