View from the East Midlands

One Wednesday morning in July, East Midlands brokers braved a rain-washed M6 to join Insurance Times and Norwich Union for a discussion on industry concerns including regulation, consolidation and commissions.

The market cycle

As the economic gloom deepens, insurers and brokers are praying for a hard market. But when will rates go up? According to Russell Scanlon’s Bryan Banbury, the market will harden gradually with fleet leading the way. Norwich Union (NU) has been attempting to do precisely that, with chief executive Igal Mayer saying he’d like to see rates go up. NU’s George Berrie said: “We have had four years of soft market. Do the math. If it continues, we will be in red-ink territory, and we are not going to go there, so rates have to increase. The good news is that virtually every broker ‘ that we speak to says the same. However, they have clients to look after. They have their own competition. It is tough.”

Berrie added: “Ultimately, we have to leave this at some point. We have made a start, from towards the end of last year. We will continue to put rates up for the smaller cases. They seem to be sticking. Sub-5,000, the rates are going through reasonably well. Probably about 60% to 70% of cases are now carrying increases and it does start with the small cases. The larger ones are more difficult. From £10,000 to £100,000, and certainly above £100,000, it is very difficult. We will redouble our efforts to put rates up there, working hand in hand with the broker. We will not be unwise about it – if it is a good case, we have held it for a while and it is a good loss ratio, then we will be wise and protect the broker in that sense as well. If the case is a little more distressed, then we are happy to walk away.”

The brokers present, however, suggested that other insurers did not share NU’s perspective.

Stuart Randall of Brokerbility took a philosophical view. He said: “We have all been here before. We’ve been through different cycles and know what is coming. We have entered the transition phase. The switch between the soft market and the hard market is always a difficult time for insurers because they have to hold out for increases, and yet, they are going to risk losing the burning cases as a result. That is an inevitable consequence of rate increases. It is a natural part of the cycle. I would not worry about it. We will all come out better at the end of it – hopefully. However, there will be some losses along the way for brokers and insurers. You have to be big, accept it, and look at the overall picture, rather than individual cases and not become paranoid about it.”

Randall added that brokers had a responsibility to explain to their clients why rising rates were necessary: “When you are close to a client, you are educating them as to what is happening in the market. By now, brokers should have been warning their clients, over the past few years, that the market is about to change and to expect increases. So when you go with a 1%–2% increase – or a 5% rise – they may not want it, especially in the current economic climate. However, they cannot not have been expecting it. You have the terrorists coming in and saying that we can save 25%. Then you will have to take an empirical view of it all.”

But MCE’s Julian Edwards cautioned that clients may not always be interested in understanding the insurance market cycle. He said: “They have their own businesses to control. They are seeing increased costs elsewhere. Surely, they have a duty to their shareholders to drive the best results for their shareholders.”

Fehnert’s Stephen Fehnert said it would take a major catastrophe for the market to harden. He said: “Two events can occur that will change the market completely, neither of which we would want – a major terrorist atrocity or a serious natural disaster somewhere where people are insured. This is one of the events that I think will happen eventually. Personally, I do not think the market will recover in any other way.”

Stuart Randall added that he did not expect reinsurance rates to increase in October, meaning the market would remain soft.

George Berrie said: “There is a lot of truth in what Stephen said about it taking an event to have a step change in the cycle. There is a tendency – borne out by the last three cycles – for a gradual move to push the rates up and a gradual understanding that rates need to increase. That takes forever. Then an event will take place, such as 9/11, and the penny drops and suddenly there is a hard market. We do not have that yet. In many ways, you do not want it either because it can be a lot of hardship to people. The reality is it would speed up the hard market. I hope these losses do not come because they are not good, the only positive part is a subsequent hard market.

“In the absence of it, the best approach is the professional approach that a broker can take to educate the client along the way in the commercial world. Here is what is going on in the market. There have been soft breaks for three or four years. Insurer losses will occur down the track and they need to avoid that. With the general crunch going on in the economy, rates will go up every renewal time. That discussion probably takes place six to 12 months before renewal. It does not happen at the last minute.

“If it happens at the last minute, you are in a panic and have then reduced the profession to ‘We will try to take some money off your renewal’. That does not help the broker’s bottom line and it certainly does not help the insurance companies. Accepting the personal and commercial lines difference here, if we as an industry can educate the client towards the need for this, then it helps it along, because there is a burning need to do this. God forbid a large event makes it academic and we will have a hard market anyway.”

Commission disclosure

Conversation soon turned to the reputation of the broking profession, and the value of the broker. MCE’s Edwards said: “The public has been conditioned to have a huge amount of trust in the insurance distribution channel. The insurers, in our regulated environment with the FSA. That, in turn, has led to us being a lot more of a commoditised marketplace. If there is an ultimate level of trust with brokers and insurers, why would you not buy on price?”

Stephen Fehnert agreed that the selection of an insurance policy was usually based on price but argued that the broker could add value. He said: “It is basically cost-driven, but I would think that, of the new business we obtain, 75%–80% is on transfer. We do not quote. We simply try to sell a service. We then go in and find out what they need. We then give a quotation. Cost is important, but often the only way of securing the business is because the relationship with their existing broker has gone.”

