Tomorrow's world

Mark Bates looks back at the conversations he had with senior brokers in the late ’90s about how the internet would change the way they did their business.

“Nobody would believe me; they didn’t think it would be the case,” says the founder of RDT, the back-office IT provider for broker firms.

He is talking about the pre-dotcom boom days when lastminute.com co-founder Martha Lane Fox had yet to become a household name.

This anecdote illustrates how technology has transformed insurance over the past decade, calling into question long-established business models.

Does the next decade pose similar challenges? And what will the brave new world of broking look like at Biba 2020?

Brit’s distribution director Tim Grant is confident that brokers are not an endangered species. “The broker is here to stay and, for the vast majority of commercial insurance companies, it will remain the favoured route. In particular, they will continue to be important in serving the needs of small and medium-sized enterprises and sole traders. Most businesses with fewer than ten employees will continue to be served by brokers.”

And while Broker Network chairman Grant Ellis believes that issues such as regulation make the barriers to entry higher than they were, he is equally bullish about the sector’s prospects in the years ahead. “There will be more brokers than there are today,” he predicts.

Niche areas

But there are a lot of threats. Price comparison sites have transformed personal lines insurance, continuing a process initiated by the direct lines providers and pushing brokers into more niche areas, such as classic cars and motorbikes.

The issue for the next decade is whether commercial lines will face a similar change. And it is fair to say that principals of broking firms – typically aged 40 and above – are generally not the most tuned-in to technological change.

“The question is: when will the [commercial] market tip and to what degree will it tip?” Broker Network managing director Nick Houghton says. “I think it will be five to 10 years before we see a new generation of customers come through. The million-dollar question is, if they’ve bought their private motor from an aggregator site, will they buy their commercial insurance in a similar way?”

His hunch is that commercial insurance will not be transformed as dramatically as personal lines, as he doesn’t believe most people will be comfortable entrusting their business insurance to an internet site. “This is your pension and you won’t want to take a risk; insurance is quite a complicated business.”

And while clients are becoming increasingly price sensitive and information ever more accessible, Brit’s Grant believes clients still want to talk to a real person.

As Houghton speculates: “Will we ever get away from a broker, an insurer and a customer sitting down together? It’s still a people business.”

But how they carry out those conversations is changing with the growth of social media opening up fresh channels of communication (see ‘What’s happening?’).

Pancentric Digital’s James Prebble, who is holding a workshop at next week’s conference, believes that social media gives brokers the opportunity to provide an intimate service to customers, even if they are at the other end of the country.

Social media can play to brokers’ strengths in other ways too, he argues. While insurers are constrained by the corporate nature of the institutions that they work for, brokers can be far more agile in the way they use social media.

Prebble adds that new technology, such as the soon-to-be launched Google Wave, will enable people to better view the same pictures – which could be especially useful when discussing claims, for example.

Meanwhile, RDT’s Bates predicts that the creation of increasingly integrated IT systems will make guaranteed rates a thing of the past.

Exploit the opportunities

IMAS Corporate Advisors’ Olly Laughton-Scott agrees that, rather than viewing new technology as a threat, brokers should be alive to the opportunities it offers (see ‘Standing out from the crowd’). The web is lowering the barriers to entry, he says, enabling niches to be exploited more effectively than in the past. “One of the impacts of technology is that people are increasingly coming to you if they think that you have something for them, so you need to differentiate yourself.”

Therefore, he believes that insurance broking is seeing “ever-more tailored products being offered both in terms of general marketplace and affinity.

“If you reduce the cost of distribution, you can reduce the size of the market that you sell to. Twenty years ago, brokers were in the high street and had to serve everything that came through the door, but on the internet, if you are searching for a little bit of x, y or z, you can find it.”

Prebble agrees: “These platforms allow brokers to be specialised and find the special interest group of their niche.

“The more generalised you are, the more you are competing on a level playing field with big aggregators, which is difficult because of the spend that they have,” he says. “Social media enables you to compete without spend.”

As a result of these changes, Laughton-Scott dismisses predictions that the market will be dominated by five big brokers.

Instead of a ‘one-size-fits-all’ industry, he believes that whatever their size, companies will need to find a unique selling point. And that includes behemoths like Aon and Marsh.

“For them, the USP might be size and ability to serve markets on a multinational basis,” he says.

Ellis says that the changing and increasingly commoditised nature of insurance means more focus on advice.

“Brokers have a great future, provided that they understand they are in the advice business. If you go back to the early ’80s, you went to a broker to get motor insurance because they were the only people who could compare prices. If you need to compare prices now, you just go on the internet.

“The clever brokers have started to embrace the idea that their job is to give customers advice about what to buy, and then source the products and look after their customers’ management of risk.”

That is especially true for small brokers, he insists. “Nobody’s talking about the demise of the small accountant – you go the high street here [in Knaresborough] and there are two or three accountants. Those who are there to meet the accountancy needs of SMEs will be on first-name terms with their customers. The broker is the insurance equivalent of those high street accountants.”

Laughton-Scott says that the ability to offer continuity is a key selling point for smaller outfits. “The problem with large brokers is that you see somebody for two years and then they move on; it’s something that they always struggle with.”

Brokerbility chairman Ashwin Mistry agrees: “Brokers who get close to their clients will prosper.” He also argues that the key for future success is for brokers to establish themselves as wider business advisers and problem-solvers.

Perhaps, counter-intuitively, he argues that top-quality advice will become more prized in a low-growth economy. “Most meetings with clients are not about insurance. We’re becoming a useful conduit on issues such as business location.

“We can share best practice amongst clients. There’s going to be massive demand for our advice,” he says, adding that creating better relationships will give brokers more opportunity to cross-sell.

And nurturing relationships could become more valuable in what is likely to be a less deal-fuelled environment.

Lower valuations

Despite reports that private equity outfits are beginning to rebuild their war chests, credit is unlikely to be as accessible as in the pre-crash lending boom. Mistry argues that firms have to plan for a future in which they will achieve much lower valuations than they may have got used to.

“With multiples of 1.5 to 1.8, there is more need for succession planning because you won’t just be able to think in terms of exiting,” says Mistry, who believes that a hike in the rate of capital gains tax is likely to be one of the first targets of the new government, giving principals another incentive to hang on to their businesses.

“There are opportunities for people who are prepared to stick it out. If you take your money out, what are you going to do?”

He is one of the many who detect a growth in the number of new businesses, as individuals start up again with the profits they have made by selling to consolidators, or go out on their own because they don’t want to work for a large company.

Biba chief executive Eric Galbraith believes that even though the current climate may be difficult, the prospects for broking are bright. “There are huge opportunities for our sector; brokers are still valued. We still offer a great service.”

The tools of the trade may change, but the professional broker’s traditional skills can, with the right approach, remain as valuable as ever. IT