Food for thought

The past 12 months have been eventful for the insurance industry in general and for brokers and intermediaries in particular. Many of the developments have come from somewhat predictable areas - such as the ongoing debate over insurer service standards, as well as the Financial Services Authority and the continued consolidation of the market. For many, these have characterised the year 2006 just as they did for 2005, although the debates have moved on and the priorities shifted. Ask most brokers and insurers what issues have come to the fore this year and they will also mention contract certainty, commission disclosure and also perhaps ongoing technological challenges.

The soft market conditions have occupied many thoughts over the course of the past 12 months. Eric Galbraith, chief executive of the British Insurance Brokers' Association believes there are lessons to be learned from the extremes of the market cycle: "Extremes of a market cycle can be unhealthy for everyone and, although we can never stop the cycle, we should try to be responsible as to how extreme the market goes with its peaks and troughs."

As far as predicted market results are concerned, Paul Chaplain, underwriting director of Fortis Insurance observes: "Market results for 2005 showed a loss for private car and many are expecting results for 2006 to be worse, even after investment income and reserve releases are taken into account. When you look at the financial dynamics - injury inflation is well in excess of the retail price index - there is an undeniable upward pressure on costs, which still exists after considering some of the mitigating factors such as developments in road safety and speed cameras."

For Cathie Bruce, distribution and customer service director at Groupama Insurances, the two issues that have stood out this year are the rapidly changing distribution landscape and the fast-moving pace of insurance retailing on the web. Bruce comments: "We are literally seeing a revolution in the way our products and services are sold. Direct telephone sales in personal lines are now being outstripped by the internet, while we are beginning to see similar developments in smaller commercial lines."

Bruce also points out that: "Within the broking community, consolidation has continued apace while at the same time the big retail brands have continued to take share."

Mergers and acquisition activity

Certainly, consolidation has continued to hit the headlines this year and it shows no sign of slowing down. The question is: has the merger and acquisition activity been good for the broker market? Galbraith observes: "There has been some good in smaller brokers coming together to make a stronger proposition for their region, although it's a shame when some of the wide variety, choice and long established names have gone from the market."

The regulatory environment has also provided much food for thought this year. Galbraith summarises some of the major developments: "Compliance with FSA rules and the integration of an appropriate compliance culture has continued for most firms this year. The main focus of attention during the year has been on client money, contract certainty and conflicts of interest, with Treating Customers Fairly becoming more central to the radar as the year has progressed."

Phil Barton, group commercial director for the Jelf Group believes one of the most significant themes, and one that will continue to be of importance next year, is that of TCF. Barton comments: "I am an absolute advocate of principals-based regulation that allows sensible businesses to manage their business in an effective way and deliver within the FSA's objectives. TCF is the first major challenge or test of principals-based regulation and it is up to the sector to engage with it much more fully than it has done to date to prove that we are responsible enough as a sector to operate within a principals-based regulatory environment."

Fortis Insurance chief executive Barry Smith also identifies TCF as having had an important impact: "The increasing focus by the FSA over the past year on the fair treatment of customers reinforces what those of us in the service industry should already know - satisfied customers are loyal customers. Those that can demonstrate they are treating their customers fairly will certainly be at an advantage."

Smith adds the view that despite its challenges, FSA regulation has been of benefit overall: "Regulation has continued to be a significant factor throughout 2006. Though regulation has resulted in increasing pressures on brokers and insurers, both in terms of time and cost, TCF regulation and the FSA's increasingly stern stance on financial crime has in principle been welcomed across the industry as a positive move."

There is much consensus that FSA regulation continues to prove demanding for many brokers in terms of the required investment of time and money, but that at the same time it has had a positive effect on the market overall. As Stuart Reid, chief executive of Stuart Alexander explains: "It's expensive and in some cases unwieldy but it is without doubt a benefit to the client, the broker and the insurer."

There are varying views on where the priorities should now lie in terms of the regulatory focus. Reid, for example, emphasises that: "Client money surely has to be one of the most important issues and I believe there is a huge amount of work still to be done on that area."

Bruce welcomes the FSA's ongoing review. "From a regulatory standpoint, it is good to see that the FSA is reviewing the impact of the current regime to ensure that it remains principles-based and less bureaucratic. This will definitely be welcomed by brokers who have consistently complained about the impact on customers in terms of service and cost," he observes.

Progress on contract certainty

One issue that has been a hot topic in 2006 is that of contract certainty. But has there been sufficient progress this year and has enough groundwork been done to ensure results in 2007? Shaun Astley, operations director at Fortis Insurance believes the industry has been making good progress throughout 2006 in terms of moving towards complying with self-regulation.

