View from the Midlands

The first topic of discussion on a wintry day in Birmingham was, not surprisingly, the market in the West Midlands – and the impact of the economic slowdown on demand for cover and the market cycle.

Matthew Southall, director of Southall Harries, said the number of enquiries had not dropped. “We are still seeing the same level.

In terms of insurers, there is still an eagerness to quote for business. In fact, there is still an extremely competitive marketplace for fleet business.

“I think we will see the market change next year. Insurers are now trying to put rating increases on renewals that are coming up. However, just before the end of the year, they are obviously looking to hit certain targets for their writing business and that creates a competitive marketplace. As a result, premiums have not really gone up at the moment.” ‘

‘ He added that clients now expected rates to increase.

Simon Egerton, managing director, commercial at Clarke Roxburgh Insurance Brokers, said it was the right time for insurers to increase rates. “The market does not always allow you to do that [raise rates], because there will always be somebody within the market who is going to come up with stupid rates. That is the danger, but I would suspect the vast majority of the composite carriers at the moment want rate increases. If you cannot do it now, the chances are that you are never going to do it, quite frankly.”

Egerton pointed out that the disparity between insurers’ new business rate and the renewal rate depressed prices. “That just does not make any sense and that helps drive the market down.”

George Berrie of Norwich Union (NU) said brokers were increasingly having longer-term discussions with clients about the rating environment. “Increasingly, some brokers are saying, ‘You need to get used to having some inflationary increases’.”

He added: “Some other brokers – and I would say they are in a minority – still do a bit of ‘desktopping’ – they will quote for business that they do not hold and then they will guess it.

That can cause disruption in the market, although I think they are few and far between now. There are still one or two. It is desperation to attract business.”

The fact that clients expect rates to increase is a sign that the market is about to turn, according to Berrie. “We have been trying to put rates up throughout the year. They are going up, but it is nowhere near enough and you will probably see a bit of a step change going forward.”

Southall said insurers had to take a hard line and walk away from business when the price was not right.

Berrie replied that a hard line would be taken. He said NU was seeking to address the disparity between renewal and new business rates.

“We measure our rates on what we call ‘rating strength’ and, naturally, you would aim for 100% rating strength in an ideal world. There is usually a bigger gap between renewable rating strength and new business rating strength. We are trying to close that gap now so the new business rate is not so far away from the renewal rate.

“Unless you close that gap, all you are doing is storing up the problem for next year. We are trying to leap that [gap] and we will see where it goes. We might have to work alone for a few months before others follow.”

London versus the regions

The conversation then turned to the merits of the London insurance market versus the regional market.

Michael Edwards, managing director of personal lines broker MCE Insurance, said: “For personal lines insurance, the insurers are really only in London because of the niche markets.

I do not see any other area.”

Southall said that as a commercial broker, he preferred to deal with a local insurer “where I can walk to their office if there is a presentation that I want to show them.

“I would rather do that than get on a train to London. Having said that, there are certain risks you would have to place in the London market.

If they are here in Birmingham, we can build relationships with the local underwriters and, ultimately, that is what it comes down to.

“If you have a good rapport with the local underwriter, you stand more of a chance of being able to manage the client’s expectation relating to cost. I do not want to see that go away. The relationship with the underwriter could be taken away if we start doing re-trading. It is fundamental to the placement of the insurance how well you get on with that underwriter and being able to write a bespoke policy that contains the level of cover that you are looking to obtain for that client.”

Tim Andrews, managing director, personal at Clarke Roxburgh, said: “The majority of regional brokers are going to be dealing with small and medium-sized enterprise (SME) business and the reality is most regional brokers do not want to go to the London market for SME business. To me, the London market is very much the high end and the international risks.”

Consolidation

The panel next considered the merits of selling to a consolidator. Clarke Roxburgh was sold to Jelf earlier this year. “One of the reasons we considered consolidating or selling the business was the fact that we were starting to get concerned about the way in which insurers reacted and dealt with us,” said Egerton.

“As we were going through the negotiations for the sale of the business, it became very obvious to us that some large insurance companies were dealing with brokers in a very different way depending on who owned the broker, so much so that we were being told: ‘This is the price for you because you are Clarke Roxburgh and this is the price we are going to give a consolidated broker.’ That was the catalyst.”

Egerton said consolidation had probably peaked in the early part of this year. “The consolidators are now in a place where they can really choose who they want to buy or bring into the business. For the time being, it has almost come to a grinding halt.”

He said brokers had to choose between their suitors with care. “One of the reasons we chose Jelf Group was because they fundamentally were not going to change the business – and fundamentally they have not. We accept entirely that we are part of something much bigger but if you spoke to our staff, our account executives, and Tim’s personal lines clerks, their day will not have changed at all. That was part of our decision and that is not the same for everyone.”

Egerton said he had not considered venture capital funding instead of selling to a consolidator. “We did a management buy-out seven years previously and we did not find the whole venture capital experience particularly good.”

Andrews added: “In the various negotiations we went through, it became apparent to us that there was a big raft of differences. One of the major considerations for us was, as Simon said, that they keep the business intact and keep the name for the foreseeable future. The primary consideration, which I think anyone selling has, is that the staff are looked after.

“I talked to a few consolidators and it was apparent straightaway that that would not necessarily be the case. In fairness, you have to admire them for their honesty. You have to be very careful whom you choose and I think we, without a doubt, picked the right consolidator to sell to.”

