Will there still be room for the small fish?

Towergate is gearing up to make further acquisitions and rumours suggest one or more brokers in the North West will be next to sign on the dotted line.

Once it happens, pundits will sigh and think yet another strong independent has been swallowed up by the behemoth.

But is the huge amount of consolidation going on in the market really such bad news? Towergate gets a lot of flak but it is far from being alone in snapping up attractive businesses.

Some feel Towergate is over ambitious, charging too much in commissions or may doubt its business model. But this has not put off many canny brokers seeing it as the right parent. There is some jealousy out there.

Towergate is now packed with hard hitters. It recently announced Patrick Snowball, former group chief executive of Aviva, is to join as deputy chairman. It also lured Amanda Blanc from Groupama, widely held to be one of the smartest brains of the business. And, when someone is needed to turn on the charm, it brings in Lloyd’s personality Terry Wellard, as a well-connected ‘fixer’.

Perhaps it is time to see the positive side of consolidation.

Andrew Paddick, director general of the Institute of Insurance Brokers and chairman of Broker Direct – which as purchased brokers– juggles both championing the smaller independent and supporting consolidation.

He says: “Let’s be practical. There are many brokers of my age within five years or so of retirement. They took the plunge in the late 1970s to set up their own firms, often leaving insurers. But, sons and daughters rarely want to work for the family business and there may be no one else to take it on. If a good price is offered, then of course it makes sense to sell up.”

But, he says when an insurer buys a broker, there should be scrutiny. AXA has recently purchased Layton Blackham, Smart & Cook and Stuart Alexander.

Paddick states: “AXA has a tied agency culture in France, although there is no evidence of any UK problems yet. We will be keeping a close eye and what is happening – if brokers are concerned, they should let us know.

“There is nothing illegal in giving preferential rates, and this may not happen, but if it does, it will distort the market.”

Indeed, the AXA purchase has taken the heat off Towergate to some extent – making the latter appear more broker friendly.

However, Stuart Reid, chief executive of Stuart Alexander, is having none of it. “We’re well aware of the conflicts of interest argument. But, there is an effective regulator in place and if we start using AXA more, then other insurers would pull their agencies.”

He adds there are some 4,000 brokers out there and even if this were to drop to say 3,000 then this would still mean adequate choice for clients.

Meanwhile Paddick insists there will remain a place for the smaller independent. “If they can go overboard on service, they may well win business from some businesses which lose their edge after being bought. Many business people like to deal with a contemporary and if the principal has left one firm, customers may switch.”

Networks, understandably, are also upbeat about consolidation. Mark Wood, managing director of the Broker Network, comments: “You cannot fight change and we relish market conditions. We have grown rapidly on the back of this. Joining us allows brokers to compete with larger firms and for now who want to sell up, we allow them to keep the name and trade as before.”

Paul Dickson is chief executive of Dickson Insurance Brokers. His firm is small, but has some first rate large clients including Ocado and Pipex as well as lucrative pub market schemes. He comments: “I’m ambivalent about what Towergate and other consolidators are doing. Of course if the right price were offered then I might consider selling, but we don’t fit the mould.

“Consolidators often want ‘pile it high, sell it cheap’ businesses or those that have a large management team in place. Whether you like it or not, it was a smart move by AXA to buy those three brokers – it went for the quality end of the market. [AXA chief executive] Peter Hubbard has moved up the food chain.”

Some may see small independents as an endangered species. But Rod Lynn, partner with Hove independent firm Scullard & Prosser, insists he has no interest in being bought. “My partner and I purchased this business around 10 years ago – from Mr Scullard. It was a family firm, dating from about 1945. We paid for top notch IT system and set up good agencies and also use Holman’s at Lloyd’s which gives us plenty of scope.”

Lynn says being part of something big has no attraction. “I don’t want to be given targets, be constantly chased or to have to answer to those I don’t agree with.

“When I ring anyone at an insurer, they are always either in meetings, or in training. We are here to speak to talk to clients who need us and we do our training out of hours. There is a reward in being independent.”

Lynn says he gives the same high level of service “to a larger commercial risk as someone who wants to insure a pedal bike. This is why we get 95% of our business through recommendations.”

He adds he also would not knock AXA’s decision to buy a broker. “You need regulation, and we would not want this. We were able to buy our firm through a loan from Finsure, which is part of NIG. Brokers and insurers have always worked closely.”

Joe Gray, intermediary operations manager for insurer Ecclesiastical, points out: “Time will tell if it works out for insurers buying brokers. They have different mindsets – the insurer should leave the entrepreneurial broker to get on with running the business and keep interference minimal.”

He believes more consolidation is inevitable. “Towergate has said it wants to double its business and is clearly going to make more acquisitions.” However, he says just buying firms is not a guaranteed route to success. “If a broker does not have a succession plan and receives a good offer, which means their employees can remain then of course it’s going to be irresistible. But, the buyer may find that the principal loses motivation and this can affect the business. It is not easy to find good managers and so customers may leave.”

Gray concludes there will still be a good chunk of independents in five years’ time – and that these will be strong firms.

“In January 2008, the FSA will discount goodwill on the balance sheet. This could be a shock for some businesses and now is the time to get the house in order – or sell up. Those who remain independent will be in good shape.”

Payment protection specialist British Insurance is seeking a buyer and its managing director Simon Burgess says criticising consolidators is poor form.

“Towergate is professional and I blame the press for stirring things up. I agree that an eye should be kept on insurers taking over brokers, but any business has the choice in whether to sell up. The problem is too many brokers know the price of everything but the value of nothing.”

And, Lyndon Wood, chief executive of independent Moorhouse Group says a sale can enable growth and if an insurer purchases a broker.

“I do not see a conflict of interest as such as long as the aim is to provide the best for the client and of course abiding by TCF. If the holding insurer offers the best cover, service and possibly price and security then that is best for the customer.”

He adds. “It may sound shallow, but if a firm is not growing or going backwards it will want to sell up for the most money. Those who are growing obviously are blessed with more choice.”

Paul Inskip, managing director of independent Motor Trade Solutions, also agrees that the heat surrounding consolidation is good news for some: “Brokers who are likely to have retired sooner rather than later anyway are taking a once in a lifetime opportunity to maximise their often lifelong capital investment – good luck to them.”

He says the market is not going to end up as being populated by a small number of firms. He says looking for positives in consolidation is far healthier than moaning about it. “You need to look for opportunities – that could be in taking the money or looking to remain an independent with a difference. The person in the street couldn’t care less about consolidation. They want good cover, at a fair price from people who are easy to contact.”

Eric Galbraith, Biba’s chief executive, says: “Consolidation is nothing new – Aon, for example, went through a phase of buying many businesses some years ago. It may spark off a small number of new start-ups which will be positive for the industry. It is clear that regulation and problems in obtaining finance have not encouraged new brokers to launch. But I am convinced that the start-up market is not as barren as it might appear.

“It is not helped that there seem to be no conclusive FSA statistics on this but I think consolidation will encourage some of the more dynamic and entrepreneurial brokers to start their own business.”

And as Reid asserts: “There is plenty of capital out there and while we may end up with small and very large firms initially, then that creates opportunity in the middle.”

However, let’s not give the consolidators too much of an easy time. Dickson sounds a note of caution. “Insurers and brokers buying other businesses are not banks, there is risk in insurance and some may be sailing close to the wind.

“No matter what they say, it is hard to guarantee a return on investment in this business.”