Keeping the spirit alive

Are the current consolidation strategies sucking the entrepreneurial lifeblood out of the insurance industry?

Paul: The short answer is no. However, it's not as easy as it was five years ago, especially with regulatory requirements and a consolidated insurance market. One of the biggest drives in the industry at the moment is people seeing their bosses or peers walk away with large amounts of money, which will encourage them to do something for themselves.

Steve: In the past, consolidation periods in the industry have led to people creating their own start-ups. How many of the recently acquired regional brokers were born as breakaways from national brokers? The bureaucracy and limitations that can develop within a large organisation can be a very fertile breeding ground for people who want to go out and do it their own way.

Neil: Consolidation is removing those who have started, and are in the process of growing, a business. They could take it to the next stage, but instead they are selling out to larger organisations.

Paul: However, others will move into that void. There is a finite amount of business and the sharper brokers will get it - whether they work for Towergate or a smaller broker. It's a question of whether people have the risk appetite.

Neil: Previous acquisitions have shown that those who have an entrepreneurial spirit will want to re-enter the market and start afresh, but some will take the money and go.

Janice: In the past five years, brokers have started to realise their true value - if anything, the industry is becoming more attractive from a broker point of view. They see people selling out and realise the value of their business, and that becomes attractive. True entrepreneurs find it difficult to give up and not come back.

Steve: If you look at the acquisitions that have taken place, some of those people will go to the top of their new organisation, in a bigger environment with greater funding and opportunity for new business.

Mark: However, when they are in their own organisation, they may be directly involved in the hiring process. Most entrepreneurs have a tendency to recruit in their own image, which won't happen in a larger organisation. That could then lead to a shortage of the next crop of leaders coming through.

Steve: That depends on the nature of the organisation. If you can do the job with a degree of authority, then that is great. However, there is a danger that you can get sucked into the bureaucracy.

Janice: It's not necessarily about scale. It becomes more of a problem if the acquisitions are by insurers. I can't see entrepreneurial spirit flourishing under the ownership of a massive corporate.

Paul: Axa would say that it has devolved units in the brokers it has acquired - for example, Stuart Reid is still a driving force within Venture Preference. The issue is whether people are going to continue to want to start their own businesses and take a risk. In some consolidator models, they have 90 offices, 2,000 people and a great degree of replication. This will have to be addressed in the future, and there will have to be some rationalisation of these businesses. That will create more discontent and another wave of people will decide to go out on their own.

Steve: It comes back to how the organisation is operated and how people are remunerated.

Neil: However, that depends on who owns the organisation. The ethos of the company is the most important thing - if you get it wrong, there is going to be a large fallout and entrepreneurs will decide to start afresh.

Mark: Many organisations have paid millions of pounds to buy an acquisition that five years later is worthless because its teams have left.

Steve: That's a key part of any company making an acquisition - retention of people.

Neil: Five years is a short period of time; we all know the people in question are going to leave to do their own thing again.

Steve: The larger broking organisations probably try to groom people for succession. However, the gamble is whether they stay in the organisation.

Paul: It's very difficult once you get to a certain size because it is hard to differentiate yourself. You could probably plug some of the people out of the three or four major insurers into the same role and they would work just as well.

Nigel: Do you believe people are really entrepreneurial? Setting up a business can be intimidating, and this is partially because insurers make very little effort to help new firms. In my experience of setting up a new business, we had some great initial support from some insurance companies, but a staggering silence from most. They hide behind logistics and regulatory issues.

Mark: As the consolidators run out of brokerages to buy, they may spend more time encouraging young entrepreneurs to come out. They have the cash, the infrastructure and the compliance ready to go - they just need to select the right people. I suspect they have not been paying much attention to that because they have been too busy buying brokers.

Nigel: The senior level may think that's great, but then the new agency gets passed down to the compliance department and you're just an inconvenience.

Janice: I agree that insurers should be doing more to support brokers.

Neil: But insurers aren't supporting brokers, because they are frightened of their major customers.

Janice: We just haven't got round to it yet. As an insurer, we recognise that we need a broader distribution platform. That means we want to get as close as possible to the big players, and help the breadth of the market wherever we can. It is difficult and you need dedicated resources to set up a facility for new agencies.

Neil: How many agencies do you establish on a regular basis for new start-ups?

Janice: It is what it has been for the past 10 years.

Paul: That is an important point. The biggest problem that start-ups have is access to the market. It is not only about building relationships with Norwich Union or Axa, it's finding a decent level of service that will allow them to grow their business quickly. Large insurers have sensibly realigned their servicing capabilities around their major relationships, but there is a gap in the market for a provider for agencies that only want to complete £100,000 of business per annum. Traditionally, there was no solution, but this is where underwriting agencies are making a big splash, because it is much easier for them to justify building a £100,000 account with someone.

Neil: But you are filling that void, and that is why the number of underwriting agencies has grown.

Mark: The target audience for most underwriting agencies is smaller, independent brokers - especially if they are start-ups.

Janice: We currently have 4,000 brokers. It was predicted that this figure would be 2,500 by the end of this year, but it is still 4,000. Consolidation is concentrated in the top 300 businesses. For the rest of the market, you need to create an easier way for them to deal with an insurer and get the support that they need. It is to our advantage that we keep 4,000 brokers.

Neil: You've answered the point on entrepreneurs because if the agency numbers are staying the same, it means that for every brokerage being sold, there is another one starting up.

