Out on the stage

The whirligig of fate likes to tease and transform. Go back three years or so and there were not many insurers in a position to even consider acquisitional activity. With investment returns still in the doldrums, balance sheets ravaged by extraordinary claims activity, and reinsurance costs putting further strain on the finances, the last thing on insurers minds was aggressive purchasing. However, now, in this short time, the picture is considerably different. Granted, rating conditions may not be wonderful but the overall conditions are good enough to ensure that healthy profits are being made. And that is even with substantial reserves put in place under the watchful eye of the regulator. So what is to be done with all that lovely money? It has to be put to good use, and there is only so much joy that can be had entrusting such sums to the accountants and investment managers to play with.

A global market

This is hardly the first instance of consolidation seen in the broking market in recent years - the brokers themselves have been at it for some time now, with aggressive players like Towergate leading the way when it comes to acquisitions. Until recent months, however, the insurers themselves were waiting in the wings, and now they have stepped onto centre stage. What this has meant, of course, is that some of the biggest names in UK commercial broking are now owned by some of the bigger names in pan-European insurance. So there are the likes of Stuart Alexander and Layton Blackham being bought by Axa; Groupama buying Carol Nash; and Alec Finch acquired by French insurance group Verlingue.

Perhaps one of the more surprising facts to arise from the last few months is that it is French companies that have been leading the way, though only the most ardent conspiracy theorists would suspect that there is anything other than coincidence here. Besides, the likes of Groupama and Axa are well-established players in the UK domestic market, with Groupama in particular making great strides to let the market know it is a broker-only insurer. Aside from this curious fact, has anyone out there been taken by surprised by the extent of the recent manoeuvres?

"If you look at consolidation over the past four or five months there has been a terrific amount, with the likes of Alec Finch, Layton Blackham and Stuart Alexander," says Peter Staddon, technical services manager at Biba. "It's very interesting, and what's that telling you? That French companies realise there's a large market in the UK that's not only a domestic market but a global market. It's taken me by surprise that they're all French, though some of these insurers did have significant shareholdings in these brokers."

Crucially, he sees the recent deals in terms of a wider market dynamic: "I'm worried about the reasons insurers are buying brokers but I'm always encouraged by the resilience of UK brokers. It will also give the insurers greater distribution potential. Why did Groupama buy Carole Nash? It's got it's hands on a quarter of a million policyholders. What insurers like is to be sharks in a goldfish bowl and they like market share and don't like their market share being eroded."

Simon Hedges, key account manager (south), at Allianz Cornhill Commercial, agrees with this assessment. "I was not really surprised by some of what's happened. For instance, the Axa takeover of Stuart Alexander and Layton Blackham was expected," he comments, adding that what is important here is control of the product channel: "I think the key with consolidation is who's got a hold on distribution - and that's both ways, as it can give opportunities to distribute through different channels."

So is this just one frenetic period of activity or is there more to come? "I still think there's some mileage to go," he says. "There's a good book of well-managed provincial brokers out there, and some of these people are of an age where they are looking for an exit. Besides, there's lots of funding available in the market, as some of these consolidators are funded by venture capitalists, so there's a real appetite for this activity at the moment.

Surplus capital

Hedges makes the point that although the industry is still in a slow rating environment, profits are still being made, and this is providing insurers with surplus capital with which to fund potential acquisitions: "Insurers are now dipping their toes into the market."

Interestingly, although he thinks the estimated 10,000 figure that the regulatory authorities says constitutes the current UK insurance broking sector will be eroded as a result of consolidation, he argues that any decline will be counterbalanced by other forms of distribution springing up to replace some of the old names that have been subsumed into larger entities. As he succinctly puts it: "People want choice."

For some commentators, the impact of mergers and acquisitions on the sector could be quite substantial, and may not exactly be stabilised by new entrants. Mark Grice is a partner at Mazars, whose predictions last year in its annual broker survey have turned out to be spot on. Then, 87% of respondents said they expected the number of insurance brokers in the UK market to continue to decline over the next 12 to 18 months (this was in April 2006). Those surveyed also said that interest in mergers and acquisitions had increased substantially, with 43% of respondents citing acquisitions being part of their growth strategy (2005: 28%), and a noticeable rise in those looking to increase their geographic spread, from 17% in 2005 to 30% last year.

