Sentiments in the spotlight

Richard Adams: For this Sentiment Survey round table, sponsored by Norwich Union, I have selected information that I think highlights some of the main concerns and issues facing brokers now and over the last 10 months since the survey began.

To kick off, the latest results about brokers' expectations in the market cycle show that 43% of brokers thought rates would soften in personal lines in the next quarter (compared with 64% in the previous quarter) and, in commercial lines, 75% expect a softening of rates (compared with 77% in the previous quarter). Almost all respondents expressed concern about the softening market, while more than half were "quite concerned" about capacity and more than one-quarter finding it "very concerning".

Meanwhile, 55% found the financial reserves of insurers "quite important/concerning" while 35% said this was "highly important/concerning". At what point do you consider we are in the cycle and is insurers' underwriting discipline what it should be?

Peter Staddon: The cycle starts the moment underwriters start making profit. When they start making profit, everybody else thinks they can join in, more capacity comes in and then economics kicks in - you have more people going for the same business. I think some of them are beginning to look at proper disciplines for underwriting to move away from the idea that you have to just get market share and then hope you get returns from the reserves to give you profit. There were situations two or three years ago when premiums jumped 60% to 80% and then came down again by 20% to 30%. It makes brokers look like idiots.

Kevin Young: We have always needed a stable market, but have never had one.

Peter Staddon: I agree. I want to see more capacity - that will stabilise the market. The trouble is, does it take it down below its equilibrium - a proper return and a reasonable underwriting profit? That is the problem.

Oliver Laughton-Scott: This is always reciprocal. I think the key point is that, with technology coming in, the feedback will become shorter. So, if you begin to write at the wrong rates you discover much earlier now than 10 years ago. So technology makes the cycle shorter and less severe, but you will always have a cycle.

Richard Adams: A lot of insurers are talking about greater discipline, but is that actually happening with better management information systems?

Kevin Young: They may have better management information, but they have not looked to stabilise everything in my experience. If you take the 30 June renewals, it is still very much 'silly season' and even sillier than it was on the March quarter - I cannot see that changing for some time yet.

Richard Adams: Looking at the results since October, there seems to be a growing expectation that rates will soften to a lesser extent. Do you think that the softening is slowing now?

Graham Coates: I would echo what Kevin was saying, from our perspective certainly, June was a lot more painful - if that is the right word - than March. Every major insurer on a trading level is driven by the bottom line.

Kevin Young: They are chasing after each other at the moment, and it is almost impossible to win a new piece of business unless it is price-driven because, whatever you come in with, somebody else will match it or the holding market will come in and give them whatever they need. You hope there will be business that is not price-driven in time and that you can have service delivery as well. But, an awful lot of it is price-driven and on your own renewals you are just waiting for somebody to come and say you are going to have to cobble off another 10% or 15% to 20%.

Oliver Laughton-Scott: The key problem is that the insurers are managed by premium income. So, if the premium income goes down, and someone misses their budget, they chase harder. That is exactly why we have a cycle because, as the rates go down, people are chasing harder to meet their budget. Unless you can find another way of managing a large insurance company that is not premium-based, you will always have a cycle, and it is going to be quite sharp.

Peter Staddon: But is the problem that the new business gets a lower rating than existing business? So, they keep standard rates for existing business and then undercut to gain new business to improve market share. Is it a soft market or is it the fact that, in previous years, they have overrated it?

Oliver Laughton-Scott: If you look at the mortgage market, those who have been with the same building societies for the last 10 to 15 years get a worse deal than those that joined in the last year, so it is the function of a modern economy. Also, those that have an existing product have a certain amount of inertia. If the existing customers have much greater mobility, then that factor will decrease but, if that movement is sticky, then we will see new customers getting lower rates and people chasing that business.

Richard Adams: With the commoditisation of personal lines, is the same mentality filtering into commercial lines?

Graham Coates: The bottom end is being commoditised, the small-ticket stuff. The big savings are to be made at the top end. The big chunk is the six-figure premiums that you cannot call a commodity market, though it kind of behaves like that from a pricing point of view.

Richard Adams: I mentioned the financial reserves of insurers - does the Financial Services Authority have the power and remit to predict problems and prevent the collapse in order to protect customers?

Peter Staddon: I do not think they will become directly involved. I think solvency is a big issue and will become an even greater issue down the line.

Kevin Young: It all depends on whether that solvency is apparent - how do you establish that? For example, with Independent Insurance, the auditors and actuaries - by saying there was nothing wrong - meant that we wouldn't always get that information. I am not an expert on solvency on insurers and I must take advice from the auditors.