“The best approach is the professional approach that a broker can take to educate the client along the way in the commercial world.

George Berrie, Norwich Union

“If you are driving down the service route, are customers more comfortable with a fee structure, as opposed to a commission?” said Julian Edwards, raising a topical point – the FSA’s consultation on mandatory commission disclosure. Would forcing brokers to disclose their commission be beneficial for customers? Not according to Stuart Randall. He said: “It adds another layer of complexity in terms of the administration and what we have to do. It adds cost to it. Disclosing commissions to smaller clients is a real issue – how can you explain the cost structure of your business to someone? What commission you receive is very difficult to translate into what you do and what overheads you carry. You can have a half-hour discussion with a small broker as to how much you take and argue the case.

“Ultimately, you will do it at the price you need to do it. It just adds complexity and is a huge tranche of administration. You know that the CRA report says it adds £82m. That is conservative, in my opinion, with the amount of processes we would have to change. Also, there is no desire to do it. We encourage clients to do it on fees for our whole lives because it is a lot cleaner – 35% of our brokerage is on fees. We are quite happy to extend that. There is space for a balance between the two but it is not one-size-fits-all. Hard commission disclosure is just a ‘ sledgehammer being used to crack a very small nut.”

Paul Chaplin warned that the customers would suffer. He said: “Ultimately, if it goes that way, what would happen is that the small clients would end up with no service.”

Stuart Randall believed there was more to the debate than commission disclosure.

He said: “The FSA is big on conflicts of interest at the moment and that is the new battleground for the FSA. The argument is moving away from hard commission disclosure. Hopefully, that is all gone. The real next ground is conflicts of interest and that is more of a real concern to me as a broker – the area between underwriters, insurers and brokers is muddied. There are some real issues going forward there, although the FSA does not seem to have as many issues with managing general agents (MGAs) as I thought it would, strangely enough. Give it time though. It may change its mind.”

George Berrie agreed that conflicts of interest was an area to watch. He said: “I think Stuart Randall is absolutely right – the debate has moved away from mandatory disclosure of commission to the status of a broker. The FSA was coming from a perspective of customer detriment – was there any customer detriment evident in our market or was there the potential for customer detriment? The first place they went to was commissions. But what are we trying to solve here by making brokers disclose commission? We simply do not have hundreds of customers complaining about it. We do not have anyone complaining about it because they just do not ask. If they want it, there is a provision for them to have commission disclosed to them. What problem are we trying to solve by disclosure of commission on a mandatory basis?

“The debate, as Stuart has said, has moved on to the status of a broker. Is there a risk of customer detriment because of a broker’s status, typically around managing general agencies (MGAs) or broker ownership, wholly or partly, by an insurance company?

“That is probably a valid place for the FSA to be because, frankly, customer detriment is a possibility – if the industry does not have enough guidelines to make sure there is no detriment. I am convinced there is no detriment but as an industry we should ensure that a broker’s status cannot in any way lead to customer detriment in terms of how we treat them.

“The ABI, Biba and the FSA are actually working towards that now to find an industry solution to areas of customer detriment as a result of broker status. It is a very hot issue and I think it is a valid one. If I were a broker, I would be less concerned about mandatory disclosure of commission and more concerned about what my status is as a broker. If you are independent, fine. If you are wholly or partly owned by an insurance company, what does that mean going forward? Is there any risk of customer detriment? I do not think there is but we should be absolutely certain that the customer is protected.

“Going back to the question on broker ownership and where brokers are now, we totally believe that the independent broker is where we want to be. We think that is right for the customer. We are not going to buy brokers outright and we have said that we will on occasion lend a broker funds if they want to grow and develop their business to help them stay independent.

“There may be the very rare occasion where we take a small minority stake in a broker towards that same end to maintain their independence. That is exactly where we are because we think it is best for the customer to have total choice through an independent broker. If it feels right for the customer, from my point of view, it feels right for the broker to maintain their independent broker status. It simply feels right for us.”

Consolidation

The brokers and insurers in the room were keen to talk about consolidation, a perennial point of interest. Julian Edwards thought the attitude to consolidators was changing. He said: “It is interesting to note that now the markets are trying to change and harden, there are increasingly more insurers who are interested in the independent broker – maybe they are easier to manipulate or drive down. When insurers are trying to collect the gross written premiums, it is a lot easier to do through the large consolidators.”

Norwich Union’s Roy Stirzaker was staunchly supportive of independent brokers. He said: “I cannot remember when I found it easy to manipulate the independent broker.?These people are fiercely independent – and long may that be so. We have thrown our weight behind independent brokers and

I still think there is a long future for them. We are likely to see some new start-ups, for which there is a pattern. We have seen business falling out of some of the large consolidators who are not giving customers the service they used to, so there is a lot of business out there for independent brokers and we genuinely think that is the place we want to be. We have established our Club 110 over the past few months, which has gone down extremely well.”

So is the party over for consolidators? According to Bryan Banbury: “They seem to have slowed a little. Perhaps they do not have many targets left. Time will tell.” IT