White-knuckle ride

It has been another rollercoaster of a year for the UK insurance industry and brokers have had to face some new challenges while continuing to address ongoing issues. Some have found that 2007 has been very much a battle for distribution, while others have focused on surviving in a soft market. Merger and acquisition activity has taken some interesting twists and turns. All this has played out against the background of some of the biggest natural disasters in the UK for at least 50 years.

Distribution, and in particular those that control it, has continued to be of concern to many brokers. Barry Wicks, marketing manager at Stevenage-based RHG Corporate Insurance Brokers said: "Insurers access to capital has crystallised into an insurer push to take control of distribution this year."

The increasing appetite of insurers to buy or invest in brokers has fuelled these concerns for some, as Grant Ellis, chief executive at Broker Network, observed: "This has been the year of consolidators being acquired. It's just that it's insurers that have consolidated the consolidator rather than anyone else."

Independence

The insurers involved in such acquisition activity have largely been keen to emphasise that the brokers will continue to operate independently. Groupama UK's investment in the Lark Group is one of the more recent examples.

John Kitson, sales and marketing director at Norwich Union, which has stakes in Giles Insurance Brokers and Jelf, makes a clear distinction between acquisition and investment. His advice is: "Don't buy brokers; it will end in tears." He explained that it is important to "let the entrepreneurial spirit flourish," and added: "Support or invest, but don't own."

Despite some initial concerns, brokers are not viewing the emerging insurer-broker partnerships as a particular threat. As Eric Galbraith, chief executive at the British Insurance Brokers Association, stated: "With insurers acquiring brokers it is fair to say it has raised concerns in many parts of the industry, but it is also recognised as nothing new. It creates a greater focus on managing conflicts but these are not insurmountable. If it can operate without reducing service standards, entrepreneurialism, reducing choice or advice and a customer focus, then I believe it will survive. People and management change, so only time will tell what the final outcome will be."

Consolidation among brokers has continued at approximately the same pace as 2006. According to Imas, which specialises in selling companies in the financial services sector, the pace of acquisition has resulted in keener competition and kept prices high.

Predictions of a slow down in merger and acquisition activity are tempered by the expectation that the pace will pick up again relatively quickly. Imas said it is receiving serious enquiries from non-UK buyers, so it could be expected that acquisition fever will maintain its momentum with new names entering the frame. Ellis added: "2008 may see some slowdown, as consolidators that rely on debt finance will not find credit as easy to obtain. However, there are enough other acquirers not reliant on debt to keep the market buoyant. Of course, the broker population continues to age as well."

Certainly, merger and acquisition activity has rarely been out of the headlines this year, but has it been a dominant issue for brokers and insurers themselves? Many have lost much more sleep over the continuing soft market cycle. Wicks asserted: "On the commercial side the real focus has been the very soft market. It's just a matter of holding on to what we have and trying to recover the reduced income by winning more clients."

Cycle

The good news is that brokers are continuing to rise to the challenge of the market cycle. There is recognition that they cannot afford simply to wait for a hard market and that there must be a proactive response to what has been a long-lived soft market. Tim Coles, chief executive at Howden Insurance Brokers, believes that creating efficiency is the key antidote to negative margin pressures. He adds that creating stimulants for growth is also vital and that a soft market is not the time to make budget cuts that ultimately could hamper growth.

A report published by Insurecom earlier in the year pointed in particular to broker concerns over the need to improve communications channels to enable business growth. The report, entitled Adapt or Die, says easier access to trading portals such as imarket and bespoke broker-to-insurer links would enhance productivity by over a fifth (21%), according to UK brokers. The report also says that according to broker estimates, more efficient e-business channels to customers would enable a similar level of increase in productivity.

Views vary on whether the cycle is about to turn, and while some are stoically certain of a soft market again next year, others foresee rates hardening in certain sectors. Tim Holliday, UK General Insurance chief underwriting officer at Zurich, stated: "Rates should continue to harden in the personal lines area as insurers recoup profitability and adjust to new distribution models. Commercial motor rates will start to harden, although that may take more time to emerge. If we continue to see rate reductions in other areas then the industry will be facing large increases in coming years, which serves neither the customer nor the industry."

