A new wave

This year has already firmly established itself as a year to remember for insurance brokers, with a new wave of consolidation hitting the industry and more set to come rolling over the horizon in the months ahead.

In recent years, consolidation in the broker market has been driven by the influx of third-party capital from private investment houses, while regulatory and commercial pressures have also played their part.

However, in the past few months there has been a concerted drive by Axa Insurance to ramp up its distribution platform and, in buying a number of sizeable, independent brokers, the insurer has changed the landscape in which the industry operates.

Whether the landscape is changed irrevocably in the months to come will depend on whether Axa's round of acquisitions further develops into a trend. Certainly, competitor insurers may feel obliged to follow suit if they believe commercial advantage is to be had and most commentators accept there will be a number of other deals announced before the year is out. Indeed, Groupama has already bought a majority stake in Bollington.

Before looking at the impact of such acquisitions on the market, it is perhaps best to get an understanding of the rationale behind them and get an insight into Axa's thinking.

A significant development

On acquiring Smart and Cook in April, Peter Hubbard, chief executive of Axa Insurance, said: "This purchase is a significant development for Axa and the UK broker market, as it is the first major consolidator to be acquired in the sector. We have a strategic goal of strengthening our distribution network in terms of business profile, geographical reach and being able to diversify our sources of revenue."

The insurer may be acquiring independent brokerages but there is no doubt the firm feels the acquisition will drive more business onto its books. Indeed, many have expressed concern that as some of the UK's biggest independent brokerages are bought, they will find it difficult to maintain their nonpartisan position, which has been the very bedrock of their success.

However, Axa is not only looking at muscling in on distributors but also at unlocking the understanding it has of its client base and so improving its own proposition through a more detailed knowledge of what it is clients are actually looking for.

Back in January, on the acquisition of Stuart Alexander and Layton Blackham, Hubbard commented: "It is a strategic priority for Axa in the UK to strengthen its distribution platform and gain greater access to its customers." The closer an insurer can get to its clients, the better it can understand them and the better it can deliver their needs. Certainly this would seem to be the lines along which Axa is thinking.

However, it is not the way that every insurer is thinking and Norwich Union claims not to be eyeing up any broker firms for a potential purchase. Yes, Hill House Hammond was bought a number of years ago but the rationale behind the move was slightly different and the firm was disbanded with the book of business being absorbed into NU's direct arm.

John Kitson, intermediary director at NU, believes buying an independent broker may be the very thing that stops it being as successful as it has been in the past. He explains: "There is a large risk that everything that made them successful in terms of energy, drive, creativity and risk taking may well disappear either through what is required by being part of a large organisation or because that drive diminishes as part of their success and the money they have made."

However, not only is there a risk that the management teams in place at these independent brokers may see their attitudes change but there is also a belief that other employees may not wish to work for an insurer-owned broker.

This is something that David Lee, a partner at London-based broker Lucas Fettes and Partners believes. He comments: "It will take at least 12 months for these three businesses to be merged together and bedded in. In that time, I would think quite a number of staff will leave as they do not want to work for an insurance company."

This in turn will weaken the businesses for the future, and Lee believes some staffing changes are inevitable whether they are brought about by resignations or redundancies. He also says it will be difficult to maintain the level of service that existed in these brokers before they were bought, given the pressures that corporate ownership brings with it.

As he says: "As a consolidator, the first thing you do is ramp up the income you can make by being a bigger fish with certain carriers but that only covers part of what your borrowings are. So where do you get the rest from? You might cut staff, you might trim this or that but as soon as you start doing that it is the service proposition that gets cut."

A beneficial move?

Clearly this is not a point of view shared by the management teams at Smart and Cook, Stuart Alexander or Layton Blackham. Paul Meehan, group chief executive of Smart and Cook, says: "I am confident that this move will be beneficial for our people, our clients and our other stakeholders. It is important that we continue to trade independently and Axa will run this business at arm's length."

Only time will tell if existing staff are happy to stay on board and the management team is capable of delivering the same performance and maintaining independence both in terms of how the firm is perceived by clients, and how things are run on a day-to-day basis.

Peter Staddon, technical director at the British Insurance Brokers' Association, is not surprised insurers have begun to look at buying up distribution and believes the move is aimed at helping generate new revenue streams and drive better understanding of clients in a soft trading environment that sees the bigger insurers often undercut by smaller rivals.

Staddon comments: "It gives them an alternative distribution channel and gives them a better understanding of the people they are selling to."

The competition to buy some of the larger independent brokers has clearly pushed up their value and eyebrows have been raised over the value for money that Axa is getting for its investments.

Lee believes Axa has paid a premium for the businesses and may struggle to achieve the sort of returns it is looking for. Industry rumours claim as much as four times turnover has been paid in certain circumstances and Lee also wonders if the move will be short-lived and comments: "Back in the 1980s you had estate agents being bought hand over fist by life insurers. How long did they hang on to them thinking they would dictate distribution and take on more business? They ended up selling them back for a significant loss and I wonder if the same will happen here."

Kitson feels the prices being paid are at the top end and he adds: "We speak to a lot of brokers and there has been a lot of talk that the valuations being given and the prices being paid are right at the top end of expectations."

For broker firms surveying the shifts taking place, there is little doubt that management boards will be asking what sort of price they would accept to sell. If there is a lucrative exit being offered, is it not likely that few would refuse an incoming offer?

Lee says he has been asked on numerous occasions what would make Lucas Fettes sell up and says: "People have said that everyone has their price and part of me agrees and part of me doesn't. We enjoy what we are doing and the staff like what they are doing so why should we change it? We do not want a short term return and are in this as an independent for the long term."

The irony is that as more of the larger independent firms are bought, they will create the movement that sees new agencies and operations become established. Whatever the management teams do, it is always going to be difficult for independent brokers not to lose something of their old selves under new corporate owners.

Even if little changes, the fear that it might and the different culture that begins to creep through the organisation will be enough for some existing staff to move on. There have been a lot of negative comments written about consolidation and there are certainly a number of reasons why too much would not be healthy for the industry. However, consolidation creates movement, which in turn creates change and opportunity and drives new growth in the market, which is definitely a good thing.

Confident future

Kitson certainly believes the broker market will continue to reinvent itself and is confident for its future: "What does happen, which is really quite inspiring, is that out of the firms that are taken over or merge, come new entrepreneurs that set up new agencies or brokerages or move online with a new set of skills and without the baggage. They start again and I think that watching this will be fascinating over the next few years."

Although there has been a huge emphasis put on size in recent years, Kitson is quick to point out that this is not everything for the intermediary market. Of course there are obvious advantages that bigger firms carry, and not only can they drive economies of scale in their commercial operations but they can also negotiate better agency agreements with their insurers.

At the same time, however, there is also an emergence of smaller niche brokers doing an excellent job for their clients and securing excellent arrangements with carriers across the market.

Kitson comments: "We have an agency base of around 4000 and maybe 15% of brokers are large consolidators and we expect that to grow. However, there are thousands of thriving brokers who are doing really well and we do not expect that to change."

Ownership at the top end of the independent broker market may well be changing significantly but this should not colour the view of the entire landscape. As some of the larger independent brokers fall into the hands of insurers it will take time to see how well they manage to maintain their independence and whether their entrepreneurial spirit is damaged to a degree that impacts on the success of the firm overall.

In the meantime, those who remain independent are likely to market their status more prominently to their clients, while others will rightly feel there are emerging gaps they can grow into over the coming years.