Edwards said there were differences between a consolidator buying a commercial lines business and one buying a personal lines operation. “There are different dynamics. I do not think people buying personal lines organisations are that bothered about the brand – they are focused on the size. I agree that the brand is all-important on the commercial side and not so important on the personal side.

“Many more venture capitalists have gone into the personal lines market compared to the commercial market. My concern with the personal lines side is that there are not that many consolidators and they all seem to have eaten each other now. What is after the storm?”

Southall said the client should remain at the heart of the transaction. “That is what we are all deemed to be good at; that is what we focus on. With some of the consolidators, as you said, there is a tendency to look at just the profit element of the business.” ‘

‘ Edwards raised the issue of staff loyalty following a sale. “Many good staff will not stay with consolidators when they are taken over. I am interested that I can see a great deal of new starts coming because a much more professional breed has come out of these companies that have consolidated. It is fascinating at the moment.”

Start-ups

Southall, who started Southall Harries in 2006 after leaving a consolidator, said: “It obviously takes a certain amount of careful consideration as to whether you are going to leave a comfortable existence to found a start-up. There are many challenges ahead, agencies being one. I am pleased to say Norwich Union did support us when we started and, in fact, the support we had from the insurance companies was tremendous. To this day, I am still quite surprised at how many of the large players supported us from day one – and I am sure they were urged not to.”

He said FSA compliance was an issue. “There is a lot of compliance that needs to be done and I can see the benefits of a larger organisation that has a compliance consultant working within them. Compliance is a key issue, but we have built our business solely around the focus of the client and that is why we have been successful at bringing those clients to Southall Harries.”

Recruiting staff was a challenge too, he said. “It has been difficult trying to get somebody to give up a comfortable job with good benefits to come to a start-up broker with no experience. How did we get the right people?

“We hand-selected the people that we wanted to start with us from day one. We had to offer them good packages and, at the same time, try to mirror the benefits they were getting with existing employers. We were able to do that and the staff that started with us are still there. It was a process that we started 12 months beforehand and I would actively encourage people to do it.”

Geoff Kitchen, business development director at Acturis, said: “As a software house, we are seeing many start-ups and they are not all going the network route. Some are very independent in their views as to how they want to move forward. There are different operating models and there are different markets that they want to go into, but they do not seem to be having a problem in getting agencies, generally speaking. They seem to be getting agencies from the large composites as well as some of the smaller players. The proliferation of some of the online underwriting offerings is obviously attractive to start-ups as well. Mostly, they seem to be surviving in terms of getting agencies.”

Raoul Suthers, key account manager at Norwich Union, added: “You should not be surprised, though, that Norwich Union or another company supports a start-up if they have a very good business plan. That is the key for somebody coming to you with a confident business plan and an idea. Clearly, we are not going to support it if that is not the case.”

Aggregators

The conversation moved on to price comparison websites. Edwards said aggregators would continue to exist: “Not in the number there are now, but they are here to stay. If you are marketing a business, whether it is insurance or shoes or whatever, embrace aggregators. You just have to move your marketing concept along.”

He added: “The main thing with aggregators is watching their manoeuvrability, which I think will hit many smaller personal lines brokers. An aggregator simply wants their brand there for repeat business. For personal lines, if I go to an aggregator, they will sell the cases that they introduced to me 12 months on.

“The main concept is for them to get their brand over so they are getting the revisiting; whenever they sell a personal lines case to me, they want to sell it for the same price to someone else next year. We have had several people who wanted to go on to our website as aggregators. No way – you have to try to protect your own brand. You do not have much of a brand in personal lines in all of our fields; that is the hijacking currently happening – the hijacking of brands.”

Berrie said: “You are right on the brand issue. If you look at the airline industry, Easyjet and Ryanair do not use aggregators. You have to go to their websites. Why give the brand away to an aggregator? Direct Line is similar.”

Andrews added: “It is the usual thing – the broker needs to add value to compete. I am pleased to say we still have very good client retention rates and I think that is down to the fact that we are there and people can talk to us face-to-face or by email or phone. People will still pay for that, albeit the margins have become much lower now.”

Edwards said: “Aggregators are our biggest marketing spend. In the motorcycle market, we are very into instant gratification so we have to get the brand out all the time, unlike a commercial risk where someone might consider the brand a lot more solid before you approach. Digital marketing is totally going away from paper advertising and you have to embrace it. It is there.”

E-commerce

The conversation then turned to the issue of electronic trading in commercial lines. “We have seen commercial lines commoditised and the SME has been commoditised at the low end of the market,” said Kitchen.

“The bar is moving up as insurers find ways to commoditise what historically we have considered to be fairly complex commercial risks. The key for insurers is to make those complex commercial risks simpler so they can be traded electronically.

“That is not necessarily going to commoditise them because it is only brokers who will be able to access these sorts of products and the brokers are still giving advice. It is taking a great deal of the grunt work out of that low-margin business so expertise can be concentrated on the higher-value business, where it is needed. “

Andrews said e-trading would take cost out of the insurance transaction. “The clients will hopefully benefit. That is the main thing for both insurers and brokers – you have to reduce the cost of transacting the business.”

Berrie said cost reduction should be the driver for e-commerce, rather than commoditisation. “Commoditisation is not in the broker’s interest, it is not in the insurer’s interest and, ultimately, it is not in the client’s interest because they get used to all these odd swings in the premium every renewal.

“It may be in the software house’s interest because you get transactional stuff going through, but it is not in anyone else’s interest. The real driver is to get cost out and it does not have to be complex.”