Who's afraid of consolidation?

The commercial lines broking market is facing several threats, no more so than on-going consolidation and how brokers of all sizes should deal with it.

Almost half of brokers responding to a recent Datamonitor survey say they are either definitely, or maybe, planning on acquiring other brokers in the next 12-18 months. But only 1.6% of brokers plan to join a broker network in the next year, illustrating the extent to which broker networks have lost their appeal.

Taking the second point first, Oval chief executive Philip Hodson says he understands the lack of appeal of networks. "Networks have little appeal to sizeable, professional, independent brokers. They help certain smaller brokers obtain a better deal for some of their clients, but I do not believe, though, that they excite carriers and insurers, who like to deal with homogeneous companies with clear and distinct business plans."

As for consolidation, the perceived view is that smaller brokers are getting chewed up and spat out by the bigger boys.

But Tim Wilson, sales and marketing director at Close Premium Finance, says the consolidation environment does have benefits for the smaller broker. "Consolidation has become something of a seller's market, with a range of options for a smaller broker to realise the value of his business - and we hear of some rich prices being paid."

It's not only the smaller brokers being approached, however. "We see some of the medium sized independents as targets too", says Wilson. The Towergate/CMIB deal is a case in point, as is the recent management led acquisition of Towry Law's general insurance division by the Broker Network.

The other factor affecting brokers profitability is the actual and potential loss of small commercial business as underwriters and internet players try to commoditise the smaller products. Mark Grice, partner and head of Mazars' broking group, says: "Brokers must react to this challenge by adding value to clients in helping them obtain the right cover at the right costs. This requires knowledge of the clients risks and an understanding of the best way of mitigating them, which may not always be insurance."

Are there any benefits of insurers targeting SMEs and what are the opportunities and threats this holds for the broker who still dominates the SME market?

"The benefits could be reduced costs for the consumer as the cost of the broker is cut out," says Grice. So the benefits for the broker are zero.

The opportunities, where they exist, require the broker to demonstrate he has a good understanding of his client and can understand his risks so he comes up with a package of cover that meets the clients needs.

"For the broker the threat is smaller businesses, run by people who are used to buying personal insurance over the phone or internet. They will go direct," says Grice.

Although Chris Garrett, broker partnership manger at Allianz Cornhill, says that the commercial lines broker market has not turned into the barren wasteland many anticipated post FSA.

"Some of the things people feared would occur post FSA have not happened.

For example, smaller brokers involved in commercial lines have not gone to the wall. What we have seen is further consolidation but it has been brokers - especially smaller ones - making a practical choice to be part of this."

Stronger position

So for Garret the smaller broker is in a stronger position than is usually accepted. "The market consolidation has shown that smaller brokers have real clout and independently serve the community they are based in. As organisations they are their own businesses and run by their own rules."

But isn't all this consolidation leading to less competition within the broker market?

"I don't see any real evidence of less competition," says Wilson. "However much acquisition activity there is, broking remains as cut throat a business as it always has been, and the end client benefits from that."

And it is a market served well by a whole range of brokers and will continue to be, argues Dave Smith, market management director for Zurich Commercial. "The commercial market is such that there is enough business for brokers to continue no matter what size they are."

Although Richard Ault, chairman of Ault Insurance Brokers, fears the impact of commoditisation, he insists that brokers must just focus on what they do best.

"The smaller end of the SME market is ripe for commodisation."

But he adds: "We will survive by providing a good quality service and the ability to solve problems - and we talk to clients. We can certainly stand on our own two feet and we will continue to prove that. But we need to focus on client care and work smarter. Insurance broking is common sense. It is about keeping good relationships.

"For example, at the moment there is the likes of Marsh and Aon who look after the bigger risks, then the super provincials, the provincials, then at the bottom there are those holding on by the skin of their teeth," says Ault

This is a view supported by Smart & Cook chief executive Paul Meehan.

"It is tough for the smaller broker and it is only going to get tougher," he says.

The impact of FSA regulation on commercial brokers is demonstrated by the fact that more than 70% of Datmonitor respondents say that FSA regulation has had a considerable costly or very considerable negative affect on their business.

But Ault disagrees. "Regulation and treating customers fairly are red herrings," he says. "If you don't treat customers fairly they will walk.

And it hasn't forced brokers to do things they wouldn't have done."

And Grice says that the whole consolidation process will help brokers focus on FSA regulation.

He says: "Consolidation will enable brokers to support a sound compliance function at a reasonable cost to turnover basis."

But one ex-broker is highly critical of the FSA and its impact. "I wake up most mornings and, on the FSA issue at least, thank God I'm no longer a broker. The demands and distractions placed on the market by FSA regulations have been vast.

Lost opportunity

"I suspect most brokers also underestimate the true costs, both in direct work to make businesses compliant, and in lost opportunity. The timing has hardly been great either, bringing additional pressures on the business when rates are soft and investment income minimal."

Conventional wisdom has it that we face a future crisis as there are few new entrants into the small broker market, which is dominated by 50-year-olds with grey hair and one eye on retirement.

But this is not a view shared by Wilson. "We see a regular pattern of smaller, vigorous players emerging: young guys in their early thirties perhaps with the ability to embrace technology and a different business model. If I'm any judge, some of these are going to build the businesses of the future."

As an industry we can only hope he is right.