Carrying it off

At the bottom end of the commercial market, direct writers are looking to replicate their success in the personal lines market as certain lines of business become increasingly commoditised. As this happens, more business can be underwritten electronically, cutting costs and perhaps making life increasingly difficult for the brokers selling this type of business.

The knowledge that brokers have gained from watching the growth of direct writers in the market should not be underestimated. There is no excuse for firms to be caught out in the same way they were previously, and those failing to safeguard their businesses and change them where necessary will only have themselves to blame if their business suffers at the hands of direct writers in the commercial market.

Challenges rather than threats

Bob Screen, managing director of Vega Insurance, feels brokers should not be overly concerned, although he accepts there will be challenges to meet. He says: "I am not sure it is necessarily a threat and I think it is as much an opportunity as anything as long as brokers can get their act together and get the technology sorted out. Ultimately, whether it is being used by an insurer or an intermediary, it is reducing the costs of handling. If you look at the personal lines market, the leaders were direct writers but there are a significant number of telephone-based brokers that have been successful in this market. There is no reason why - in a market that is more intermediated - brokers should not be successful. What has happened in the personal lines market should also act as a wake-up call for brokers so they do not get left as far behind this time."

At the smaller end of the commercial market there is no doubt that the most basic of covers are becoming packaged products that are increasingly price-driven. As Kevin Young, managing director of Argyll Insurance Group, comments: "High-street brokers could still suffer from a real push by the direct writers but it will only be at the very small end of the market."

While technology is fast-moving and developments in recent years have been staggering, Young still believes that automated underwriting for business further up the commercial ladder is not practical and adds: "I still have a view that there is only so far that automated insurance quotes will go."

While there are changes taking place in the underwriting and delivery of insurance at the very bottom end of the market, whether it actually amounts to much of a threat is another question. As consolidation continues in the market and there are fewer high-street brokers catering for the needs of the smallest commercial clients, it could be argued that direct writers are simply filling the gap.

Grant Ellis, who heads up The Broker Network, comments: "There are a lot of smaller brokers being bought by larger players and the very attentive service they would have given the small client is going to be put under question. There are not going to be as many local brokers servicing the small-business community and the fact that some of the business will go direct is offset by having fewer competitors in the high street for those clients and so there is not going to be a major problem."

Direct entrants

Where Ellis feels there will perhaps be a problem is in the number of direct writers that are looking to enter the market, and he believes there will be a high rate of attrition as many discover that there is simply not the volume of business at this end of the market to sustain their operations. He explains: "For all those going into direct commercial, it will be interesting to find out where they are going to get their customers from. There are 3.5 million small businesses in the UK, two million of which are sole traders, and so there are a set number of clients. If 10% are susceptible to packaged commercial products, that is only 350,000 policies - not enough to support everyone that wants a slice of the market. It is not like direct motor where there are tens of millions of cars on the road."

For brokers themselves, the greatest threat would not appear to be from new players and methodologies but from not evolving as the market is doing around them.

Simon McGinn, director of trading at Allianz Cornhill, says: "I think we will see some changes in the market as insurers have the ability to distribute small commercial business through automated ratings, but I do not necessarily see it as a threat to the broking community. My view would be that it actually gives them some opportunity because it will enable them to take the cost out of their business in the same way it does for the insurers. What it will reduce is their ability to reduce the price because they will not be able to have that conversation with the underwriter and the insurer will be looking to carry the price from its rating engine right through to the client."

However, is this such a bad thing? In cases that can be underwritten and distributed in this way, the risks involved will tend to be standard and natural market competition will keep the pricing low. McGinn believes that, in not having to focus so much on the price aspect of this type of business, it will let brokers concentrate on developing the role they play and how that can be expanded for the clients' benefit.

He says: "It will enable brokers to compete with direct writers because they will be able to operate on a similar cost basis and they will be able to use existing distribution capabilities to service their existing clients much more effectively. It will also enable them to focus their efforts not just on driving prices down but on securing their position as a distributor through providing mass-marketed risk-management solutions for their customers.

"It is a little like Sainsbury's and Tesco, where both have traditionally been very good at driving their supplier prices down, but only one is viewed as being absolutely fantastic in terms of how it distributes its product and gains market share. That is because it focuses on the client proposition and I think brokers have got similar opportunities to be able to focus on that."

Broker role analysis

Taking the time to analyse the role they play and how they can evolve is going to be important for brokers in the commercial market as it continues to develop. There has already been a move away from simply looking to secure the cheapest insurance for their clients to being more closely involved in highlighting the risks that each client has and the best ways to manage them.

Young comments: "There is a risk to which any business is susceptible and what you do is analyse that and try to eliminate it. If you cannot eliminate it then you look to reduce it, and what is left is what is passed on to the insurer. I think direct writers will worry brokers for business that does not need risk analysis, risk management, risk identification and reduction. However, the vast majority of businesses require more than just an attractive bottom-line price and they require analysis to confirm the cover they have is correct and the expertise to ensure the whole process has been handled correctly."

However, as brokers move away from the traditional role of simply being sellers of insurance, then they will be looking increasingly to charge a fee for their services rather than rely on commission. For brokers spending time highlighting risks and discussing how best to manage them, a commission-only fee structure will simply not remunerate them appropriately for the time they are spending and the work they are doing.

How long a fee-based structure takes to manifest itself will depend on how good brokers are in educating their clients as to why it is necessary and if they are prepared to view themselves as consultants who should be paid for the expertise they bring to their clients. Peter Staddon, head of technical services at the British Insurance Brokers' Association, feels that brokers have always been very slow in coming forward in this regard and hopes things change in the future. He comments: "Brokers seem to have this problem of not being able to bill clients. I believe that most UK public limited companies want value for money and that is what they get from a broker in the expertise that they deliver, and brokers must be confident in saying: "I do an excellent job for you and, if you want that level of service, then you have to pay for it"."

Young agrees, but claims the move to a fee-based operation should not be as problematic as many anticipate. He adds: "We would look at income being far fairer than commission and I believe that, if we are to be treated as a profession and not an industry, we should be remunerated with a fee and not a commission, which is a better representation of the work we do for customers. As long as you rebate the commission you earn it should not be difficult to sell the idea of fees at all."

Service development and charging

As brokers look to develop the service they offer clients and the way they charge for it, it is also going to be increasingly important to understand what each client requires and to segment them. In the past, some brokers have had a single modus operandi, which has been used for their clients across the board. In taking this in the context of the changes that are happening at the lower end of the commercial market, brokers should see automated underwriting and packaged products as a means by which they can deal quickly and effectively with the needs of their most basic clients.

Screen comments: "I think what is likely to happen is that broking business will be smarter at segmenting its customers. Brokers historically have had this insurance-for-all mentality and not really understood the costs of transacting business for different customers and so have not understood how that affects their profitability."

In the last year, brokers have had much to cope with as regulation has come to the market. However, one thing it has forced the market to do is to assess itself more closely and the job that it does. In meeting challenges in the future such as a more commoditised market and increasing use of automated underwriting, brokers must not simply see them as a threat but work out how they can be used to their advantage. While some may view such changes in the market as threatening, those that are prepared to change themselves will all the sooner be able to see the opportunities that such change brings.