Scrutinizing sentiments

David Worsfold: The feeling in the market is that it is softening. Are rates softening?

David Grant: They are bumping along at the moment. We must not forget that claims inflation is still out there and will not go away.

Peter Staddon: Is it the fact that there are more claims in the market or is it because the address on liability market was too much for it to then come back to an equilibrium?

Francois-Xavier Boisseau: It depends on the market. On commercial, the dynamic created by the liability market, which was pushing the required severe price increase, meant that property (insurance) prices have gone beyond the point required to achieve the technical result. Commercial and liability are still reasonably solid but it depends on the size of the risk. On personal lines, we are seeing some reductions. Most insurers are seeing underwriting profitability on motor.

Stuart Reid: There is awareness from clients as to what is happening with rates. They are aware that there are deals to be done. I agree that premiums of £5000 and below seem to be holding their own. It is larger risks and, in particular, in the London Market that we are seeing most competition. There is some softening, but some more dramatically than others.

Simon Clarke: It does seem to be that, if you are the right type of client, you can get a significant reduction in premium.

Stuart Reid: There is capacity, there is competition and there is a repeat of cycles we have seen before.

John Warburton: There are some changes in terms of governance of insurance companies. Certainly, from the larger players, we are seeing a more disciplined approach. The property insurance market is notoriously difficult to price adequately. We compare it with the motor fleet market where there are sophisticated models in place. Hopefully, what we will see is a corrective action by companies on top of their underwriting. If you look at liability, we are still seeing 10% to 12% claims inflation on employers' liability.

Francois-Xavier Boisseau: I am less convinced that the cycle will be more gentle than in the past on medium to large commercial risks.

Stuart Reid: Claims inflation is very important. We have liability claims inflation and one hopes that might drive up the market.

David Worsfold: Regarding clients focusing more on their rates and cycles, presumably that is because insurance is now showing up more on peoples' radar screens?

Stuart Reid: Partly that, but partly because insurance has also been in the press a lot with the Financial Services Authority. Primarily, it is because people saw premiums rocket two years ago and now they are plummeting.

Bob Screen: Larger businesses tend to be more aware of the market cycles.

That has been a driver from the client's point of view.

Peter Staddon: I think the top end was over-rated. Don't do it over one year, do it over three. I think we are looking foolish.

Francois-Xavier Boisseau: I have to put the increases into context of the huge losses. We will never recover from the losses we have incurred.

On top of 2003/04, from a weather perspective, everything has gone down, so inflation has slowed down. Yes, we might have gone overboard in some sections, but there has already been a strong correction this year. It is very difficult to manage a cycle.

David Grant: As we move on to 2005/06, it will be interesting to see the reaction of shareholders. How will they react to a deterioration in results?

Francois-Xavier Boisseau: I believe listed companies are under more pressure than others. If shareholders want profitability and growth in market share, it is a source of pressure on management.

Bob Screen: You also see the banks making stacks of profit, and the public group us all together.

David Worsfold: And the important thing with perception is that the big insurers are so big that, if they make a modest profit in percentage terms, it's only millions of pounds. It washes over the public.

Bob Screen: Then, if you are looking at underwriting profit versus the financial result, it is a different story.

David Worsfold: Regulation was another of the big themes of the sentiment survey. One of the issues is that of transparency - who is paying for what and how that is made clear.

Francois-Xavier Boisseau: What is frustrating is trying to apply a single solution. Why should we apply the same recipe whether it is a provincial broker or London Market broker? What does transparency of costs mean?

I think the FSA's current standard is very sound, leaving it to the insurer and intermediary to make sure there is nothing that will lead to a criticism of the service.

Stuart Reid: It is a challenge for the FSA to realise that there are three parts of the UK insurance market - international, provincial and the London Market. They are all completely different. We have an issue with Lloyd's and the London Market over contract certainty and policy issue and they seem to be screaming about transparency of commission.

The connection between the two is what exactly? I don't see it. The provincial market is fine and excellent but the national and international markets have their own problems as well. The challenge for the FSA is to realise that those three markets have different demands and needs and are looked at slightly differently.

David Worsfold: Is the FSA up to the challenge of regulating general insurance brokers?

Stuart Reid: They are doing a good job so far.

David Grant: Regarding treating customers fairly, I never come across customers asking about how much commission is. They just want to know how much their premium will be.

Stuart Reid: To all intents and purposes, I do not think there is a problem in the UK general insurance broker market. I don't know how many people have asked the public what they want.

David Worsfold: But, if you take what the general public want, you probably would not have statutory regulation of general insurance sales anyway.

Stuart Reid: We have had complaints from customers about all the paperwork we send them.

Chris Blackham: We talked to partners in large firms of solicitors and asked who had read the terms of business of policies given to them. None had bothered to read them. We are supposed to be taking costs out, so why not put it all online?

Stuart Reid: I heard that the Irish regulation compliance manual is just 16 pages long.

Peter Staddon: I was looking at a report from Mazars and, apparently, 85% thought there was too much regulation required by the FSA. Fifty-four per cent felt the cost was greater than originally expected.

