The distribution landscape

The UK broker market is probably the most sophisticated in the world. While insurance is distributed predominantly either directly or via banks in continental Europe, the UK customer is fortunate enough to have access to unrivalled intermediary expertise.

The period that insurance broking is going through now is pivotal in the history of the market and rumours of the independent broking sector's demise have been greatly exaggerated; the sector is in ruder health than many commentators anticipated.

There are various dynamics at work in the market including broker acquisition and consolidation and the growth of networks. Each relates back to the control of distribution that many have described as a war.

We have visited this battlefield before. Brokers felt huge enmity when insurers began selling personal lines direct. The entrance of major retailers in the personal lines arena and the explosion of internet distribution has illustrated that the power of the consumer will dictate distribution rather than the industry.

Since then, brokers may have considered the attempt by insurers and banks to develop a direct model for the small commercial market as both annoying and inevitable, but in reality it has given them little cause to lose sleep. Independent brokers dominate this sector and will continue to do so: many have started their own direct offerings via the internet and this has helped them to achieve differentiation.

Broker approaches

Consolidation has seen the larger brokers looking at the range of business and customer types they cover and rationalising them, for instance by outsourcing or divesting themselves of personal lines business. By taking cost out of the process and developing their own propositions for customers they have been able to mark themselves out from their competitors.

Equally effective has been the trend towards using underwriting agencies. These agencies have been able to market their own range of products, carry out operational functions and even undertake claims handling as a result of having fully delegated authority from their insurer backers. Some of the biggest brokers using underwriting agencies have gained the ability to influence the offering and its end price, all while gaining greater control of customer service. This places profitability firmly within their hands, which brings both opportunity and threat depending on the quality of the execution.

Alongside consolidation, the broker network model offers independent brokers an umbrella. This gives them access to scale, compliance support, training and, on some occasions, buying power through central deals with insurers. Brokers seeking safety in numbers or avenues to exit the market should come as no surprise to insurers, as there is a history of them not doing enough to make smaller brokers believe that their business is valued.

While the potential revenue streams controlled by the big brokers will always be attractive to the major insurers, a substantial amount of income has sat with the smaller broking community, often with greater stability and profitability. Working with the different sectors is not mutually exclusive; it requires simply a different model of working.

In spite of consolidation and the growth of networks, there is a flipside that includes either brokers breaking away after take-overs or independents that have always wanted to remain independent. These are the entrepreneurial business people that have the confidence to back themselves and go it alone, perhaps indulging in smaller-scale consolidation on a local level.

In this so-called war for distribution some insurers are looking to win by acquiring the distribution channel, in other words by buying brokers. Others have identified different strategies that are focused more on becoming the insurer of choice in the products, services and support they provide.

The demands presented by consolidation have taken time and resources, but we must not forget the bread and butter business within the independent broking sector. What is needed is a sensible strategy - having a balanced portfolio.

What is needed

Insurers need to focus on giving independent brokers what they want to ensure a mutually profitable relationship, but the questions remain as to whether or not independent brokers know what they want and if they have the will to change.

An interesting dynamic exists at present: independent brokers have less buying power when compared to the consolidators, which have bigger premiums and fewer suppliers. Conversely, the independent broker tends to have less gross written premium, but a greater number of suppliers.

The approach of having multiple agencies is culturally comfortable for independent brokers, there is arguably a need for independents to rationalise their supplier bases and drive better deals with a smaller panel of insurers.

One such area is the development of schemes. This is not simply about affinities, niche business or specialising in trade groups. It is more about the management of larger, bespoke deals in which brokers want to mix and develop cover to create something more bespoke than 'off the shelf'. They want the volume of business to be reflected in the deals they can strike with insurers.

What customers should see as a result of these industry developments is more professionalism across the board. The accomplished broker will be talking to the customer in depth about its business and providing solid consultancy advice.

As brokers continue to develop specialisms in particular classes of business, customers will be able to source products and services more closely aligned to their businesses. This growth should have a knock-on effect not only for the direct customer but the wholesale market also, bringing new expertise to a multitude of brokers nationwide.

The independent broker sector is facing exciting challenges. Brokers that bring their entrepreneurial spirits to the fore, develop a clear game plan and understand the markets they want to attack and the insurers they want to work with are the ones that are likely to succeed.

Independent brokers without game plans are therefore going to be in the worst position; the need to be dynamic to survive the market of the future is paramount.

- Phil Bayles, Director of trading, Norwich Union.

WHAT YOU SHOULD ASK YOURSELF

1. What are you looking to achieve for your business in the next two to five years?

2. Are you looking to acquire, exit, grow organically or attack a market segment?

3. Have you considered other income opportunities such as arranging exclusive schemes in new segments or offering risk management advice?

4. What do you want to keep and what do you want to change about your insurer partners?

5. What is your comfort level of premium income that you are writing with any one insurer?

6. What are the value-added benefits available from your insurer partners?

7. Are any elements of your business underperforming?

8. What is keeping you awake at night?