Astley goes on to explain: "Contract certainty has resulted in more rigorous contract processes, providing greater clarity for the customer, particularly for commercial lines. However, it is likely that insurers and brokers will need to carry out further integration work in 2007 to ensure that contract certainty principles are built into 'business-as-usual' processes."

Contract certainty will continue to be on the regulatory agenda next year, as firms develop the systems to enable them to provide data on their performance in this area, asserts Galbraith, adding that: "The certainty of terms is important for all parties and progress in this area will be beneficial to brokers."

Commission disclosure also continues to be a source of much debate - and indeed formed an important part of a speech given by FSA chief executive John Tiner, at the Insurance Institute of London in October. At the time, Tiner pointed out: "Having been thrust into the spotlight by the Spitzer investigations in the US, commission arrangements have been the subject of much discussion, but over the last six months or so, it has become palpably clear from our discussions with carriers, brokers and buyers that not everyone is talking about the same thing. To unpack that a little, as a first step it is important to distinguish between the different - and indeed polarised - perspectives about the benefits of mandatory commission disclosure. These vary between broker, insurer and buyer and between those in the London Market and those in the regions."

Tiner made clear in his speech that: "Our prime concern here is customer protection and the wider question of the management of conflicts of interest.", but added that: "In practice, in spite of these controls, it would seem that disappointingly few buyers are exercising their right to request disclosure and, as a result, there is an absence of transparency to the customer."

As far as the concern over lack of customer requests for disclosure is concerned, Reid puts forward the view that the client does not ask because it is not an area that is of interest to them. Mark Cliff, distribution director at Axa agrees: "At the moment the fact is that customers are more interested in the service and advice they are receiving from their brokers."

Regarding progress made in other priority areas, Reid expresses disappointment that imarket has not developed sufficiently this year. Peter Knowles, strategy and marketing director, Polaris UK, says: "2006 has seen three new insurers join imarket, a 40% increase in transaction volumes and the number of broker firms signed up reach 2500. In addition, Sirius and Open GI have joined Acturis, providing trading directly from the brokers back office and additional software houses are expected to be offering this very soon. Finally motor trade and professional indemnity products have been added with directors' and officers' insurance to follow around the end of 2006."

Certainly, these are encouraging indications that progress is being made. Bruce is optimistic: "Slowly but surely imarket is beginning to find its feet and more and more carriers are adding value with new products and services. Hopefully, 2007 will be the year that imarket is ready to take the next step and begins to realise its potential as a valuable portal for brokers and insurers."

The year 2006 may finally have seen off any predictions regarding the extinction of the smaller broker. Despite fierce competition and the ongoing climate of consolidation, the small broker segment has continued to prove resilient. Some point in particular to the fact that the focus for acquisition activity has shifted away from smaller brokers.

Cliff observes: "The focus has been more on the middle-sized brokers. There are certain people acquiring the smaller ones but I think it is inevitable that the consolidators will take over the consolidators." Cliff, however, also believes that part of the continued success of the small broker segment is the increasing emergence of new start-ups.

Competition awareness

As far as the continued success of the smaller brokers is concerned, Galbraith observes: "Everyone should be aware of competition. Small brokerage firms are successful because of their service proposition, technical and broker skills - like many other firms." Bruce concurs: "No business is owed a living and to survive it needs to add value. If a small broker can continue to achieve this then the future should remain bright. Research (particularly in the SME arena) illustrates that the advice proposition wins and if this is coupled with convenience, personal relationships, choice, independence and a good price, you have the potential for continuing success."

The past 12 months have certainly been busy for brokers and intermediaries across the board. While much has been achieved this year, progress will continue in 2007 for everything from the regulatory environment, to merger and acquisition activity and technological initiatives. For many, the 2007 diaries are already looking pretty full.

COMMISSION DISCLOSURE - BIBA'S VIEWPOINT

Eric Galbraith, chief executive of the British Insurance Brokers' Association summarises BIBA's position on commission disclosure: "BIBA's position on this topic is well documented. It supports the FSA's goals of recognising and managing potential conflicts of interest in the way brokers are remunerated. Through amending its Terms of Business Agreements (TOBAs) to commercial customers, BIBA's members have made an important step towards greater transparency and it is pleased that John Tiner recognises the value of this.

BIBA and its London Market Brokers' Committee (LMBC) are aware of the differing views in the market concerning disclosure. BIBA is working with all the sectors of the insurance industry to establish a clear approach that moves towards ensuring active disclosure of broker remuneration to clients. And it is aware some brokers have already adopted full disclosures.

"BIBA is keen to assist the FSA in accomplishing its objective and is confident an industry - led solution is not only desirable but achievable."

- While the two papers issued by BIBA on how brokers manage conflicts of interest (which impacts the FSA's view of commission disclosure) are for members only BIBA will release these to non-members on request.