No demise

Smaller brokers have continued to pull out all the stops to prove that rumours of their demise have been greatly exaggerated. There is no doubt that this year, like last, has presented some significant obstacles, but it appears they have not been insurmountable. David Smith, broker managing director at Zurich UK General Insurance, observed that they remain a key part of the distribution chain: "Community broking will always have a place in the personal lines and SME sectors, as many customers want the advice and personal contact they provide."

Galbraith pointed out that good businesses have a better chance of continuing by adjusting to the changing environment: "I believe that we will continue to see consolidation and I certainly hope that the entrepreneurial spirit, knowledge and skill sets of the smaller, local brokers will continue to be available. The growth of networks has assisted smaller brokers in retaining much of their independence."

According to Cathie Bruce, distribution and customer service director at Groupama, revenues from the insurer's own small broker segment have increased. Bruce added: "We are constantly striving to improve our e-trading offerings to assist them to place business with us efficiently and at least cost."

Smaller brokers will certainly benefit from increasingly efficient methods of transacting business, and some of the more tried and tested tools such as joining networks or driving specialist lines of business are also continuing to bring results. "Those brokers that have developed schemes or have experience in niche areas can avoid the worst of market competition and continue to thrive. Not only do schemes offer good development opportunities, business also tends to be loyal and less price sensitive," explained Bruce.

Mike Lawton, regional broker sales director at Royal & SunAlliance, points in particular to the 'one town, one office' brokerages. He commented: "The broker market is as vibrant as ever and while none can argue that consolidation hasn't changed the landscape, the customer requirement for independent market advice will mean the local broker will continue for years to come."

Start-up

The fact also remains that, while some smaller brokers are being snapped up by acquisitive firms, there is also a vibrant start-up market. As Kitson asserted: "Demise? What demise? They will thrive forever. Knock one down and another one will spring up." (See p.16.)

Concerning wider industry issues, when asked whether any particular lessons have been learned this year many industry professionals point to the response to the floods.

Alan Gairnes, head of property underwriting at Royal & SunAlliance, emphasised that the industry should be proud of its response to the floods and observed that it was able to showcase its service in getting customers back to normal after a claim. On the other hand, Gairnes added that the industry managed to score something of a reputational own goal by talking about the need to increase premiums while homes were still standing in water.

Francois-Xavier Boisseau, Groupama's new chief executive, asserted: "The industry has illustrated that it does have the ability and resources to cope with and manage significant losses with a broad geographical spread. The insurance industry rose admirably to the challenge of dealing with some of the worst weather for a century."

If this year can be compared to a ride on a rollercoaster, then some brokers could be forgiven for wanting to get off. The majority, though, have dealt admirably with the lows as well as the highs. They could, however, be in for more of the same next year.

2007: A WET YEAR

Garry Lloyd, director of customer services at AMG, provides his opinions of the industry's response to the floods.

Bearing in mind that this year's floods are considered widely to represent the biggest domestic catastrophe in living memory, the response by the insurance industry was remarkable.

Thousands of properties suffered severe flood damage and the performance of insurance companies' frontline teams, loss adjusters, restoration contractors and all other parts of the supply chain was fantastic. Many staff worked very long hours to ensure that initial visits were carried out quickly, alternative accommodation was organised, emergency payments were made and initial strip out and drying was under way.

Many of the lessons learned in Carlisle were applied this time around. There was improved coordination of restoration contractors and builders and better communication between insurers and various parts of their supply chain. There was also improved management of customer expectations.

There are, of course, things that could have been done better. Technology could be further enhanced so that reports can be prepared and dispatched more quickly. There is still more work to be done to improve the collaboration between the various parties involved in managing the claim. The floods also highlighted that there are skills shortages across the industry.

We are not out of the woods yet. As the building repair phase gets under way we have to deal with contractor capacity issues, shortage of building materials and frustration for customers while building repairs are undertaken. (For more on the floods, go to page 34.)