Year in review: 2008

JONATHAN DAVEY, DIRECTOR, SSP

At the beginning of the year, the global credit crunch and the threat of the worst recession since the 1930's were not on the agenda for broker managers. Although we had already witnessed the first run on a British bank for over 100 years, it was business as usual across the industry and the changes to capital gains tax rules in April led to a flurry of acquisitions in the first quarter.

However, as the financial crisis deepened, we have seen a significant slowdown in consolidation and the unprecedented valuations have fallen back to more realistic levels. There is still credit available for the right deals and, with some organisations weakened by the downturn, new opportunities will appear.

The continued consolidation, combined with the growth of aggregators and the increased profile of networks, have all contributed to shifting the balance of power away from insurers and had a significant negative impact on their distribution costs. Over the course of the year, insurance company chief executives warned of unsustainable commission levels and threatened to withdraw support as they looked to cut distribution costs. These warnings have now become reality, with sustainability and added value becoming the new watchwords. The pressure is now on the new networks to show that they can deliver large volumes of business and lower transaction costs.

This year has also seen the entry of aggregators into the small to medium-size enterprise market, following in the footsteps of the direct writers. Although brokers still dominate the SME market, research by Datamonitor reveals that more and more SME customers are willing to buy online, while insurers are reporting rapid growth in the number of online transactions. Like personal lines before it, SME business will become systemised. Information technology will cut out transaction costs and products will become standardised. Innovative brokers and start-ups have already begun to develop quote-and-buy websites to address this shift but there is still a long way to go.

Recessions typically see rates harden but, with plenty of insurer capital looking for a home, the earliest sign of a hard market could be the end of 2009 unless there are some significant events. In addition, with no economic upturn expected before 2010, whatever the business model and channels brokers use, they will need to focus on improving productivity and efficiency while continuing to service their ever more demanding customers. Strong relationships with financially secure insurers and providers will be imperative during this period of unprecedented financial turmoil, however, the recession will open up a range of opportunities for brokers with strong business models and management.

SIMON COOTER, DISTRIBUTION DIRECTOR, BRIT INSURANCE

As 2008 began, broker consolidation was a seemingly unstoppable force with many predicting the demise of the independent broking market.

The first quarter of the year saw a rush of deals as the capital gains tax deadline day loomed. Since then, activity has slowed considerably, initially as a natural consequence of this rush and subsequently as a result of the credit crunch. Deals are still being done but in numbers and earnings multiples far closer to the longer-term average.

Consequently, a notable trend this year has been the number of high quality independent brokers committing to independence. In many cases, succession plans that would put many insurers to shame have led to a new generation of leaders in their late 30s and early 40s taking the reins at these firms.

Meanwhile, reduced investment returns in extremely volatile markets, two major hurricanes and the effects of several years of softening rates in the UK have affected insurer results adversely. Yet rates have remained stubbornly soft, albeit with some upward movement seen in commercial motor and some personal lines classes.

Networks have grown in popularity and are making an already busy space even busier. Similarly, managing general agents have popped up all over the place and, like networks, come in all shapes and sizes. Each of these responds to genuine needs and opportunities but it will be interesting to see which ones prosper and which fall by the wayside.

A back-to-basics mentality is likely to dominate during 2009 against a backdrop of a global economic slowdown; a hard market appears to be within touching distance. There will be a greater focus among brokers on organic growth and the acquirers of the last few years will undoubtedly push for synergies in their businesses. Next year, resources will have to be targeted carefully. In these uncertain times, it will be more important than ever to pick trading partners carefully.

The broker market is ready for this challenge and approaches 2009 with cautious optimism. It is now up to insurers to make sure that brokers receive the support and service that they and their clients demand.

LYNDON WOOD, CHAIRMAN, MOORHOUSE GROUP

There is plenty that will make 2008 memorable and, equally, much that people will want to forget. From a broker's perspective, there was a lot of talk from insurers but little or no action - yet.

One or two have attempted to talk commission levels down but whether or not it will happen is still open to question. The main driver is the profitability of their own businesses and quite right too, as insurers are there to make money also. There has been a great deal said about rate hikes, which so far seems to be hot air and no more. I hope, with the January renewals looming, we will yet see rate increases across all classes of business.

The various crises with AIG and so on shows the banking and investment industry in a state of near collapse and it is more serious than just a blip. Only time will tell if the massive taxpayer-funded bailout will save our economy.

I think that the noticeable slowdown in broker acquisitions, while the consolidators regroup and secure funding, will give way to another onslaught but in a very different light in the second or third quarter of 2009.

New chief executive officers and teams have been installed at several insurers, some of whom have an accounting background as companies make their best attempts to turn a profit. Accountants seldom run businesses well but I hope that it will be different this time for all of our sakes.

The growth of the internet and online sales activity in the commercial arena is becoming even more buoyant and is starting to become a little crowded, so there are questions to answer as to which will survive and which has the knowledge to succeed. It is a battlefield for electronic traders and it is not just the investment bankers that can have all the fun.

Redundancies seem to be the flavour at present, with insurers laying off thousands of people; this is a great opportunity for brokers to pick up some great talent and exert even more control over the industry.

One certainty is that economic uncertainty will continue well in 2009 but, as the great Winston Churchill said: "never, ever give up".

ANDREW TJAARDSTRA, EDITOR, PB

It has been a tumultuous year in financial services with some of our supposedly finest business leaders ending up with egg on their faces. Lax regulation, a City obsessed with making a short-term buck and traditional banking trying to expand into more exotic products all contributed to this mess.

In the broking sector, the banks saved Erinaceous and its more successful insurance arm is now Barbon, with the lending banks deciding to keep the business rather than sell it on. Meanwhile, insurance rates have been too low for too long and, in addition to hurricanes and some clients going bust, insurers' investment returns have been hit substantially. Consolidation in broking and insurers buying brokers has continued, although at a much reduced rate in the second half of the year. The banks still see a strong future for the consolidators, with Oval refinancing, Towergate given a breather on its debt covenants, Jelf buying brokers such as Manson and Clarke Roxburgh and Giles dipping into its war chest on a regular basis. Jelf's dramatic fall in share price - peaking at 272p and now below 100p - suggests that these are good times to be a private company. Some strategies, such as IAG's purchase of Barnett and Barnett in an attempt to form a mini-consolidator, have been thwarted by external events, while Brokerbility has continued to attract members at a rate of knots. In this diverse market, independent brokers such as Central Insurance Services and Berkeley Burke's insurance arm completed management buyouts.

We are in for an interesting 12 months next year as the economy falters and business plans are rewritten. However, there are plenty of opportunities, especially as, according to a Finaccord survey conducted in August, (Small Business Metrics: Insurance for Small Businesses in the UK) 19% of businesses in the SME sector that employ personnel do not have insurance at all. It is going to be tough out there as clients reign back expansion plans and cut costs but businesses and clients that can survive these tough times are likely to become more lucrative as the good times return.

What is certain is that a hardening rate environment is now needed far more than ever. As I wrote in January, "independent brokers still have the upper hand when it comes to the distribution battle" and client relationships are set to become more important than ever.