View from the South of England

For the second event in the Focus on the Regional Broker series, Insurance Times headed to Reading, where a mixture of brokers of all sizes discussed distribution, technology, the changing role of the broker and regulation. Given the diversity of businesses represented, it was perhaps surprising that there was such consensus on the thorny issues of consolidation and regulation. Everyone in the room agreed that choice for consumers was the best option, and that the broking market’s greatest strength lies in its vibrancy and diversity.

Distribution

Distribution, and the consolidation of the broker market, will always be a hot topic when people from the industry get together, and this group was no different. While there were representatives of consolidators and independent business owners sat around the table, they seemed to reach a consensus, believing that choice and diversity is the best option.

Lucas Fettes’s David Millen said: “We have got to come to terms with the fact that consolidators and networks are with us for the long term. It is interesting that we are led to believe that their war chests are shrinking at a rate of knots, so the rate of acquisition is falling. The feedback we have as an independent broker is that the major insurers and composites are pleased that we are independent and are committed to wanting to work with us. That is the way we see our future; in being able to offer a truly independent alternative to a consolidated or networked broker.”

Norwich Union’s Paul Charlton confirmed that the insurer backed independent brokers, but said that it happily worked with consolidators too. He said: “What has always impressed me about the insurance broking market is its entrepreneurial spirit and broad church. When I first started the big threat to the small independent broker was the banks. The market has been really clever and entrepreneurial in actually embracing the banks. In the same way that the market has now embraced consolidators and networks. There is room for all of them, there are valid reasons why a broker joins a consolidator, joins a network, or is independent. That is what makes the market vibrant.”

Charlton added that start-ups are now starting to emerge: “We have seen consolidators growing, and getting more expert at what they do, but we have also seen over the last two years new shoots appearing – new people starting up. I think that demonstrated that the market has room for everyone.”

Simon Bennett, of Bennett & Sons, was keen to point out that independent brokers can provide personal service. He said: “We are talking about consolidators as though they are actually a different breed, they are after all brokers. The difference is the way they do business.

“Our view is that clients are always going to want someone to give them advice; to sit in front of them and talk about insurance. Quite of lot of them would prefer to deal with an owner-operator of their own broker – somebody who is going to give them a personal service, rather than having to phone Exeter for your claims and Carlisle for accounts.”

Stuart Alexander’s Arthur Farrow was quick to point out that larger brokers can provide personal service too. He said: “One of the key aspects that we want to maintain is what one member calls community broking. This basically means making sure the client gets exactly what they want on a face to face basis.”

“We have to come to terms with the fact that consolidators and networks are with us for the long term.

David Millen, Lucas Fettes

The internet

The conversation soon turned to the growth of the internet as a means of distribution for insurance, evoking some irritation in the room as brokers complained that the public was taught to judge insurance policies on price alone. As Simon Bennett said, business customers learned to always look for price cuts in their personal insurance, and carry that expectation across to commercial insurance. “People who run businesses, think in the same way that all insurance is the same,” he added.

AIS Direct’s Tom Anderson agreed. He said: “When you are buying on the internet, sadly most of the people are being driven by price and are not getting the best advice. If you look at the competitors we see on travel insurance and they are all selling, direct, and all on the internet. If you go behind the price driven part and look at the policies you will think ‘oh, my goodness’.”

Arthur Farrow thought this threatened the role of the professional, and illustrated his point with a tale from his own experience. He said: “We saw that people went into the motor market buying things direct, buying a commodity not a professional service. They did that, and then motor insurance developed into household. Now it has gone into travel, and is going into small commercial. The goalposts are getting wider and wider. Then there is the FSA telling us all we have got to be very professional and do things properly. When I bought motor tax last week the guy at the post office said to me: ‘Insurance for your car sir?’ I told him: ‘I buy my insurance from an insurance professional, I buy my stamps from you guys’. He was a very jovial fellow and said: ‘We are really very professional in selling insurance, sir’. I asked him: ‘Can you tell me the difference between the Road Traffic Act and third party fire and theft?’ He looked me in the eye and said: ‘Would you like some stamps?’ That is an element of distribution that makes me cringe.”

Jelf’s Carole Lowe believed brokers should educate the public to better appreciate the work they do. She added that brokers should to adapt to changing habits, and use the internet to their advantage: “The buying habits of consumers are changing. The next generation down is going on the internet a lot more. That is the only way my children know.”

Simon Bennett agreed. He said: “When my children start insuring things their first thought is going to be to look on the internet, rather than walk down to their local insurance broker in High Wycombe.”

MGAs

Managed general agencies (MGA) have been in the headlines recently, with a number of large brokers looking to set them up, and insurers falling into line. But what did the brokers at the table in Reading think?

Arthur Farrow said: “I think there is a place for everything to a certain extent.” But Martin Wright believed that MGAs are just insurers by a different name.