Oliver Laughton-Scott: Collapses are never predicted by the ratings agencies. Countries go bust and then the ratings agencies declare them bust - they are always catching up - otherwise it would become self-fulfilling. A concern is that the insurance market is very small and concentrated in terms of suppliers, and there is a danger that the FSA puts pressure on people to use the big players - a danger to the market.

Peter Staddon: If we can prove they are independent, that is good, but, if they do not have any formal rating, then we are on the back foot straightaway.

Graham Coates: Also, brokers have to offer best advice. Contract certainty is a big issue at the moment. Service is not what it should be, for commercial contract certainty is a bit of a joke at the moment. We have to look at how they deal with claims, on a day-to-day basis, ratings are only one element.

Richard Adams: It sounds like ratings agencies are inher-ently flawed?

Oliver Laughton-Scott: I think they are like democracies - they are the worst of a bad bunch. I think it is very difficult for them to predict collapse, and they are limited in what they can do.

Kevin Young: There is no problem with capacity - it will only be an issue when the soft market goes hard again.

Richard Adams: Is it the regulator's influence, or is it down to market forces?

Andrew Holman: It is difficult for the regulator to become too involved in things such as capacity. Then, they are not only interfering in the market but also with the individual participants in the market. It is interesting to see what effect the franchise board at Lloyd's is going to have on reducing syndicate capacity in line with the softening market. It is early days yet.

Oliver Laughton-Scott: Our view is that regulation will have less impact than people expect. People look at one impact on their business and then they look at the other impacts. Insurance premium tax was introduced and caused no impact whatsoever, because everybody bore the cost - it was a level playing field. As long as regulation affects everybody equally it will have very little impact. Everybody's concern is that the cost compared to the benefit is not justified.

Richard Adams: Moving on to the subject of service, 18% said it was improving, 38% said it was the same and 35% said it was worsening. Many blamed lack of skills and call centres. What can be done? And has the FSA led to improved or reduced service levels? I also wanted to ask whether insurers tend to service brokers that give them quality in large volumes and, therefore, poor service is peculiar to small brokers - or is insurer service an issue across the board?

Graham Coates: I would not say there is a direct correlation between the size of account and level of service. When I moved to the broking side of the insurance business, I was horrified at the level of service brokers were prepared to put up with and do not think it has improved over the last two to three years. The fact that insurers are so focused internally on being FSA compliant has not helped.

Peter Staddon: I think that call centres are an easy target.

Paul Matthews: I think service is improving, working with a small panel of partner insurers, I have seen tremendous improvement in the last six months. Over the last few years, the consolidations of the insurance companies are more or less complete. To take Commercial Union, GA and Norwich Union as an example - they all had so many different systems, now they have got their act together. I think, if you have a big account and you need something to be sorted out, it will be.

Paul Smith: It is about buying power. I travel up and down the country and see all kinds of brokers. A vast majority of those brokers are not getting good cases. Most of them have 50 agencies, some with a couple of cases in there.

Paul Matthews: You have to not choose them for those couple of cases. We have a balanced book with a small number of carriers that allows us smooth transactions, risk transfer and then they write business that they would not normally write, which would not work for small brokers.

Paul Smith: We (COBRA) have a select panel (of insurers) that we encourage our brokers to use, and it is starting to work.

Oliver Laughton-Scott: If you penalise bad service by moving your business, then they will react, especially if you make it clear to them where they are going wrong. They are economic animals.

Andrew Holman: I think the issue of contract certainty has been the biggest issue in the industry for years, and will help create a level playing field. Whether you are large or small, you will have to receive your policy document on time or it will be the insurance company in trouble - not you. At the moment it is the broker that spends 25 minutes on every call; unless you have a big enough account, then you just ring up the boss and tell them to sort it.

Richard Adams: Offshoring by insurers is also a concern. Fifty-six per cent said it was "quite concerning" or "very concerning" and many of the comments throughout the survey on service referred to the poor quality of call-centre operatives. If the trend to offshore continues, what are the long-term implications for broker/insurance relations? Is this more of a trend in personal lines, or are offshore call centres taking commercial enquiries?

Kevin Young: We do not deal with offshore call centres - it has not become an issue.

Oliver Laughton-Scott: You have to differentiate between selling and administration when talking about call centres. I think the effectiveness of outgoing call centres is decreasing. I think, on the administration side, it is an issue of costs. It is a small part of the market, but small commercial brokers who have a lot of small risks. Though I do not think it will really change the issue.