David Worsfold: Have you been putting this to the FSA, saying customers do not want it?

Peter Staddon: We are focusing on this, yes.

Stuart Reid: We have brokers in a soft market with increased regulation.

I believe consolidation will come and that will have the opposite effect the FSA wanted. It is frustrating.

David Worsfold: The FSA is feeling satisfied with itself at the moment.

Numbers are much higher than anticipated. My perception is that there are people thinking that they will get their business regulated, then sell. Is that what is happening?

Stuart Reid: I am surprised that big profitable brokers have sold. It will be interesting to see how they deal with returns in June this year.

I feel pressure will come onto the smaller brokers from many different angles - insurers are reducing credit terms, reducing commission, reducing service levels to the smaller brokers. With the cost of regulation, competition from other brokers and being in a soft market, surely it is inevitable that consolidation will come.

David Grant: But the number has gone down year on year. In the PB sentiment survey, nearly one-quarter said they would make acquisitions in the next quarter. More and more are doing commercial rather than just personal lines. I do not expect a huge shift in numbers.

Francois-Xavier Boisseau: It is not the small ones, it is the medium-sized ones that are selling and that is the opposite of what was expected.

Stuart Reid: I think also we must not forget that the small businesses have very profitable accounts.

Peter Staddon: Is regulation not a barrier to new start-ups?

Chris Blackham: We have several initiatives where brokers can grow out of our business. I think that last year,things looked quite grim, but now there are opportunities. The hard part is that the guys do not have enough business to do it.

Peter Staddon: But the passion is there.

Chris Blackham: Yes, but young brokers are risk-averse. We were more entrepreneurial when we set out. I was losing money day in, day out when I started and on the point of losing my house, money, everything. Today, brokers want security.

David Worsfold: One of the main points that came out of the latest sentiment survey is that there is still a huge amount of concern about the quality of service from insurers and the inefficiencies of the relationship.

Stuart Reid: Having a binding agreement is a pre-requisite for us today to allow us to give good service. There isn't a difference on price but there is a difference in service. Technology might help in certain areas, but we have been willing to invest in technology and we are ready, but we are not moving further forward. Yes, we are keen, but we are the middlemen.

David Worsfold: Insurers say they are desperate too.

Francois-Xavier Boisseau: You have as many systems on the insurance side as you have insurers. There is such a variety of situations. Imarket is slow to deliver but is on the right track. It is truly trying to connect the main back-office systems of the brokers. There is a glimmer of hope.

Stuart Reid: We have two systems. We have a situation where I can send and receive e-mails on my mobile phone, but we have got people who are paid tens of thousands of pounds to go to Lloyd's with a briefcase. One hopes that imarket will provide savings, but we should double the time we expect it to take.

Francois-Xavier Boisseau: The distributor market is very different, very fragmented. It is clear that it is not a helpful context. Now that the broker market has started to consolidate, if we look at the market share of the top-50 or 100 intermediaries, there are fewer systems in the back offices of those brokers.

David Worsfold: What else should insurers be doing to improve their service?

Francois-Xavier Boisseau: Skills. If they could make decisions based not only on cost savings, but on skills too, we would have a different picture. If we make a mistake on forms or claims, it is because of the skills shortage. It is one of the biggest issues the industry has faced.

All the mergers have de-skilled the market.

David Worsfold: What should insurers be doing to address that?

Chris Blackham: It is a long-term thing. It is about putting skills and quality ahead of cost savings.

John Warburton: Our chief executive has said we need well-qualified people.

We train them for two to three years in underwriting but it comes at a price. We often get into bidding wars for staff. If you look at some of the insurers who are not present today, cost-cutting will be on their agenda. It is easier to do that but, in terms of long-term sustainability, it is very worrying.

Francois-Xavier Boisseau: People who are investing in skills will be the winners. There is a natural dynamic here.

Peter Staddon: Could that create the failure of a major insurer? Look at Independent.

David Worsfold: But Independent Insurance invested in skills and look what happened.

John Warburton: I am not sure that is the problem. I think a market exit by insurers domiciled outside the UK is a potential problem.

Bob Screen: We talked about some of the work traditionally done by insurers being done in the broking market. How the business is going to be written is important.

Stuart Reid: I agree with you. You need graduate training. But when you are talking about skills required for policy issue, there is a lot we can take from insurers and we are happy to do that in most cases.

AT THE ROUND TABLE

Guests

Chris Blackham - Chief executive, Layton Blackham

Francois-Xavier Boisseau - Managing director, Groupama

Simon Clarke - Chairman, Hall & Clarke

David Grant - Marketing and compliance director, NIG

Stuart Reid - Chief executive, Stuart Alexander

Bob Screen - Managing director, Vega

Peter Staddon - Head of technical services, British Insurance Brokers' Association

John Warburton - Sales and distribution manager, Allianz Cornhill

Hosts

David Worsfold editorial director, Incisive Media

Alex Broad - editor in chief, Professional Broking

Photography: Steve Daszko Photography.