What's in store for 2004?

Regulation will not take effect until 14 January 2005, but brokers can already start to prepare. Brokers have access to (near) final rules, following the lengthy consultation process, and can now register to apply for authorisation.

Andrew Paddick, director general of the Institute of Insurance Brokers, says regulation will bring enormous change to everyone, from City brokers to one-man bands.

He says: "Regulation will drive efficiencies in what has been a sloppy industry. Some brokers haven't been doing a proper job for consumers. Often they don't even understand that policies have to be suitable for clients and believe it is up to customers to read policies. That attitude won't work in a regulated environment."

Paddick believes a large number of brokers are ill-prepared for regulation but adds there are opportunities for those that get their act together.

"Brokers have the opportunity to take business from secondary intermediaries," he says. "These intermediaries are not likely to become appointed representatives as the principal would need huge resources to manage them, so they will not continue to sell policies after regulation."

Richard Sheikh, chairman and chief executive of Camberford Law, agrees regulation is the biggest hurdle for 2004 and says many small to medium-sized brokers will need help with compliance. However, he does not recommend becoming an AR and believes most brokers will go for direct authorisation.

Sheikh says: "Brokers should register for authorisation rather than merging or going down the AR route. Those that approach it logically will find compliance is not as frightening as it seems."

Fear and disbelief

The emergence of the FSA's rules has been met with fear and disbelief, according to Layton Blackham director Chris Blackham. He predicts a reduction in the number of small brokers as the cost and requirements of regulation, combined with lack of buying power and the need to invest in IT, makes the current financial model increasingly untenable.

Paddick agrees, saying: "The market will be driven by economies of scale and firms will get together so they are not competing against each other. As a result there will be fewer small players unless they are specialist or niche."

Paddick predicts firms unprepared for regulation will panic sell next year. He believes supply will exceed demand by the end of 2004 and that such brokers will be worth less as a result.

More than a thousand brokers are predicted to disappear before the onset of the FSA regime, according to a survey conducted by accountant Mazars in conjunction with the British Insurance Brokers' Association.

Colin Calder, head of broker development at Axa, says this consolidation will contribute to the emergence of super-provincials. He says Folgate, which already has 27 acquisitions under its belt, is leading this drive.

Blackham predicts that three or four super-brokers will emerge during 2004, probably funded by venture capitalists. As he points out, however, regulation is not the only challenge they face.

Bob Beckett, executive chairman of the Beckett Group and deputy chairman of the Chartered Insurance Institute, says: "Firms are put out of business due to capital erosion, difficult markets and regulation. In a substantially consolidated market brokers will have to access new markets and, as a result, will need to be more innovative," he adds.

Paddick believes the personal lines market will see the biggest reduction in broker numbers, with brokers exiting completely by selling up or outsourcing their personal lines books. He points to Keelan Westall's decision to sell its personal lines business to focus on its core commercial property business as an example.

Personal lines brokers now have to compete with direct insurers that have large advertising budgets and also supermarket giants. Calder believes the success of the supermarkets is down to their ability to collect customer information, market products and build strong brand awareness, things he claims brokers and direct insurers have failed to do.

The FSA's decision not to regulate the sale of travel insurance through travel agents was a further blow to personal lines brokers. The future of standard travel insurance with personal lines brokers now looks bleak and brokers are likely to focus on long-haul or annual policies.

Brokers are also fighting back through networks and at least five large broker networks launched in 2003. In general, networks aim to enable small to medium-sized brokers to compete more efficiently with compliance solutions, shared marketing initiatives and increased buying power with insurers.

There are regional networks such as south-west broker alliance Nexus, West Country insurance broking group Westinsure and Surrey-based network Cobra. Others aiming for a wider geographical reach include Broker Direct, Orpheus Select, the Willis Commercial Network, the Champion Network and newly created acquisition vehicle Vega. Technology company Software Solutions Partners also has a network called Key Choice, and Misys' network is known as Countrywide.

Folgate is offering to regulate members as ARs but, should brokers opt to leave the market, can also offer exit strategies.

