Housebound

What an interesting time to be an insurance broker. With the recent flurry of consolidation activity, the traditional position of brokers in the insurance sector has changed; they can now define themselves as an independent broker, a network member or part of a consolidating machine. However, whether they have embraced the online aggregator market, or have changed from an insurance broker to a managing general agent or underwriting agency, they will need to have a strong relationship with a software house in order to survive in the current market.

The software house sector has also significantly altered in the past few years with consolidation activity as rife as its broking counterpart. Of particular interest is the acquisition of Sirius by Software Solutions Partners (SSP) in May 2007 and the vertical integration between Towergate and Open GI in September 2007. More recently, the board of SSP has admitted that it is in discussions with a financial buyer, perhaps in response to the Towergate-Open GI relationship.

So how has consolidation in the software house market affected brokers? Would it be better to choose an independent software house such as Acturis, or an independent system that can enhance a broker's web offering - WNS Assistance, RDT or Sheraton Systems, for example?

According to Theo Duchen, co-chief executive officer at Acturis, consolidation in the sector is viewed more as the purchase and ownership of multiple systems, rather than combining these into the one system.

He says: "There is a perception that there is a battle for market share, and that bigger - that is, having multiple systems - is better. However, it's a false argument - the more systems that need support, the more problems there are in delivering service. Owning different products and services can also slow down innovation."

The battle for market share is one of the main drivers behind consolidation, but the larger firms get, so the argument goes, the harder it is for them to be innovative. On the other hand, many of the firms that consolidators target are themselves small, innovative operations, coming under a larger umbrella organisation.

Lawrence Walker, chief executive at SSP, supports the argument for the latter: "We have seen plenty of consolidation in the past three to five years, and I believe we are now at that second stage of consolidation. We have swept up all the smaller niche and peripheral players and are left with a core group of companies."

He adds: "Our acquisition strategy is focused on economies of scale. We wanted the skills and capabilities in various markets and now have high-end commercial expertise in terms of technology. The acquisition of Sirius brought in mid-market activity to the broker sector and, at the same time, we have departments in personal lines, direct business and e-trading capabilities. We have streamlined and moved into additional sectors in order to cater for the existing market."

Golden opportunity

It is true to say that the insurance sector has gone through a period of consolidation for all parties, and there could be a number of reasons why one software house would buy another. The obvious answers are to grow market share or to fill a gap in product offering.

Simon Hughes, sales and marketing director at Open GI, says consolidation is an opportunity: "While there is more competition among software houses, brokers are now committing to longer term technology partnerships. They are keen to deal with providers that have a proven track record of large-scale implementations and are capable of delivering solutions that support increasingly diverse and complex models."

Mr Lawrence supports this view, saying a company needs to be large in order to look after what he calls 'low-skilled engagements'.

"Whatever form an insurance company takes - whether it be a managing general agent, a broker, an underwriting agency or an insurer - it will want to work with a supplier that understands the market and can provide the right services, such as administration, technology, distribution and consultancy," he adds.

While a compelling argument, another driver behind consolidation may simply be to keep up with the pace of technology and customer demand. Indeed, brokers in the insurance market are realising that they need their systems to change with them. So says Tim Rankin, managing director at WNS Assistance, an outsourcing company that focuses on motor claims handling in the UK. WNS acquired its information technology systems supplier, FLOvate Technologies, in 2007 to give it "more credibility and scope in the market."

From a business perspective, Mr Rankin says consolidation in the market is more about seeking a total solution: "Consolidation comes at a cost - you need to think about licence fees and the costs to run products and services that have been acquired. However, you need to look at consolidation as a tool to develop your technology to give your customers what they need, and quickly. Technology should be designed around processes and not the other way round."

Whatever the arguments may be for all the consolidation activity in the market, the question remains, what does this mean for brokers? After all, the industry would not want to be confronted with a situation similar to that which supermarkets are experiencing, explains Mark Bates, founder and chief executive at software supplier RDT.

He explains: "While they are professional and well-run businesses, there is a lack of choice for customers - and that, unfortunately, is the downside after any consolidation activity. We are finding that large insurance companies are conservative and prefer dealing with large software providers. They believe the software they are signing up for is much more sophisticated than the smaller providers, however, they may instead find they have a system that stifles their innovation."

Mr Duchen adds: "In my opinion, merger and acquisition (M&A) activity tends to not deliver the promised value. There is plenty of growth opportunity in the industry that does not involve buying other companies - you need innovation and a good system, and to effectively service customers."