“When I bought motor tax last week the guy at the post office said to me: Insurance for your car sir? I told him: I buy my insurance from an insurance professional, I buy my stamps from you guys.

Arthur Farrow, Stuart Alexander

Simon Bennett queried the future of the distribution model. He said: “Most of the MGAs you can think of have major insurers behind them, and probably a three or five year contract. What is going to happen at the end of that time?”

“Some will undoubtedly crumble,” said Arthur Farrow.

Martin Wright believed the MGAs would take a new route. He said: “They have the option to go into the reinsurance marketplace; that is the next development, rather than using a front end insurer. If I was developing an MGA I would be looking at going straight to Munich Re or wherever it might be. MGAs already offer quite a lot of the facilities that an upfront insurer offers without the transactional cost of running a retail insurer.”

Phil Casement said: “It is a more sophisticated version of the old scheme relationships.” Asked if the regulator should be looking more closely at the model, he said: “If they do not have to comply with the rules and regulations as we do, then it puts us at yet another disadvantage.”

However Paul Charlton believed there were solid rules to protect consumers already in place. He said: “The broker is duty bound to explain on whose behalf he is operating and from where the underwriting is coming. One of the things that we as an industry have not been as good at is on the fact that we are protecting someone’s assets. When catastrophes happen, such as last year’s floods, the industry really stepped up to the mark and did a fantastic job.”

Regulation

As the roundtable was held the week before the FSA’s consultation on mandatory commission disclosure and conflicts of interest closed, it was a hot topic, with every broker in the room agreeing that forced commission disclosure would be a mistake.

Carole Lowe said: “The problem is that the public are not educated. We are not used to charging fees. Very few brokers understand how to put a fee together. They have not got a structure in place.”

Simon Bennett added that customers had unrealistic expectations: “We are all constantly fighting against people like Direct Line, who are telling people night after night on the TV to cut out the middle man.”

“I think everyone probably adopts the same attitude. If a client asks you how much commission you are charging them, you will tell them. You do not need to regulate it.

Tom Anderson, AIS Direct

Martin Wright agreed. He said: “I cannot understand why the FSA have their knickers in a twist over commission disclosure, because it is the cost of distribution. It is how you get the product to the marketplace. You have to pay a commission to do that if you are an insurer; if you are going direct you should have to disclose your marketing costs. It is pointless.”

Everyone present said that they had never been asked by clients how much commission they earned. Arthur Farrow added that, far from helping the market, commission disclosure could put brokers out of business. He said: “It will achieve fewer brokers in the market and more insurers doing direct business.”

Martin Wright added: “Companies like Marsh and Aon, the international brokers, because of the Spitzer effect, want complete commission disclosure, because they tend to work on a fee basis anyway. The problem that the FSA have at the moment, therefore, is that even as an industry we cannot decide on the best way forward, because the views are polarised at either end. If we cannot get our act together, how can we expect the FSA to defend our position?”

Simon Bennett said: “Is it because the way the commission is paid at the moment is wrong or is it too difficult to justify, because the way we do it at the moment is by percentage? If you had to disclose that, for a motor fleet of say £10,000 premium, you are getting 7.5%; nobody is going to make too much fuss about that. If, however, you had a £100,000 property owner’s account, where you are earning 30% and you have to disclose £30,000, someone is going to say it is a lot of money, what are you doing for it?”

Andy Giles had an even stronger view. He said: “Why do you have to say it? Why does insurance have to disclose it? There is no other industry that has to disclose what they earn. I cannot see what purpose it serves. I believe that you sell it for what you sell it for and you earn what you can.

Any business is in there to make a profit. If we try to sell the wrong product, we do not earn and somebody else will. I think it is obscene. I get offended by the fact that somebody is trying to tell me what they wish me to earn.”

Martin Wright agreed: “I could understand it if it was not a competitive industry and you had two or three players that dominated the marketplace. You could then argue the case that there could be misuse of this position, but it is such a highly competitive marketplace with so many brokers and so many people competing for the business on price that it just does not demand it. Market forces control the pricing.”

Tom Anderson summed up the feeling in the room: “I think everyone probably adopts the same attitude. If a client asks you how much commission you are charging them, you will tell them. You do not need to regulate it. To me there is an awful lot more that needs to be regulated.

“For example, I want to see everyone who sells travel insurance regulated, because everyone sitting around this table is affected by them. The poor guy who goes in to buy his holiday is affected by them, because you can bet that, even though they are not supposed to do it, they will give away the travel insurance free and probably make 300-400% in the process.

“I used to run a payment protection insurance company and I know the profits we made on that; I know the profits that the people, such as the banks, who were doing the deals made on that. Perhaps there is more of an issue there. Maybe they should be telling the customer that they are paying 10% and 9% of that is going to the profits of those people concerned.”