Acquisitive members

The Mike Williams-headed broker network Total Broker Solutions, backed by Bob Beckett, is hoping to get authorisation from the FSA to regulate an initial 500 brokers. This network will also feature a panel of acquisitive brokers to whom members can sell.

Layton Blackham has replaced its original network offering with a highly selective business partnership, which is currently profiling prospective brokers to identify 12 founder partners in 2004. Its infrastructure is already in place and includes a compliant ASP software solution, hosted by Acturis.

It is unlikely that all of these networks will survive - some failed this year. Euclidian Insurance Group put its Grid network on hold indefinitely in 2003, while Swinton's plans to build a commercial broking network failed to get off the ground. It still insists the network will go ahead, however, despite the setbacks.

Blackham says: "We have seen the continuous emergence of networks as entrepreneurs try to jump on the bandwagon but this could be a costly mistake. Too many networks are emerging with no substance or proper backing. This results in unsatisfied brokers and insurers and will eventually cause rationalisation."

Jim McGuinness, chief executive at insurE.com, maintains that networks will succeed but adds that they must be backed up by robust technology.

He argues: "Networks are the way the market will go but the technology must meet their compliance needs. Technology gives brokers the opportunity to run the business more efficiently and that will be even more important as commission rates fall with the cost of regulation and further consolidation."

Camberford Law, for example, has invested £500,000 in technology in the past 18 months. Sheikh says it is important to use technology as much as possible as the market becomes more competitive. This includes simple things like using email instead of the phone and making transactions online.

Polaris imarket went live to the 35 members of its Intermediary Advisory Forum at the end of 2003 and the initiative will gradually be rolled out during 2004. The system allows brokers to access multiple insurer extranets and, if it takes off, could revolutionise the industry.

Calder is firmly 'pro' imarket, but Royal & SunAlliance's UK director of commercial, Peter Webster, is taking a more cautious approach. He says: "I will be looking to see how imarket develops. It is an important opportunity. The initiative requires commitment from all interested parties and we should be supporting it."

Of course one of the biggest difficulties for brokers during the past 18 months has been the hard market, which Sheikh says has hit the smaller intermediaries particularly hard. These brokers have found it hard to get access to insurers' branches or access sectors such as liability insurance, he says.

Sheikh says the market is still hard but believes business will start to improve during 2004. He says: "Increases in premiums have now been applied and we are only likely to see increases of between 15% and 20% in 2004. The past two years have been difficult but there is a good future and things are going to pick up."

Blackham believes this lack of capacity will continue and that insurers such as Norwich Union, Axa, RSA, Zurich and NIG will continue to dominate the market.

Indeed, broker consolidation was foreshadowed by the flurry of acquisitions in the insurance market in recent years. Although the pace slowed during 2003 there were still high-profile deals. The Royal Bank of Scotland acquired Churchill Insurance Group from Credit Suisse Group, making RBS the third largest general insurer in the UK. Halifax Bank of Scotland has announced plans to launch a general insurance business, First Alternative, and is currently awaiting FSA approval for a launch in early 2004.

Disposal restructuring

RSA has been engaged in a disposal programme. This has included the sale of its Australasian interests, its UK health business and the UK estate agency operation Sequence. Webster says: "We have made considerable progress on our disposal restructuring programme with a number of sales and a successful rights issue."

He continues: "There has been a lot of change and we have done much to consolidate our position - it is now about focusing on operational performance. Next year a major challenge for insurers will be maintaining appropriate pricing levels in the commercial market by encouraging market discipline."

Calder believes that the shape of regulation could encourage the industry to return to composite insurance. He says: "The splits in the industry could disappear because the FSA regulates companies under one insurance heading and does not differentiate between life and general insurance, for example."

All in all, 2003 was a tough year for brokers and 2004 looks set to be just as challenging. Regulation will have a huge impact on insurers and brokers and they need to start to comply. However, it is not all bad news.

Whether brokers choose to join a network, upgrade their technology, merge or acquire, those that make the most of the changes are promised a more professional and efficient industry by the end of 2004.