Peter Staddon: When I was broking I used to have very good relationships with the inspectors and I can see that becoming difficult if they are 3000 miles away.

Oliver Laughton-Scott: If your client requires a visit, somebody will have to know the premises. Call centres, however, can give a much better service in some instances.

Peter Staddon: Many brokers lost motor accounts to Direct Line. Then, the following year, brokers won the business back. They realised they could do more for their customers. Direct Line was great for the industry and kicked us out of the 17th century.

Oliver Laughton-Scott: It did more than that, the business came back to specialists that have the flexibility and quality to deal with the business - the Carole Nashes and Footman Jameses of this world.

Graham Coates: That is where most independent brokers are having their own niches, schemes and facilities.

Paul Matthews: Insurance companies have recognised this and are directing customers through the specialist brokers.

Oliver Laughton-Scott: What insurers find very difficult is building up specialist know-ledge. Because they are vast org-anisations, people progress as managers and they do not want to remain specialised in one area for 20 years. They find it almost impossible to build up that knowledge about cars, tree surgeons, hotels and they accept that, and that is why small specialist brokers are being supported.

Richard Adams: Insurers offering SME commercial direct is quite concerning (45%) or very concerning (35%) to those brokers surveyed. What do you think of the notion that SME direct offerings will tend to attract poor quality business?

Graham Coates: It shouldn't, because insurers will set strict underwriting premises.

Oliver Laughton-Scott: I think many smaller brokers will have better loss ratios and will know their clients and will, therefore, be less likely to have an inflated claim.

Paul Smith: We are concerned at COBRA about SMEs. The small continuity-type broker is concerned about these direct arms targeting their bread-and-butter business - £3000 to £7500 accounts - and which can hit the smaller brokers.

Andrew Holman: It is segmenting a segment of the market. A small sector of the SME business will be purely price-driven and will not want any service. Brokers should concentrate on delivering a service for which they can charge a premium.

Paul Smith: I think that some of the policyholders are becoming shrewd and clever when chasing a quotation, and not releasing information that has a rating impact to the underwriter. They are making that risk fit the mould so they can get a quote. Some clients are just after a cover period and an employers' liability certificate - so they are home free.

Paul Matthews: I would say that a lot of smaller brokers are now merging or acquiring locally in order to create that critical mass and therefore move up the supply chain and get better terms from insurers.

Richard Adams: The survey results on the introduction of regulation were damning. Ninety-five per cent of brokers said it had increased costs and 79% said profits had been hit. A further 99% said it had increased workload and 59% said it had inhibited employees' performance. Seventy-seven per cent said it had not improved customer satisfaction. Does this represent the inevitable pain of implementation or does it signal something more serious?

Kevin Young: It is obvious it will increase costs and affect profit. Where I think there will be a problem is on the accounting side - the six-month reporting, depending on what size you are. It would have been so much better if the FSA had determined if risk transfer was going to apply or not, because then we would not need to be operating a two-tier system.

There will always be a time when you find you need to operate a client-money bank system as well as risk transfer. Fortunately, we have an accounts director, but the amount of time she spends on that is phenomenal compared to before. And that is just to make sure we are taking the money at the right time. We all had risk transfer before the FSA - why did it have to become this minefield? Even the system software houses have not provided anything, now we are frightened of taking our money too early and cash flow is so important.

Oliver Laughton-Scott: On the flip side, it has been a real asset for many brokers at Lloyd's to force through change such as internal disciplines. Because there were so many empires it was difficult to change the culture.

Peter Staddon: Kevin has hit the nail on the head. Guidance will come out fairly soon as to how exactly it should be managed. A lot of what the FSA has introduced is good business practice, which is now evidenced. I would like to see the cost of the FSA in the UK compared with the non-UK market. I am convinced we are paying for the gold plating. And this causes me a huge amount of concern.

Oliver Laughton-Scott: I think we are paying for an efficient civil service. I do not suppose risk transfer is bolted down in EU regulations. If you take on an agent, there should be complete risk transfer. Small decisions have a huge impact.

Kevin Young: I think it is now very difficult for brokers to use an external accountant. The accountant will come in to perform the audit and will not understand what is going on. But how many can afford an internal accountant?

Richard Adams: Another concern has been about government red tape. Eighty-eight per cent has considered it to be very concerning. Is this part of a tendency in the UK to gold plate best practice - health and safety being another example apart from the FSA - do you think there is too much legislation and red tape? Or, do you think the rules by which UK companies are required to abide are necessary and indeed one of the reasons why foreign businesses come here to trade?

