View from the East of England

In the hottest day of the year so far, brokers in the East of England descended on Norwich to discuss the big issues facing the market today with representatives from Norwich Union and Insurance Times. They came from as far afield as Southend, Bury St Edmunds and Ipswich to Norwich Union’s impressive city-centre Marble Hall headquarters, where the debate ranged from general issues such as consolidation and the impact of technology to more hard-hitting topics including the state of the market cycle and regulation.

They agreed that mandatory commission disclosure could have a grave impact on independent brokers and that by working together, the market can thwart the threat posed by the FSA. Despite widespread consolidation in the region, the group remained positive about the future for independent brokers.

Economic downturn

After a brief introduction from each member on the panel, the East of England round table kicked off with a discussion on the state of the market, and concerns surrounding the current economic climate.

Les Selby, consultant at Woodward Markell Insurance Brokers, was invited to open the debate after highlighting at the start the economic downturn and how it will impact brokers and their clients in their future. “Clearly it is an issue, for example, fuel costs affect quite a few of our clients because of the haulage market,” he said.

“It is going to drive the way the country goes in the future, because if it affects every one of our clients. If prices are going to be driven downwards then our clients are going to feel that their insurance costs should go down. We have to counteract that and, although as has already been alluded to here, rates are rising – and should be rising – most of us around the table would support a sensible increase in rates. We have to be careful they are sensible, and that we chip away gradually at rate increases, rather than panic, because of a particular circumstance in five years’ time. I also feel we are storing up potential claims for the future, which always seems to come when, if it is not a recession, it is getting close to a recession, because some nasty things tend to come out of the woodwork.”

Mark Edmunds, director of business development, Uttings Insurance Brokers, agreed. He said some insurers would cut 25% off the previous year’s premium to get the business. “Clients are saying they do not want to chase the bottom line quote each and every time, but in the current economic climate they have no choice; they are making people redundant, they have to be seen to be cutting back themselves, directors’ cars are being downgraded, those sorts of things. They cannot spend a penny more on insurance, and if they can spend 20% less they are delighted.”

Philip Tuckwood, director of Smith & Pinching General Insurance Services, thought the situation would become worse, because of oversupply in the market. He said: “My personal view on that, and I have been trying to convince my colleagues on our board, is that the implications and the solutions for us are that we have to change the way we see ourselves. We have to stop thinking about ourselves as merely selling insurance, and we have to give our clients much more of what they need. We need to find out what it is they need, and try to supply that for them.”

Hardening market

Brokers around the table were keen to discuss the future of the market and, more importantly, when the current soft cycle is likely to turn.

Peter Foster, chairman of Norwich broker Hugh J Boswell, said that while some insurers are putting up rates, the market as a whole is not showing any signs of hardening.

“The main corporate insurers are pushing forward on rates, but others are forcing them backwards by pushing them back down again,” he said, adding: “The company markets must not react, they have to keep doing what they are doing. The danger is some insurers could start saying, okay, we cannot see this working, we are losing huge volumes, and go backwards on their strategy. The only way the insurers will beat the new entrants is by sticking firm, and pushing rates forward sensibly, probably no more than currently.”

Edmunds said that historically insurers needed a jerk reaction. “We are not looking at 2%, 3% or 5% increases, in 18 months or two years. We are looking at 30%, 40% or 50% increases, because those idiots that are buying it in at whatever cost they can get at the moment cannot sustain that, and are inevitably going to have to put rates up in the future.”

Mark Hutley, managing director of Iris Insurance Brokers, thought the market would change as a result of a large-scale catastrophe. He said: “If you look at US catastrophe at the moment, the investments are coming in on the catastrophe market, which represents wholesale insurance capacity, and we have new syndicates, increased capacity, we have low interest rates globally, but investors are looking for alternative sources of investment.

“We had a weak catastrophe market last year and we are looking at a reasonably mild hurricane season this year. That wholesale supply is going to continue. It is not until that supply is stung that you will buy a big catastrophe. You will still see teams able to negotiate new capacity, and then bring that capacity into the UK market, and back out into the high street, which is where maybe some of the existing business will change if it gets a 5% increase.

“They will be chasing the quality, mid-priced business, not the high risk clients. If you get away with a 70% increase on one client because no one else will do it, great, but the extensive book of good business will be chased by that capacity.”

He added that he expected the decreased rates to build up a time bomb of claims. “Insurers are going to struggle to try to increase the premium, but it is not until the whole thing catches up with itself, which is 18 months after that critical line date, then it is going to go bang. It is a question of how big it goes bang.”

Consolidation

Richard Burgess, director of Alan Blunden & Co, said consolidation did impact on the regional markets, but brokers should have no fear about spending money to enhance their businesses. “Brokers moan a lot about consolidation and how the aggregators do not do this and do not do that,” he said. “Yes, you can join the network, or you can get on and grow. However, you have to spend money to grow, whether it is acquisitions, whether you are consolidating, or whether you are deciding to spend some money on the internet and develop your business. If we do not spend any money we are not going to have a client walk in the door and buy a policy off us. Those days for us went many years ago, but we spend a lot of money in marketing our business and it gets business back in.”

Simon Wilding, director of Insurance Risk Solutions (IRS), said the increased consolidation in the East of England has been positive for the start-up broker.

“We have seen it as a huge opportunity,” he said. “As consolidation has increased it is a great opportunity. There are the IRS’ of this world starting up everywhere. We think the clients want to go back to traditional values. A lot of clients that have followed us and that we have picked up since have done so because they understand what we are saying. It is a pretty simple message, one that they believe in and we believe in, and one that they buy into.”

