Bank bailouts - Uncertainty could benefit brokers

In October, the government took an unprecedented step in announcing that it was to make capital investments of £37bn in the Royal Bank of Scotland, Halifax Bank of Scotland and LloydsTSB. Such a large investment by the government will no doubt have some effect on almost every sector of the UK economy and brokers are no exception.

Peter Staddon, technical services director at the British Insurance Brokers' Association, warned that brokers need to be very aware of insurers' present situations: "We need to carefully monitor what is going on. We need to be sure that the markets we are trading with are appropriate and solvent." Tony Cornell of Cornell Consulting took a pragmatic view of the problems being faced by insurers, suggesting that brokers may finally see rates rising as insurers suffer: "Rates may rise as insurers need to increase returns for capital invested, as well as to cover recession-related losses arising from crime and bad housekeeping." In addition, many insurers and reinsurers are suffering from Hurricanes Ike and Gustav.

Staddon advised: "We have to be aware of clients' own situations. For example, where a client is struggling, (a broker) could suggest taking payments by premium finance rather than cash. We will have to work harder to go out to see clients but brokers will play a much bigger role for their client bases and we will be very successful."

Limited impact

Cornell believed that the banking buyout will help lubricate the sale of Royal Bank of Scotland's insurance businesses: "RBS, LloydsTSB and HBOS will want to get out of government clutches as soon as possible. I suspect RBS will want to sell Direct Line, NIG and their other insurance investments more than ever and LloydsTSB may want out of Esure." However, Cornell also believed that, as the banks own predominantly direct insurance businesses, the sale will have little impact on brokers.

Cornell also highlighted that the buyouts could act as a potential saviour: "The benefit is that the downturn may be less than would have happened if there was a financial meltdown. Brokers will not be faced with as many clients going out of business with the resultant bad debts and loss of business."

Three days after the government announcement last month, Oval shocked the insurance community by announcing a £115m refinancing deal with four UK banks to support an acquisition drive to end their summer acquisition freeze. "The buyouts showed that there is not as much money floating around. However, the recent Oval acquisitions prove that funding is still available for the right proposition," reflected Brian Denney of Leeds-based broker Denney O' Hara.

Acquisitions

Philip Alexander, head of the insurance group in the financial services division at BDO Stoy Hayward, believed that financial market turmoil is driving further consolidation within the sector and is likely to continue to do so. Alexander remarked: "There are likely to be bargains out there; some brokers need to sell and the current economic environment means that prices are low."

Staddon appeared to support the view that brokers will continue to thrive despite any impact that the bank buyouts might have on the rest of the insurance sector: "When the UK economy has had an issue in the past, the broking sector has had a track record of always doing very well. I see brokers making better returns in the next 12 to 18 months than in the previous year."