KPMG warns brokers 2009 will be 'tumultuous' for their businesses

Brokers have been warned that they face a "tumultuous" time in 2009 as the recession begins to bite and the regulator increases its scrutiny of firms.

The warning came from advisory firm KPMG, whose European head of general insurance performance advisory services, Mark Winlow, predicted a much tougher environment for brokers.

"We expect insurers will seek to reduce expense ratios in 2009 - broker commission and income will trend downwards and the pace of broker consolidation will slow," he said.

"I have not seen any evidence of insurers in trouble but there is a challenge for brokers that are wholly dependent on commission income. Where the proposition is based on value, these businesses will be fine but the broker marketplace will certainly be more tumultuous than the insurer market.

"Brokers are more leveraged than insurers and I can't see how they will be immune to the economy. This sector of the market will take the brunt of the pain," he warned.

He also added that he expected to see more intrusive regulation of the insurance market.

"Insurers and brokers should expect the regulator to accelerate its visits to those organisations it has not yet seen, generally visit on a more regular basis, and probe more deeply into every aspect of the business," he predicted.

"The reputation of the regulator has been tarnished recently so they will be keen to avoid having any more failures on their watch," he added.

But it was not all bad news. Mr Winlow also predicted that the market would begin to harden this year and claimed there were already signs of this taking place.

"Insurers don't have much choice but to increase rates," he said. "It is the only logical step. They have used up all their reserves and they have very little recourse to alternative capital. They have to raise prices."

He pointed to the latest AA benchmarking index, which showed upward movement in private motor as an indicator this was happening.

"People are increasingly aware of risk in these uncertain times and recognise the need for insurance," he added. "In addition, insurers are aware that risks have changed and they must price accordingly but hopefully there will be no dramatic hikes."