Mapping the road ahead

If the latest research is anything to go by, it would seem that UK insurance brokers - who might justifiably think they had enough problems to cope with in recent times with the advent of statutory regulation - will have to cope with even greater challenges in the years to come. The issue this time is not simply one of responding to governmental pressures but one that goes to the very core of their business - the extent to which certain lines of insurance will continue to be distributed through the intermediary channel.

While hardly a new concern for brokers, a new worry that has crept onto the scene recently is the alarming evidence that the pace of change is set to increase radically, bringing into question the very existence of many high-street firms.

According to Defaqto's latest report on the sector, brokers could be forced out of the home-insurance market altogether by the end of the decade if their market share continues to decline at its current rate. Defaqto also claims that distribution of home insurance has swung dramatically towards bancassurers, and brokered products are no longer as good as those marketed by direct writers.

In its third home-insurance market report, the research group states: "During the past four to five years, there has been a rapid and significant shift from the traditional brokered sales model to the insurer-direct model, and towards a market increasingly dominated by a small number of bancassurers that now sell direct, rather than purely through branches." Brokered home insurance accounted for about 25% of the market in 2003, according to the Association of British Insurers, whereas, this year, the figure is likely to be less than 20%.

The decline in motor

It is not only in home insurance that brokers have been facing the pressure. Ever since the advent of Direct Line in the 1980s, the proportion of intermediated business for motor insurance has steadily declined and, for personal lines insurance in general, the intermediated route has faced a plethora of challenges in recent years. This is not only from direct writers but also from the growing influence of the major supermarkets and banks - alternative intermediaries with considerable pulling power and well-known brands that many brokers are finding it difficult to compete against.

Yet, despite the falling market share that brokers can claim in motor and home insurance in recent years, the situation is not necessarily as pessimistic as it might seem. According to Amanda Blanc, distribution and customer service director at Groupama, the decline in brokers' share of the personal lines market is not set to continue ad infinitum.

"Our view is that things are definitely levelling off," she says. "Once people have decided on their channel, they tend to move around between direct insurers, and their share of the market for motor has stayed more or less the same. Yes, it is true to say that banks now have a better share of the market, but it is at the expense of the direct writers, not brokers. All of our research suggests that direct has gone as far as it can and is stagnant. It is the brands these days that are really powerful, but you have to appreciate that brokers offer choice and value."

Besides, Blanc explains, the growing influence of the banks itself indicates that the intermediated channel remains a popular route to market: "A lot of the banks use a panel arrangement and Groupama would sit on those panels."

It is not only in personal lines that the industry is offering evermore attractive routes to market for the end-customer, she adds, indicating that technological initiatives such as the e-commerce portal imarket, finally coming into its own, mean that - for 'straightforward commercial transactions' - internet usage is increasing.

Despite the pressures they are facing, brokers still remain a significant force in UK insurance and insurers are as keen as ever to stress that they remain a vital component of their selling strategies.

Despite jettisoning high-street broker chain Hill House Hammond and ploughing considerable resources into its direct arm, NU Direct is adamant that a multichannel distribution strategy remains at the core of its proposition, according to David Macmillan, director of corporate partners. "We go to the market with a three-pronged attack: direct, partnership and broker," he explains, adding that, in the insurer's assessment, what matters in the current buying climate is a strong brand. "Our strong conviction is that the UK consumer will want to buy from trusted brands such as Saga, Tesco or NU Direct," he comments, elaborating on other developments as far as the company is concerned when it comes to routes to market: "The other big distribution trend for us in the past 12 to 24 months is the internet, both through our own site and those of partners, use of which has grown by 100%."

Internet uptake

He says the growth in the purchasing of insurance over the internet says a lot about the general surge in uptake of internet usage and purchasing in general in the UK and has been for Norwich Union across the board as far as its products are concerned.

Macmillan outlines that, although the growth in the internet as a distribution channel has been fantastic, insurers nonetheless continue to lag some way behind when it comes to really making the most of the opportunities that the World Wide Web can offer: "When I look at ourselves and at other insurers, we have a long way to go to be as smart as other retailers such as Amazon in the way they use customer data and cross-sell products."