Paul: There is more consolidation at the top end of the scale, but it is getting de-leveraged at the other end because the businesses that come into this sector are owned by consolidators. It should be in everyone's interest - certainly for insurers - for that business to trickle down to a less aggregated channel. Insurers are almost obliged to try and agitate that market. Nevertheless, in a competing situation, if a smaller broker is looking for business held by an insurer's favourite consolidator, then who will get the business?

Neil: I've been surprised by my experiences - we took a team two years ago from Aon, and they naturally assumed they would not get the same deals that Centor could get. They were impressed because the underwriters said they preferred dealing with us.

Janice: It's about quality business - what would drive the deals you are about to get? If you manage your business to deliver good returns, that makes you more attractive to insurers.

Paul: There is a definite service delivery offering down the lower end of the scale - that's the bit that's missing from most insurers. However, for individual specific facultative placements of risks up to £25,000, it is difficult for a small player to attract the attention of the major composite insurers.

Mark: That is an important point because an underwriter at an insurer will have a big budget to meet every month - it cannot afford to spend that much time on a sub-£10,000 piece of business. However, the underwriting agency can spend more time with a smaller broker. This will help spur the market on, and breed a new generation of entrepreneurs. In addition, consolidators could invest more time and energy into supporting smaller teams and brokerages.

Nigel: Do the carriers put some of the smaller brokers in touch with each other, so that they can learn from the experiences of others?

Neil: A few years ago, certain insurers used to do that, and we would all club together and become unofficial non-competes.

Nigel: As an industry, we need to encourage younger brokers to punch above their weight, whether that is via alliances or groups. It is not happening in insurance at the moment.

Steve: If you look at who supplies the support behind managing general agents (MGA) in the market, it is the big carriers. This is almost a recognition that we can handle that many, but it is easier to take some of that capacity and plug it into a separate mechanism that can handle it.

Janice: As an insurer, we support MGAs, but we need to offer a different service. Some brokers will go to underwriting agencies, while some are screaming out for us to do something different. If we want a wide distribution platform, then we need to have an answer for that end of the market.

Steve: The key to it is how you respond to customer needs - it's about differentiation.

Janice: In a free market with plenty of opportunity, these models will survive in any way, shape or form.

Paul: The industry needs to be careful not to become complacent. The biggest structural problem in the market is that many foreign shareholders in UK insurance entities do not understand the distribution models that are in place. They would all rather go direct, similar to what Direct Line is doing in the commercial sector. Unless we get some entrepreneurial dynamism in the way that we mange distribution, it could be taken away from us. I cannot see a subscription risk in Lloyd's being handled direct with a customer, but there are certain classes where it could be used, such as commercial motor.

Mark: Commercial motor is well within the sites of the web aggregators. However, you need more market capacity for underwriting agencies and MGAs to thrive. In a softer market, you can get more smaller, entrepreneurial brokers to compete.

Nigel: With the power of the web and the major insurers wanting greater control of distribution, you have to be much smarter and differentiate.

Steve: If you look at who has entered the broker market in the past 10 years, what has been radically different?

Janice: At the British Insurance Brokers' Association conference this year, there were less traditional brokers there - that shows how much the market is changing.

Steve: We have always tried to differentiate and focus on what clients want, which is genuinely different to what we deliver as an insurance industry. Clients want to run their business and keep making money. We deal with some of that as an industry, but we don't do anything else that can assist and support them. The natural areas to differentiate centre around risk management.

Neil: This industry is poor in that respect. To be entrepreneurial, you sometimes only have to do a very small thing. Insurance is still insurance at the end of the day.

Mark: Look at the power of online services. We provide directors' and officers' for smaller independent brokers. A decade ago, that was all a complete manual process; the class was over-complicated and it was a one-size-fits-all driven by the London market. However, through smaller companies, we put a fright on a profitable class of business to the large insurers. It's changing the process, but it is certainly something different.

Steve: There are a number of classes that lend themselves to a process. There are still vast swathes of business that require professional service and advice - whether it is from a broking perspective or an underwriting perspective.

Neil: That won't change - people need professional advice from brokers. However, the processes are getting slicker and quicker though the drive for efficiency. Apart from adding bolt-on services to certain policies, not much else has changed. As an industry, we are slow to change and adapt - you only have to look at IT.

Mark: Much of that comes from the major insurers. Technology change is being driven by small independent brokers and underwriting agencies. There are reasonable-sized brokers that have their own in-house systems.

How can we encourage more people into the industry?

Steve: It is not just attracting talent into the industry - it's about making the most of the talent we've got. The industry believes it has a problem with the quality of employees, but there are hundreds of high-quality individuals in the market who are lost in big organisations because their skills have not been developed.

Neil: Alternatively, they just need a bit of education. There are many people who simply do not have all the skills yet, and that needs to be developed. We have a terrible reputation as an industry. Working in insurance can be fun, and you can make some money and do very well out of it, but the difficulty lies in trying to explain that to people outside of the industry.

GUEST LIST

- Paul Upton, Chief underwriting officer, Evolution Underwriting Group

- Steve Williams, General manager, Fusion Thinking

- Janice Deakin, Trading director, intermediary business, Norwich Union

- Neil Walton, Chief executive officer, Centor Insurance and Risk Management

- Mark Shreeve, Chief executive officer, Angel Underwriting

- Nigel Barton, Chief executive officer, Oxygen Insurance Brokers.