Wilding added that insurers had been very supportive. “One of the uncertainties when we launched in 2007 was what the insurer reaction would be to us, especially where we came from. But we were amazed, and it made it clear that the insurers really do value the independent broker, see it as having a future, and want to work closely with us. That was not just Norwich Union, but the full range of insurers – it has been amazing.”

“We have to stop thinking about ourselves as merely selling insurance, and we have to give our clients much more of what they need.

Phil Tuckwood, Smith & Pinching

Charles Foster, divisional director of Cliverton/Lycetts, was quick to agree. He added: “It has been a great opportunity for most of the people around this table. I suspect there have been teams of individuals in the consolidated bigger companies who are dissatisfied, and there have been reams of clients who are hugely dissatisfied.”

Chris Ball, business development manager of Broker Network, argued that some brokers joined networks because they just did not have the resources to grow on their own. “There is no secret about it, [brokers] joined Broker Network because they are concerned about their future, about who is going to buy them, and who they can buy,” Ball said.

“They do not feel that at their current size they can compete in the marketplace. They have a choice, they can buy someone and get bigger that way, they can sit there and wait to be bought, or they can join a network. Or if they are large enough go on their own?”

Janice Deakin, corporate sales director of Norwich Union, said it was encouraging to hear the brokers’ responses to consolidation. “You will hear individual instances of what we are doing, but they are all part of that strategy, which is to give much more up front and on the ground support to the independent broker,” she said.

“When I started in Norwich Union on the broker side, I was asked the question,’you have 4,000 brokers now, what do you expect it to be in two or three years time?’ Everyone would say 2,000 or 2,500. We have still got 3,800 broker relationships. What happens with Insurance Risk Solutions is happening on quite a wide scale, and the more we can support that reseeding the market the better.

“We want as broad a distribution platform as we can possibly get in this market, and that is why, as hard as it is sometimes, we need that feedback from you, because we are very vocal, and will be more so. Not just vocal in terms of what we say, but hopefully what we do, and that is very much about more support, remembering where our bread is buttered, and more support for the independent brokers.”

Regulation

Whatever the topic of discussion when brokers are in a room together, regulation and the FSA are always on their minds. Commission disclosure and conflicts of interest are the hottest subjects for the regulator right now and brokers are in the firing line.

Peter Foster, Biba chairman for the Anglia region, opposes forced commission disclosure because he believes it generates the wrong behaviour and the wrong buying patterns with clients. “Biba is imploring all members to sit down and write to the FSA stating what you as a firm are doing to ensure that you are meeting all of the market-led objectives, to avoid the FSA’s perceived need for hard disclosure. The more firms that write to the FSA and say what they are doing to avoid conflict of interest, then the more likely the FSA is to avoid mandating.”

Burgess said the FSA needed to look at the commission structure in the wholesale market. “Our biggest concern as a wholesaler was how on earth does the broker at the end of our wholesale chain disclose what the commission is? We have written to them to explain that we get a certain percentage, and it passes to the broker, it is a safe and regulated chain, but what interest has the client got in what someone four marks up the chain earns?”

Deakin said brokers needed to stand up and fight their position. “My worry about it is that it may be designed to target a certain aspect of the market, but the biggest burden, if we are not careful, will fall on the smaller independent broker, because of the cost of change and what implementation means operationally.

“Is it a simple document on the back of a policy, or is it actually having that conversation face-to-face with your client at the point of sale? They are quite different things in terms of what they might mean to your businesses. If they are geared towards the large consolidators on the higher commission, it will be some sort of blanket solution that will impact your businesses.”

The table agreed that the majority of clients were not interested in how much brokers earn in commission. Edmunds said the situation would create a problem as clients would spend more time focusing on what brokers were earning and less time on what they were delivering. “We did an exercise with our commercial clients, asking them if they wanted to know what we were earning, and 95% said ‘no’. They wanted to know what their bill for insurance was, but how that was split was up to us,” he said.

Burgess claimed that mandatory disclosure would create an uneven playing field. He said: “If you are a direct insurer you will not have to disclose your commissions. It is just not an even playing field with independent brokers.”

Technology

The discussion ended with a debate on the role that technology has in a broker’s business. After briefly touching on how aggregators have changed the market, the panel were keen to offer their thoughts on how technology has helped them develop.

Simon Clayton, marketing and development director of LFC Insurance Group, said technology was vital to assist integration. “You almost invariably pick up people with different systems, and to try to get those systems working together is a challenge,” he said. “That is magnified at the moment, because our last acquisition was an underwriting agency, which has a completely different system in itself. Unfortunately, you tend to be in the hands of whichever provider you are with, and however good your relationship is, you cannot help thinking it is going to charge me whatever it wants and there is not much I can do about it. That is the environment in which we have to work.”

Valerie Hockley, managing director of Blyth Valley, said her business had its own in-house IT team, which could build unique solutions at lower cost. “With a new product or new insurer we bring it in and we can accommodate it. We have an off-the-shelf package called Goldmine, which is a back office system, but we have built on that to develop our own system.

“Technology is absolutely important. It keeps overheads down, it enables us to process things far more efficiently than we ever could before. When there are rising costs everywhere else, technology is the one thing we can use to lower those costs. It is investing in the business in technology to keep driving down those unnecessary costs.”

Jon Neill, head of trading south at Norwich Union, said a dilemma for brokers was picking which system to go for. “Do you build something in house, do you actually go outside?” he asked. “That creates a problem in its own right, because you come up with something and everyone has got something different.

“How do you get everyone to want to go down one route? If you have invested a lot of money down a particular route and it is successful for you, it is actually quite a confused arena.”