Unfortunately for brokers, their share of the market will continue to be eroded in the commercial lines sector as well, he adds: "On the commercial lines side, I guess the whole trend is for commoditisation, which has happened in personal lines. We are starting to see that at the small end of the market and I think that trend will continue. For example, Barclays now has some four million SME customers."

Mark Winlow, managing director of UK personal insurance at Zurich, offers some words of hope for beleaguered brokers amid all this gloom with his assessment that some sort of balance will eventually be achieved when it comes to various distribution channels, and that we are not far from that balance now. "We have a view that the customer has a strong say in how they buy personal lines insurance, and the predictions are that one-third will buy direct through the internet or telephone, one-third will buy through a broker and one-third will buy through a brand," he says. "We do not favour any particular channel - we are trying to play in all three."

Winlow thinks that the level of knowledge of the consumer can also work in the broker's favour in a number of ways: "I am not sure the customer is that sophisticated when it comes to buying insurance, as many do not differentiate between an insurer and an intermediary. One of our competitors has said privately that the broker channel is dying, but the brokers with which I am working are looking very closely at how they add value and they know more about the risk."

Taking the opposite line to NU, Zurich does not necessarily believe that the internet will continue to grow at the rate it has in the past, and Winlow adds: "Zurich has a partnership with Easygroup, which will attract customers who want to do more of it themselves, but I am not convinced that it is a significant growing area in the market place. A significant proportion of the workforce does not have that much time and being on the internet is not necessarily the quickest way to do it."

As far as Zurich is concerned, the cross-selling route is also limited, he suggests. "I think there are opportunities for cross-selling but I am not convinced the numbers will be significantly high," he comments. "A bank offers a range of services but where we fit as a professional insurer is that we will have a partnership; our direct operations will only ever comprise about one-third of our business, so some 75% of our business will be sold through other peoples' customers and that is where working with a brand or a broker comes into it."

NU's director of RAC applications transition, David Williamson, disagrees, however, and is keen to point out the enormous potential that the bancassurance model offers: "If you look at banks and building societies, which have been successful in selling linked products, they have a huge untapped investor base. So I think the banks will do very well - they are a huge untapped force."

Of course, insurance brokers themselves have not just been quietly getting on with things and hoping the threats to their livelihood will quietly go away one day. Instead, the savvy brokers - both in personal and commercial lines - have had to really step up a gear in recent years, marketing themselves more aggressively and offering more sophisticated products tailored to the end-customer.

A case in point is the AA, one of the most sophisticated intermediaries in the market place, which has invested significant sums in terms of its marketing spend in recent years, and is now in the position of being one of the most recognisable brands in the market, particularly when it comes to motor insurance.

Targeting alternative routes

Smaller intermediaries have also upped the ante, however. Ian Richens, chief executive of commercial motor specialist FM Green, says that any broker worth their salt in recent years has really upped their game, and his company is no different, targeting alternative routes to market in much the same way as the underwriters themselves have been doing. "As you know, one of our main routes to market has been through associations and a product that gives us a competitive advantage," he declares. "If we can persuade the insurer to give us a unique wording, we are at an advantage to everyone else, even in a soft market."

Richens suggests that the dynamics of the market cycle itself are also forcing brokers to become evermore shrewd. "Also, on the wholesale side, we are aggressive with product pricing and what can be offered, and have 10 guys on the road," he adds. "We have also recently launched an instant-quote facility in conjunction with NIG and, in effect, offer a one-stop shop. We have had to be up to speed because, in a soft market, we have had to be leaner and meaner."

With brokers themselves fighting back and many insurers believing that the erosion of their market share is levelling out, perhaps all is not as gloomy as it might seem for brokers. And, as Winlow explains, insurers remain happy with the intermediated channel: "Our strategy is built around what the end-insured wants. We are not going to force people who have said they have bought through a broker; they have to be branded direct. If they want to go through a broker we are happy for them to do so." For the managers of intermediaries throughout the UK, the hope must be that this attitude becomes entrenched.