PB Sentiment Survey May 2009

May 2009
Sentiment survey
Laurent Matras,Managing Director,Groupama Insurances
The results of the latest PB Sentiment Survey demonstrate the growing impact of the recessionon the business activities of UK brokers.

View the survey (PDF).

For our first Sentiment Survey of 2009, alongside our normal questions surrounding premiums and rates, questions focused on how brokers are faring in the economic crisis, insurer service, acquisitions and commission disclosure.

Brokers surveyed are forecasting a hardening market. In personal lines, 57% of respondents believed that premiums will rise over the next six months compared to 67% of respondents who said this will happen in commercial lines (see graph 1). In both sectors, less than 10% of respondents believed that premiums will fall, showing that - in contrast to the October survey results (when 56% of respondents believed that premiums would stay the same in commercial lines for the next six months and 48% believed the same of personal lines) - the majority of broker managers surveyed now said that the market will harden. The same trend was visible for renewal premiums (see graph 2), where 60% of respondents believed that personal lines renewal premiums will rise compared to 59% in commercial lines.

Rates

Allianz Commercial's general manager, Chris Hanks, believes that it is important for brokers to understand about hardening rates and support insurer partners' attempts to increase them: "The combination of more recession-related claims, five years of a soft market and decreases in interest rates mean that 2009 will undoubtedly see a rates correction. Therefore, the industry must continue to press on determinedly in its push to increase rates to acceptable levels throughout 2009 and beyond; insurers that do not raise them will struggle to survive."

Some of the brokers surveyed stated that the insurers not raising rates are not winning confidence, while several respondents believed that insurers not correctly pricing risk is their largest concern of the recession so far. One respondent said: "Some insurers are continuing to offer rating that does not reflect the underlying risk. Some insurers do not seem to recognize that we are in a recession at all; we are being undercut by some direct insurers that do not underwrite risks."

Despite premium rises, respondents have seen relatively little change in underwriting capacity. In personal lines, 41% saw no change in capacity compared to 43% in commercial lines. However, some respondents believed that some lines of business have seen large-scale change in this area. One said: "Capacity is reducing significantly for some markets, such as property and the food industry."

Cautious

According to 58% of the brokers surveyed, underwriters in commercial lines are becoming more selective about the business they write. This trend is not as strong in personal lines, where 60% of respondents have seen no change. Glenn Caton, sales and marketing director at Hiscox, explains how he sees it: "Commercial lines by definition is a broader and more complex category than personal lines; there is a wider variety of risks for underwriters to consider. We are specialists and pride ourselves on understanding the risks, so we are naturally selective about the business we write. We are particularly interested in who we insure; it is much more important to us than what we insure."

Concerns about the impacts of the recession on the insurance industry were, unsurprisingly, raised by a large number of brokers; 80% of respondents have seen clients cease trading (see graph 4) as a result of the recession, up 27% since last October. "We are seeing an increasing number of businesses failing. Nothing is more frustrating than working with a client for two to three years to bring their insurance programme into proper shape, only for the business to fail for reasons pretty much beyond its own control," said one respondent.

Competition

Of the brokers surveyed, 92% said that they now have clients seeking quotes from other brokers while 47% went as far as to say that they are now losing business to other brokers as the result of the recession, with many listing increased competition for existing business as the single biggest challenge they are facing in the market today. "Customers are checking more markets to try to find a cheaper option, especially in motor and household insurance," explained one respondent. For some of the brokers surveyed, increased competition from other brokers for renewals is causing significant problems. "We are losing significant commercial accounts because we are not able to compete with the attacking broker," said one respondent.

In April, Vincent Gardner, broking director at Reading-based Finch Commercial, told PB: "Client loyalty is being tested as companies come under constraints and pressures. It is becoming more of a financial transaction than before, although we are holding our own by taking up an aggressive broking strategy with renewals."

However, despite 94% of respondents noting that a number of their clients are being squeezed financially (see graph 3) and that they are looking to cut back on their insurance products (compared to 72% last October), an overwhelming 63% were positive about the coming year in terms of opportunities for their business with a further 20% being extremely positive (see graph 6). "We have to work harder and provide excellent service to combat the rates offered by direct insurers but we have been largely unaffected by the recession so far," said one respondent. This compares favorably with the 50% that were positive last October about the coming year and the opportunities presented by the credit crunch. This surge of optimism appears to run at a parallel timing to the hardening market and therefore suggests that increased rates are playing a role.

As a result of the recession, 69% of respondents are considering cutting their costs and expenses as the recession deepens (see graph 5). Some larger brokers have recently hit the headlines with cost cuts; at the beginning of April, Aon announced that it was beginning consultation with its staff on reducing its pension contributions. Willis has also announced that it has given staff the option of sabbaticals on 30% pay and the opportunity to work four-day weeks.

Irritant

When asked what the biggest headache has been for brokers so far during the recession, the lack of availability of credit insurance was repeatedly flagged. One respondent said: "Credit insurers have withdrawn from many sectors due to a fear of what might happen." The withdrawal of Amlin from the marketplace has left many brokers struggling to find replacement cover for clients that wish to move their cover away from the insurer.

According to Euler Hermes, a rise in bankruptcies of 34.2% is expected in the UK in 2009 and it is unlikely that more insurers will step in to fill the space. In January, Martin Holland, managing director at Heath Lambert's credit insurance division, told PB: "It may be impossible for some clients to place due to poor debt records and exposure to high-risk industries such as car manufacturing, though most will be picked up. Insurers are approaching business differently, with more rigorous underwriting on policies." (PB, January/February 2009, p.8)

The credit crunch has also made some respondents think more carefully about the insurers that they work with: 79% said that they are being more selective about which insurers they choose to transact business with based on their security ratings (see graph 7), with 58% believing that insurers are cutting back on broker service. One respondent explained: "We are being selective about insurers based on relationships and service standards."

