Super-provincials bite

Repeatedly, over the past two decades since the birth of Direct Line in 1984, the broker fraternity has defied assumptions that it is an endangered species. The opposite, however, is emerging to be true as this is an industry characterised by adaptability and resilience.

One of the more absurd suggestions has been that thousands of broking firms would disappear during the two years leading up to the introduction of regulation. Better to sell now, ran the theory, than to risk being regulated out of business in the future.

With the benefit of hindsight, however, this was never going to happen, if only for the simple reasons of market economics. As anyone involved in the housing market knows, a surfeit of for-sale signs inevitably depresses values. Evidence now suggests that relatively few brokers have been willing to underprice themselves simply to ensure a clean getaway. The number of broker firms has also remained high for positive reasons. These businesses tend to be run by individuals that cherish their status as independent entities. The majority would rather plot a course through present difficulties than abandon ship. Many are committed to their profession, to their clients and to their staff, and they want to survive as viable, independent businesses.

Brokers have been encouraged in recent months by a gradual yet powerful shift in perceptions about the forthcoming regulatory environment. The issue of whether it is really going to be so bad has arisen - due to many already being regulated on a voluntary basis under the General Insurance Standards Council. The Financial Services Authority has confirmed that this will put them well on the road to full authorisation. What is more, regulation is, in many ways, little more than a codification of sound professional practice, with a few administrative hoops to jump through for good measure.

In other words, the majority of brokers that have survived to date will probably be proved compliant anyway. All that will perhaps be required is a change of habits to satisfy the regulator's procedural requirements and meeting the annual fees.

Market developments

This said, it cannot be ignored that profound changes are occurring.

Life is tough for smaller firms, especially those with sizeable personal lines accounts. An amount of consolidation is taking place, with firms either merging or being subsumed into larger organisations. Another phenomenon is the continuing development of networks, where independent firms pool resources to meet the cost and rigour of compliance and benefit from collective marketing muscle.

In 2002 the top 250 brokers controlled one-third of the market, while in 2003 they controlled half. We are seeing the emergence of super-provincial brokers - firms with a premium income of more than £50m. Not only have these organisations fuelled spectacular growth through acquisition, they have been able to fill the vacuum left by the national firms, which have arguably lost focus and 'bite' in recent years. Brokers, therefore, are finding their own ways of meeting the realities of the current market and creating viable operating models. But certain questions need to be answered: what are insurance companies doing to adapt to the emerging situation? How are they adjusting to the new broker market? Are insurers really committed to the intermediary distribution channel or are they hedging their bets until the expected shakedown in 2005?

Brokers need to know who their friends and allies are and it is essential that both insurers and brokers recognise their obligations with regard to maintaining a strong and healthy relationship. Companies that have faith in the broker market should commit publicly to that mode of distribution.

Clearly, the super-provincials are going to secure a large slice of the intermediated market. They tend to dominate a geographic area and have breadth and depth of expertise. They can negotiate with the biggest underwriters and they have strong capital bases to allow for further expansion, either organically or through acquisition. But, these players will not have the entire market to themselves. There is another tier of brokers - with an income of around £8m - where firms will be able to compete effectively, combining flair, experience and service to develop a persuasive proposition.

If there are to be casualties, they will be among the smaller firms that do not have the critical mass to survive. That is not to say that there will not be room for specialists or local firms that trade on goodwill built up over decades, but the intensity of competition from larger firms will ensure that life remains challenging in this sector.

The task for insurance companies throughout 2004 is to recognise the diversity of the market and to devise a structured distribution strategy that mirrors the segmentation of the broker community. A one-size-fits-all solution is no longer either acceptable or realistic. Different types of broker have different needs and, if insurers want to secure business from this channel, they must be sufficiently flexible to supply what is required.

The right mix

The same applies to networks. No two are the same and it is down to insurers to recognise the distinctions in each case. There is also an argument for insurers making judgements about which networks will survive - those that have the right technology, marketing strategy and overall package to attract and retain membership. Brokers, after all, are independent and entrepreneurial. They are not great joiners. Not all networks will succeed and those that do will never be able to rest on their laurels.

Strong working relationships between insurers and brokers are essential because, regulation aside, difficult times lie ahead. There are tangible signs that the market is softening, which might make selling easier, but this ultimately depresses income and puts pressure on margins all round.

Then there is the ever-present threat of direct sales and competition from large retail brands.

If the intermediary market - brokers and pro-broker insurers - is to flourish, concerted action is needed. Arresting the slide into a soft market is the subject of great debate, but the temptation to sell on price must be resisted at every opportunity. If underwriters and brokers adopt a 'cheapest is best' philosophy, the FSA might find itself with little more than a couple of supermarkets to regulate in a few years time.

It is from strong brands such as Tesco and Sains-bury's that much of the contemporary and future competitive threat emanates - Tesco alone has a million motor and household customers - and brokers need to assess whether they should try to compete or redirect their resources to more profitable areas.

While there remains a strong presence of high-street personal lines brokers, it is right to be pessimistic in this area. But the picture is not one of unrelenting gloom. Despite the growth of supermarket retailers, convenience stores survive, as do specialists, boutiques and outlets for products not suited to the supermarket ethos.

There is still demand for choice and advice despite reports to the contrary.

Brokers that harness technology and build an offer based on competitive pricing, service and choice can run profitable accounts. The internet is a great leveller as local brokers can muster a presence as impressive as a national conglomerate, but with the added attraction of variety and choice. Also, fewer conglomerates are willing to maintain a physical presence within local communities. Indeed, there must be a market for high-street chains that have efficient centralised resources and solid brands. Insurers that abandon such a customer-friendly and immediate distribution mechanism may come to regret it because the consumer demand is evident.

Telebroking

By the same token, the outlook is promising for 'telebroking', which has effectively taken on the direct writers. A telebroker does everything a direct writer does - but with added choice and advice. Is there an irony more gratifying than the fact that direct writers now sit on telebroker panels?

Clearly, gaps in the market exist for brokers to exploit - and there are insurers willing to help brokers make the most of them.

More comfort can be obtained from surveying the commercial insurance market. The super-provincial brokers and medium-sized firms should be able to enjoy happy hunting among any risks that require advice and professional service. It is only with off-the-shelf package business that direct sales pose a serious threat. But, even here, brokers should be able to capitalise on their traditional strengths in much the same way as their personal lines counterparts.

Research among small to medium-sized enterprises suggests an interest in buying cover direct and over the internet but no research suggests that SMEs do not want to buy insurance from a broker. The brokers that can deliver the goods in the contemporary fashion demanded by the market will continue to do well. The insurers that recognise the pace and scale of change and adapt their offers accordingly will also continue to benefit.