IT platforms

Mr Duchen also agrees with Mr Bates' concerns over lack of choice: "Not many software houses are actively selling their legacy systems to customers, so you are seeing a consolidation of sorts in that a vendor's services are not being fully distributed to the market."

In addition, Mr Duchen says that the recent M&A activity means that there is now less choice for customers and that, ultimately, there will only be around five providers of any significance left in the market.

"I am surprised how little value seems to be generated around consolidation. At the end of the day, brokers will not see much difference after the consolidation of the software house market; they will still believe their systems are Sectornet and Sirius, rather than SSP," he adds. "From a broker's perspective, consolidation doesn't change the product offering, but it may have an impact on service. In theory, it should change the focus on existing systems in order to create a 'best of breed', but in reality, consolidators may well try to change as little as possible."

Indeed, software house M&A activity can present some challenges. Mr Hughes says there may, or may not, be consolidation of the IT platform. If there is, then it can disenfranchise the brokers concerned as the platform their business runs on may no longer be strategic. "However, if there is no consolidation of the IT platform, then the software house has to develop and maintain multiple product streams, placing additional investment into research and development. Either way, there are challenges to overcome," he adds.

System-wise, these challenges will separate the wheat from chaff, says Paul Ring, director at Sheraton Systems (Websure). He believes the providers with the strongest products will be the only ones to survive: "There will be a bit of a shake-up over the next two to three years, but the survivors will be the ones who focus on the strength of the systems and functionality they offer, rather than their size."

Mr Ring says he is also concerned about consolidation affecting consumer choice: "It depends on how far consolidation goes, but you don't want to be left in a situation where there is a choice of only one or two software systems. What you may see after a long period of consolidation is that, after a year or so, entrepreneurial programmers and designers start emerging with systems that are often better. Competition forces improvement."

Whatever happens, there is still a minority of brokers that need to consider either joining with a software house, or upgrading their old legacy systems. In addition, Mr Bates says that none of the platforms available were designed to be used with the internet: "They were designed as an island, with no concept of architecture."

Consequently, Mr Bates predicts that there will be a move towards software companies with 'in the cloud' technology - that is, software where a broker will not need to have anything on the premises other than a connection to the internet. He explains that the software house market is a difficult space to break into: "The situation is changing. Both Open GI and SSP provide comparative quote systems that need to be continually updated. Someone has to maintain those rates. When the technology improves, insurers will be able to feed in rates automatically, so they don't have to rely on a third party to maintain them."

Mr Bates adds that if rates were to be updated automatically, it would allow smaller companies to enter the broker space - and this is where software companies with in the cloud technology come in. "We are already seeing new technologies in the market, for example, customer relationship management (CRM) systems."

CRM systems focus on creating two-way exchanges with customers so that firms have an intimate knowledge of their needs, wants and buying patterns. Mr Bates explains that any firm can sign up and use them: "The cost is significantly lower for the software house and the insurer."

Survival of the fittest

Despite this, Mr Rankin believes it would take a revolution in technology to slow consolidation - although, like Mr Bates, he agrees that new technology will steer the market. "Competition is increasing in general insurance, and until someone revolutionises the market, consolidation in the software sector will continue. The economies of scale and the ability to keep up with the changes mean that software companies need to continually develop new products and solutions."

Software houses, like all businesses, need a sustainable business model. Financial stability is an extremely important factor long term, and while some software houses are built on a long-standing successful track record of financial performance, others are not. To have a strong relationship with a software house, brokers must consider all of the operations available in the market. It is important to remember that they are not IT experts and mistakes are possible - regardless of how much consolidation has taken place.

A SNAPSHOT OF SOFTWARE HOUSE ACTIVITY

- Software Solutions Partners (SSP) was formed in 2002 when Computer Sciences Corporation's (CSC) retail insurance division was acquired by a management buy-in team of ex-CSC executives. SSP acquired Sirius in 2007.

- Open GI was established in Worcester in 1979 as Misys Minicomputer Systems. Its broker network, the Countrywide Network, was formed in 1986. Misys General Insurance was acquired by Montagu Private Equity and its management team in March 2006 for £182m and, after a three-month transition period, was rebranded as Open International, incorporating Open GI and Countrywide. Open International acquired global market technology provider MI Limited in October 2006, and was then sold to Towergate Partnership in September 2007 for £276m, with the existing management team retaining an equity holding.

- Anodas Software teamed up with Zylog Systems in April 2008, in a bid to enhance its presence in the UK insurance sector.