Andrew Holman: I think it is difficult for new broker start-ups and that is a direct dampener on entrepreneurial growth. Idiotic rules like client-money transfer are playing into the hands of other countries.

We should be looking at China and India, which are going to be the powerhouses over the next 20 to 50 years, and have a very well-educated workforce. If we are not careful, it is not just going to be call-centre jobs going over there, it will be everything.

Kevin Young: If you look at Europe, some EU regulation is taken seriously in the UK but completely flouted elsewhere. Look at wheelchair access - if you go to Spain, every bar on the beach front has toilets down three flights of stairs, whereas we, in the UK have taken it very seriously. We take it seriously because we are British.

Oliver Laughton-Scott: We need to have a culture in which we can say we made mistakes. They could employ a lot of people from the industry to become the gamekeepers.

Graham Coates: Is that not wishful thinking? If you have a strong personality from the industry who has built up their name and reputation and then joins the regulator, they would be judged differently. They would be working for different masters and, if they do bring in the realism you have suggested, then they would just be seen as being in the pay of the insurers.

Oliver Laughton-Scott: I think it is wishful thinking but, if you wish for something hard enough, then it happens. The ability to be flexible would guarantee the success of the regulator in the long run.

Richard Adams: I want to ask each of you about the outlook for brokers? In the survey, a handful of brokers said they felt very pessimistic, 18% said they felt quite pessimistic, 42% said they felt fairly optimistic, while nearly 32% described their feelings as "neutral".

Oliver Laughton-Scott: I am optimistic. There is an opportunity for brokers to expand their risk-management services driven by technology. The insurance broking industry has underestimated how valuable it is to clients.

Kevin Young: I am very optimistic, especially about the commercial sector, though there may be pain lower down the chain.

Paul Matthews: I am very optimistic. We operate in niche markets, and some of these have hardened in recent months. We are above the insurer market average for the Motor Insurance Database. Enquiries are up, we are giving insurance companies 82% renewals and we have hired 26 new people.

Peter Staddon: Our standing compared to other UK companies concerns me. We are always underrated. I can see further consolidation - when we get consolidation at the top end we will get entrepreneurs. I believe the market will be even stronger in five years' time.

Graham Coates: From a business point of view, yes, I am positive. A downside is that some insurers, having repaired their balance sheets, are demolishing them again. Also, I would like to see the industry moving towards the same status as solicitors and accountants. We need to do more to educate the public.

Richard Adams: Do you think that will be one of the longer-term benefits of regulation?

Andrew Holman: The Lloyd's market has undergone a serious amount of change over the last few years. It seems to be settling down. In particular, there will be opportunities for some of the medium-sized brokers to pick off the carcasses of some of the larger ones.

Paul Smith: I am in a fortunate position in that I can pick and choose who joins our network. The vast majority of our members are hungry, enthusiastic and professional organisations. If we are giving added value to customers, we should not be afraid to charge for professional services.

AT THE ROUND TABLE

Guests

Graham Coates, head of operations, Stuart Alexander

Andrew Holman, chief executive, Holmans Insurance Brokers

Oliver Laughton-Scott, partner and founder, IMAS

Paul Matthews, managing director, Footman James

Paul Smith, director, COBRA

Peter Staddon, head of technical services, British Insurance Brokers' Association

Kevin Young, chairman and founder, Argyll

Hosts

Professional Broking

Richard Adams, editor

Andrew Tjaardstra, reporter

Insurers offering overall best service

1st Norwich Union

2nd Zurich

3rd NIG

4th Allianz Cornhill

=5th Fortis

=5th Royal & SunAlliance

MESSAGE FROM THE SENTIMENT SURVEY SPONSOR

The popularity and value of the Professional Broking Sentiment Surveys has been increasing and we know from our own research that they are genuinely appreciated by the broking profession.

We have been very keen to ensure that there is a tool available that regularly tests the temperature of the market and allows brokers to have another voice to express their concerns about the issues that really matter.

The Sentiment Surveys certainly achieve this very effectively and I was particularly impressed that we have recently been able to quantify the level of concern among intermediaries about the impact on their businesses and customers of the new regulatory regime. This shows how the surveys can help to drive the agenda and offer a regular platform for the views of the intermediary sector.

The Professional Broking Sentiment Surveys are now well established and I would urge all brokers to make the effort to participate - because they really can make a difference.

Amanda Blanc, Distribution and customer service director, Groupama Insurances.