So, given such accurate predictions, how far does he think all this will go? Will we really be in a situation akin to the independent financial adviser market, which has seen substantial shrinkage in numbers in recent years post-regulation?

"The big players are trying to source their distribution, though the broker market is very fragmented, so it can't always be that the insurers will be willing to go down that low," says Grice. "The market will shrink by some 25% in the coming years, and the only new entrants will be specialist niche brokers or those who think they have a very good IT solution. This is going to happen mainly in the commercial sector, as the commercial sector is where the better margins are."

It would be wrong, however, to see what is happening at the moment as merely a move whereby insurers are pouncing on good brokers. Instead, the current marketplace provides much more of a fluid scenario for the opportunistic broker, in Staddon's opinion, who points to the possibilities offered by Europe: "I do find it absurd that insurers can say they use brokers but are also trying to cut the brokers' throat. It will be interesting to see how these organisations work. It will be interesting to see UK brokers buying continental brokers, though a lot of them are tied agents. I can see consolidation happening on both sides in Europe, working to the benefit of the consumer, though it has to be said when you do get consolidation you do lose choice, which is to the detriment of the consumer."

"Where will it all go?" He asks. " A lot of people who set up businesses a while back are now thinking of retiring but the problem of consolidation is that you get pure economics - the law of diminishing returns, which means downsizing and a lot of very competent people out there find that they are out of a job. It's not beyond the wit of a UK broker to say 'let's set up in a less hostile environment and use the Treaty of Rome as a passport into other territories'."

Whether or not UK brokers do take up the opportunity and make a greater push for Europe is an interesting possibility but such talk is merely speculation. What BIBA is clearer on is that historical comparisons simply are not helpful in this instance. "I can't see a Direct Line with independent financial advisers," Staddon comments. "Sure, it's a similar product, but it's not quite the same market. Obviously, everybody thought the idea of a network would work but it hasn't, it's collapsed. I can see the potential for a grandparenting system, as well as niche areas coming forward."

Yet, as startling as the wave of consolidation might have been these past few months in the UK regional market, so far it has not really touched London. Is this situation merely an anomaly that is set to be rectified, or is this is a qualitative difference between the regional players and the London market that justifies the different market dynamic?

Low-key London

According to one London market broker, it is only a matter of time before consolidation happens in this sector as well. "I think we will see more consolidation amongst Lloyd's players, both amongst managing agents and brokers," he says. "As far as I'm concerned the scene in London has been somewhat low key compared to what's happening elsewhere. If you look at the overall picture, it's still one where the London market is lagging behind. As a rough guess, a quarter of the leading 50 brokers in this country have changed hands over the course of the past year but just how many of those have been London market brokers? Not many."

"In London, what have we seen recently?" He continues. "There have been a couple of moves recently at the mid-tier level, with the likes of Glencairn changing hands, and these are situations where large US players are looking for a firmer foothold in London. Can I foresee more of this happening? Quite possibly, yes. And that's not just my opinion. Everyone's view is that it's only a matter of time before there's another round of consolidation."

Will any such consolidation dramatically alter the overall shape of this market? Not everyone is convinced. As far as David Hough, spokesman for the London Market Insurance Brokers' Committee, is concerned, a little bit of perspective needs to be introduced: "If you asked 10 years ago the conventional wisdom was that there would be a few big insurers and a number of small niche brokers but no room for anyone else. However, we've seen a number of mid-size brokers prospering - predictions of their demise haven't come true. The key here is quality."

In five years' time, where will the industry be? Well, it is probably the case that consolidation is now starting to happen in a serious manner, and the predictions of a 25% decline in brokers seem on the face of it reasonable. Do not hold your breath, however, this is a famously fickle market, after all. As Grice says: "When the Financial Services Authority came in it started to nibble away, and then the broker consolidators came first. Now insurers are making a move because they're thinking to themselves they don't want to lose control of their distribution channels- though it's all cyclical! A few years ago Royal and SunAlliance didn't want to own its own broker, now insurers are deciding they do. These things come full circle."