The art of joined-up thinking

The economic argument for broker networks looks clear. The average network candidate brings in about £3m gross written premium per year, and garners roughly 13.5% commission from the top five insurers. The networks argue they can negotiate 3.5% extra commission, from which they can pass on 1% extra to brokers.

However, when brokers consider the figures more closely they may not be so attractive. Insurers are often unwilling to increase commission on personal lines and few would be willing to increase the overall motor commission by 25%. On household, networks have little to offer as most brokers can do better on their own anyway. Brokers in this sector typically command a £2.5m commercial book, meaning a network increase of only £25,000 commission.

On commercial books, the average network broker probably earns about 30% of their commission on motor fleet business. Again, few insurers are willing to up the commission. The going rate for this class is 8% and even if insurers altered this, an extra 3.5% would be impossible to achieve.

The 1% extra commission for brokers, therefore, seems negligible.

Worse still, these figures disregard insurers outside the top five, which account for as much as a quarter of brokers' business. These insurers may not wish to deal with networks, meaning the 1% increase on 70% of the brokers' commercial books is only achievable with 75% of their insurers.

And even the top five insurers may struggle to deliver their undertaking if technology cannot extract and assemble each broker's monthly income.

Networks can only help insurers work out how much they owe each month if all its brokers have the same IT system. Therefore, it may not be worth the brokers' while to upgrade their systems.

Figuring it out

A £3m GWP broker has on average 12.5 staff and spends £75 per person per month on technology. This adds up to £900 per person per year, or £11 250 in total. Assuming broker networks have implemented a centralised application service provider as their standard systems, brokers could expect to pay about £225 per month per seat.

This all-inclusive figure would incorporate everything from central IT staff to internet connectivity and disaster recovery facilities. These additions must necessarily form a part of any complete ASP service for network brokers, even if they choose not to take all of them. Indeed, some of the larger brokers charge out their IT at £275 per month, a figure that doubles for larger offices.

Even if an average broker pays £225 per person per month, they still face an increase of £150 per person per month. With 12.5 staff and the difference in VAT, this means an annual increase in IT spend of about £26 438. With networks offering just 1% extra across the brokers' businesses, the average broker would, therefore, be about £6500 to £11,500 worse off having joined the network.

Brokerage income is not enhanced on motor insurance or uncooperative insurers' business. For an average £3m broker this leaves £1.5m to improve upon. Therefore, to make a difference, a 5% increase in commission has to be achieved. A 5% improvement on £1.5m to £75,000 which, even deducting the extra increased IT spend, adds £48,000 to brokers' profits.

This level of commission enhancement is only achievable if frictional costs to insurers are significantly reduced and some of the savings passed down the line. Technology may be able to help with this but networks will not work unless brokers are prepared to invest and demand the gains dangled before them.