Finding their place in the sun

It was not so long ago that this time of year gave rise to gibes at brokers' expense, as their tans from the elbows down and from the neck up betrayed long afternoons on the fairway. But times have changed.

Undoubtedly, the heyday of brokers was during the 1960s and 1970s when their reign as the unchallenged champions of insurance distribution was secure. However, in facing up to the subsequent challenges that have come their way, brokers have shown both resilience and adaptability that looks set to continue to serve them well.

With regulation coming at a time when the principals of many brokers are nearing retirement, the feeling is that many will feel that enough is enough. Certainly, for those looking to acquire firms in the next few years, this is being touted as a window of opportunity by the likes of Peter Cullum, chairman of Towergate.

Paul Dyer, commercial director for Towergate Underwriting Group, says: "I think, for a good number of intermediaries, they are mindful of the enforcement of regulation and that the costs are going to increase not decrease. There is also the time factor because, for many principals of insurance brokers, regulation requires them by necessity to give up what they would regard as their normal job, which is servicing their clients. They will not have the time to do that and, for many brokers, that is part of the pleasure of being a broker - it is, after all, a people-oriented business.

He continues: "These people have to confront the reality of maintaining risk registers, undergoing regular checking of continuity planning and ensuring that Insurance Conduct of Business regulations are up to speed. They must now begin to prepare their returns in electronic formats as those deadlines are approaching rapidly. All of that is going to be eating into the available time for servicing clients for principals of many brokers and that is a fundamental step-change in the way in which they identify their future."

There is no doubt that much of what regulation demands is onerous and time-consuming. However, it is certainly no less than many other sectors in the financial community have had to cope with and few have argued convincingly that, overall, it is not to the benefit of the clients.

Dyer continues "This is an evolutionary step and, if you look at what the FSA is asking, it is entirely sensible in a business sense and it is also entirely consistent with the pressure that other industries, and certainly other areas of financial services, have had to bear. Nevertheless, it does cut to the quick of why so many people entered the industry in the first place. What the FSA does indirectly rather than directly or even by intent is to actually change the way in which people perceive their own jobs and roles."

He adds: "There is an emotional element and it is that combined with the fact that many principals are, in truth, looking at maximising the benefit of their business because they are looking at retirement and so there are many combining pressures. There is not one in particular that is going to necessarily knock them over but the combined pressures may do so."

Bob Screen, managing director of Vega Insurance Services, agrees that regulation will continue to have a significant impact. He says: "Consolidation went a bit quiet in the two or three months prior to regulation when everyone was focused on getting through 14 January, and in the month afterwards. I think people have breathed a huge sigh of relief now they have crossed that threshold and principals of businesses are now starting to get back to their business and see what it is they need to do, whether it be carrying on, investing in IT or personnel, or considering their future. Now that 14 January has passed, they can start thinking about the business.

"Going forward, I think another line in the sand will be when the electronic reports need to start filtering back to the FSA on 14 July. I suspect there will be difficulty for some brokers in doing that - and then it will start to hit people that there is an ongoing cost of regulation and there are other ongoing aspects than just getting over or past the January hurdle. I think that might start some people thinking again."

However, many brokers say that insurers are unconcerned that the broker market is shrinking and that the trend may be accelerated by regulation. As long as the volume of business is there, the only other consideration is in handling what will become a more complex relationship, as David Leary, head of broker solutions at Norwich Union, explains: "When businesses consolidate - resulting in fewer players in the market - relationships become more complicated. Dealing with a host of people within a smaller number of organisations means that the relationship and lines of communication need to be managed keenly. Insurance companies have to act to reflect the changes that have taken place in their intermediaries in order to overcome any new complexities. Also, insurers need to focus on more than just the here and now. This involves understanding where the business is going and adopting a more consultative approach to find solutions that help the broker achieve those goals.

"Where there is a strong bond with a consolidator, the insurer ought to inherit incremental business growth, while the increased strength the broker achieves through scale lends itself to obtaining better arrangements for the client. We are not unsupportive of this movement in the market and finding ways of working in partnership has already proven to be mutually beneficial."

Broadening the lines of vision

While ongoing consolidation seems indisputable, its extent is certainly open for debate. Peter Staddon, head of technical services at the British Insurance Brokers' Association, believes many principals need to really think about what they want for their business and broaden their lines of vision.

He says: "We have a lot firms run by grey men, in grey suits with grey hair that do not think far enough ahead, and they have to put their own egos and feelings on the back burner and ask what they really want for the business. Do they want to see it run for another 30 years and do they want out in 15 years? If so, they should start thinking about that and provide people with the responsibility and training they need. They must also start releasing equity - a lot of these people owning the brokerages will not release equity to young people. These young people will then ask why they should put in all the hours they do when they can go elsewhere and receive the same salary and some equity from another firm. When you own a business your attitude is totally different."

Staddon says that BIBA is working hard to provide training resources at an affordable price to the market and urges firms to make the most of them. He accepts that regulation will fuel consolidation and that many firms will cut down on the number of products they deal with, but feels there is no reason new life should not be breathed into the industry to compensate for this.

He says: "I think there will be a lot of new entrepreneurs coming forward and things like franchise operations will start up so that people can do it on a basis where they have the support to expand without having to take all of the risks themselves. I wonder if people will want to go and work for a mega-broker or if they will set up and try to do it for themselves in areas where niches exist. I really would like to see these people succeed."

It is ironic, therefore, that consolidation may well be the prompt that many need to go it alone. It is also likely that, as brokerages become larger, they will implement their own training and recruitment programmes that will create the skill base that many fear is in such danger. In previous decades, many skilled entrants to the broking industry came from insurance companies, but that avenue has been closed off.

Screen adds: "You had a number of what people would term 'new business inspectors', who started off businesses in the 1960s and 1970s and I suppose that created a bit of a brain drain from the insurers' point of view. I think they tightened up on their processes and procedures for those new business inspectors and so made it more difficult to leave and set up on their own."

Personnel are no longer coming to the market with the same level of expertise as those that had been trained by the insurers, and brokers are having to provide the training for themselves. Screen continues: "I think brokers have started to look after their own better and realise that the insurers are not providing the training they once did and that the flow of well-trained recruits into brokers is very sparse these days. As brokers get larger due to consolidation, then the resources will become available to provide the training and more and more have realised they have to grow their own."

This is a point with which Dyer agrees, adding: "I think the industry has rediscovered from a commercial and practical standpoint just how valuable training and competency actually is and how much more of our resources must be allocated to it."

The changing landscape

There is no question that the landscape is changing and that regulation is fuelling a move to consolidation. However, this is producing its own side effects and is part of a market evolution that is toughening up brokers to cope with the demands of the day and is not allowing them to stagnate and become obsolete.

The figure of 85% - referring to brokers' grip on commercial insurance - is commonly referred to by senior insurance company staff. This figure, by all accounts, looks like it will be representative for the foreseeable future. Business processes will have to change and competition may be greater from bank assurers and direct writers, but development and evolution is part of any market. The number of brokers in the market may fall but, looking to the future, Dyer hopes it will have succeeded in attracting some of tomorrow's brightest performers.

He concludes: "I would like to see an army of really bright and young people looking at the insurance industry and for them to say that there are some really big businesses here that make very good returns with loyal customer bases that understand and respect the services that are offered, and this is quite a nice place to work." Among these larger players there will also be room for the smaller independents, provided they can find their niche.