Assistance

While some insurers were praised for their speed, accuracy and flexibility, concerns about the state of insurer service continue to be raised by a number of brokers. "Service standards have become poorer and upcoming job cuts will just make that worse," said one respondent.

In response, Phil Bunker, managing director at LV Broker, says: "Inevitably, with what is going on in the banking industry, some insurers will be looking at ways in which they can save money and, with many being forced to make redundancies, service levels are likely to fall. The insurance market is extremely commoditised, meaning that - unless your prices are competitive - the chances are that you will start losing business. So, among those insurers under financial pressure, service standards are likely to fall to enable them to remain competitively priced and still generate income for their owners and shareholders."

Bunker highlights that not all insurers are cutting back on their levels of broker service: "Because we are a mutual, we are not under pressure to pay shareholders dividends. We try to go the extra mile so, for example, we will call policyholders if they are in an area that is reported to have flooded to see if they are okay and if we can assist them."

For the second Sentiment Survey in a row, Norwich Union featured in the top-five insurers for service in all four categories, coming first for commercial lines underwriting service and commercial lines claims service.

John Kitson, sales and marketing director at Norwich Union, believes that the insurer's popularity with the survey's respondents is due to the hard work of teams throughout its business: "It's recognition like this that is always the hardest won and the most rewarding, particularly when the market is facing difficult times; this is the best sort of feedback to help give us and our staff encouragement. We don't always get it right by any means but strong signals like this make the intense efforts that our teams put in seem very worthwhile."

Debut

Groupama is a new entrant to the best service categories this year, the insurer being voted third best for commercial lines underwriting service and fourth for personal lines underwriting service. Perhaps it has been listening to the brokers that it purchased over the last few years and stratifying its service to suit brokers' needs.

The first few months of 2009 have seen little consolidation activity with only a few deals completed. Despite 30% of those surveyed having been an acquisition target in the last six months, while 33% had approached a potential acquisition target in the same time period. Some insurers are opting to support independent local brokers in preference to supporting the consolidators, with the likes of Norwich Union setting up the Broker Independence Group.

When asked if they expect greater or lesser acquisition activity in 2009, just under half of respondents believed that it would drop (see graph 8). "There is less cash available, so people will find it harder to raise capital and are concentrating on their existing business and clients," said one respondent. The ease with which brokers can raise credit for their businesses was highlighted by some respondents, 34% of whom believed that it is now harder to do. This could be what has put the brakes on some deals and one respondent said: "It has become almost impossible to raise the capital needed to expand."

Thorny

Another perennially sticky topic broached in the survey was commission disclosure, which has been hitting the headlines of the insurance press repeatedly over the last few months. The Financial Services Authority ruled against mandatory commissions disclosure in April and formally confirmed 'industry guidance' status on a market solution in respect of conflicts of interest, disclosure and intermediaries' transparency in the commercial insurance sector. The British Insurance Brokers' Association, London and International Insurance Brokers' Association, Institute of Insurance Brokers and Association of British of Insurers have all welcomed the move; Biba has now said that the industry has until 2011 to bring its house into order.

Respondents' opinions regarding the FSA's movements on commission disclosure were fairly evenly split: 45% agreed with the regulator's stance (see graph 9). "Customers are entitled to this information so it should not be withheld," said one respondent, however, other respondents were strongly against commission disclosure: "(It) will never be a level playing field when direct insurers do not advise how much they spend on marketing," said one broker. Of those surveyed, 34% had submitted comments to the FSA on the subject, with another 7% intending to in the future.

- Thank you to all that took the time to complete the broker-only survey; the next one will be published in October. If you do not receive the survey and would like to then please e-mail ro.osborne@incisivemedia.com with your contact details.

OPINIONS ON UNDERWRITING SERVICE

"Too many insurers are price driven; service levels don't count, apparently."

"Access to decision makers and a flexible approach are key."

"A 24-hour turnaround is desirable."

"Get it right first time."

"It is helpful when small commercial business can be done online and if it refers then they come back to us with an answer, normally the same day."

"Underwriters need to be willing to amend cover and adjust mid-term if clients' situations change."

"Insurers are listening again."

"Too many errors creep into documents."

"Service standards are deteriorating; upcoming job cuts will make things worse."

OPINIONS ON CLAIMS SERVICE

"It all comes down to speed, efficiency, fairness and minimal paperwork."

"We have had very few claims recently but they have all delivered."

"No one seems to stand out as having a better service than anyone else."

"Mostly, online decisions and speed are paramount."

"All insurers seem to be looking harder for reasons not to pay at present. At best, this slows down the settlement."

"It is always good when (insurers) work with you to resolve problems rather than creating them."

"I do not think that anyone has an exceptional claims service. There are too many overseas call centres."

"They lack customer focus."

WHAT ONE THING CAN INSURERS DO TO SUPPORT BROKERS DURING THE RECESSION?

"Keep an open mind to the plight of the policyholder."

"Find solutions such as new products that reflect changing needs in the recession."

"Not cut back their services. They should invest in helping and assisting brokers that supply them their business."

"Try to ensure all branches of the same insurer are using the same rating and not competing against each other."

"Renegotiate commissions for those brokers that offer additional services to customers and take the administration away from the insurer."

"Be flexible on premiums and, where the overall strategy is to increase rates where the case warrants, allow a reduction to help us retain the business."

FAVOURITE INSURERS

1) Norwich Union

2) Fortis

3) Groupama/Zurich

5) NIG

BEST INSURER FOR COMMERCIAL LINES UNDERWRITING

1) Norwich Union

2) Axa/Allianz

4) Groupama

5) Fortis.