Regulation and IT are top of the agenda

Richard Adams: What is the greatest challenge facing UK brokers?

Richard Sheikh: The Financial Services Authority would be at the top of my list. Technology would be next, particularly with the promotion of imarket.

Ashley Canning: The challenge for the industry is to ensure the technology works. From what I read, imarket does seem to be working although there have been negative comments. It is imperative that, as an industry, we get it right and look to insurers to help, otherwise we will look foolish.

Richard Sheikh: In the past, we have had people saying they will deliver, but will they? We need to make sure it will work this time.

Alec Finch: I think a more immediate challenge is restoring our credibility after a hard market. Now that we have a soft market we are experiencing problems managing our customers. We have to get back to a position where we can be profitable but trying to avoid high premiums. We just do not have any credibility. That is a bigger challenge now than the one we are all facing, which is coming to terms with regulation.

Stuart Reid: If you have a client that you saw two years ago and the premium doubles, you would think they would be happy to see their terms issued at half the level it was two years ago. But they aren't happy.

Do any other business overheads fluctuate as much as insurance? No. It messes up forward planning and profitability for all of us. Insurance companies have a lot to answer for in that regard. They look to brokers to try to quote a hard market. Another important challenge for brokers is their relationship with insurers. We have the situation with risk transfer, which will no doubt have some impact on credit terms. Generally, the service that brokers receive is tiered for different size brokers. That relationship with insurers will be paramount to any business in the next few years. It's a very important challenge.

Richard Adams: Do you all agree?

Phillip Hodson: I don't think the FSA is the major challenge. Any broker with a strong financial services arm will have gone through the traumatic period with the FSA and they will have understood the needs and requirements that are necessary for any well-run brokerage. Most are well run and ready to meet the challenge. Scale is vital and becoming increasingly so and is needed to obtain quality, trained, motivated and caring staff, which we find difficult to recruit.

Richard Adams: Concerns have been expressed about the low number of brokers that have applied to the FSA. Are brokers being complacent?

Alec Finch: I think they are taking it very seriously and are taking time to get regulatory business plans in place. We are a member of Unitas and only one of our 11 members has applied so far and, privately, I think they probably regret having applied so early. There are a lot of outstanding issues that are yet to be resolved. It is a sign that the industry is taking regulation by the FSA very seriously.

Stuart Reid: What about the secondary market? It's a big income earner for some of the insurance companies. How that will pan out I have no idea.

Ashley Canning: There need to be further guidelines issued, particularly for the secondary intermediaries. However, it should not be a big challenge for professional brokers.

Paul Picknett: Hasn't the regulator failed by not issuing enough guidance?

Peter Beddis: You ask the FSA a question and they can't give you a direct answer. We don't have an independent financial advisory arm so this is new for us but we are on track to apply. The problem is that they never give a direct answer to a question.

Richard Sheikh: We have had the same experience. With submissions due by July, most brokers, in my view, will have their submissions in by the deadline.

Paul Picknett: That also creates a logistical problem for the FSA. There will be a wave of applications coming in at the same time, at the last minute. They have admitted that.

Steve White: The FSA also received a lot of mortgage applications a fortnight before the March deadline for a discount. If brokers rush to apply too early, they might regret it. Regarding the secondary intermediaries, the British Insur-ance Brokers' Association has been working with the Associa-tion of Residen-tial Managing Agents to produce a joint communique for members. If brokers have property managing agent clients they can give them the information we have put together.

Ashley Canning: But, if you have those discussions with secondary intermediaries, an alarming number of them haven't even heard of regulation. It says something about their trade association.

Richard Adams: To what extent do you expect the structure of the broking market to change by January 2005 and is consolidation still happening, even if not at the pace anticipated by many?

Stuart Reid: I think we have been surprised that there hasn't been much quick-quick sell by small brokers. I have been surprised that the brokers with £2m to £5m commission levels have sold what could have been directly authorised and have dealt with it well. I think the pricing of these brokers is perhaps out of kilter with reality. There are a few out there who are paying very high prices and there are other, more experienced individuals who are not prepared to pay that. So I think that has dampened the market. We might see more activity at the end of this year. We will have to wait and see. The market has been quieter than I thought it would be, with a few exceptions.

Richard Adams: Do you think there will be a second wave of brokers who will find it too onerous?

Stuart Reid: I genuinely hope so. But it is difficult for a broker in a small town to discuss with someone with whom he has been competing for the last 20 years to ask whether he can buy them or whether they can buy his business. But, it is natural that some will do better if they collaborate. Regarding service from insurers, critical mass and the size of the brokerage will be ever more important.

Richard Sheikh: There have not been a lot of acquisitions but it should be borne in mind that sole proprietors are aged 55 plus. It will be interesting to see whether, post-regulation, they have an appetite to carry on. Unless brokers are of a certain size, insurers won't deal with them. At the moment a lot of people are sitting tight.

Phillip Hodson: Age and fear are the two main drivers. Business is simplistic. Broking is just another business and the fundamentals are the same. If you move away from the fundamentals of business you get into bother.

Steve White: They might also be taking a medium-term view that their business will have more value by getting authorised.

Phillip Hodson: Price factors are interesting. I would say that some national players have paid what I consider to be ridiculous amounts of money for fairly ordinary businesses. You should only acquire the brokers you want and not deviate from that whether it is niche or local or whatever.

Richard Sheikh: My own feeling is that if you are going to acquire it has to be for the right reason and the correct price is important.

Phillip Hodson: Culture is also very important. The acquirer and the acquired must have complementary cultures.

Alec Finch: The FSA is not driving consolidation. It might be the tipping point, but I think there are other issues.

Ashley Canning: It (the FSA) is the straw that breaks the camel's back. The reality of compliance has yet to hit home. We are all talking about it and perhaps companies here today are further ahead than most. When it comes to implementing regulation it could be a different story. We might see some movement towards the end of this year or the beginning of the next.

Stuart Reid: But we have to write a business plan every year and it has not necessarily been in the nature of a broker to do that. When a broker has a lot of clients to see it is something of an imposition.

Peter Beddis: The other thing that has happened is that you do not get people who leave Marsh and Aon to set up their own brokerage. It doesn't happen any more. Where are tomorrow's independent brokers going to come from unless people like us remain independent for the longer term?

Alec Finch: Again, it is a question of scale.

Richard Adams: Is the growth of the super-provincials set to continue?

Stuart Reid: Yes, the super-provincials or the quasi national brokers. There are certain prerequisites for that. Super-provincials do not necessarily operate in just one area so, if you have a network, then the consolidation is much easier because you can bring in new brokers. Cash is being invested in these companies at the moment and there is a lot of money out there and a lot of consolidation coming. Service levels will be different. Is it set to continue? Definitely.

Richard Sheikh: There is certainly a lot of venture capital available.

Richard Adams: Do you think the value of the super-provincials will rise because of the contraction of the small end of the market?

Steve White: Can the market support many more super-provincials?

Phillip Hodson: I don't think there will be more than about four super-provincials. Looking at Jardine Lloyd Thompson, after that there will be only a few, whether it is three or four. They will be national firms of a certain size hoping to serve their corporate clients.

Richard Adams: How successful have brokers been in training and retaining staff?

Phillip Hodson: We have been very poor at training and recruiting. As a small broker you tend to spend your time building the business. I think it is a great weakness and I would like to think that, as we get bigger and stronger, we will invest more money in training. That is not the same as attracting people into the market place as opposed to accountancy, for example. We must encourage youngsters to see that it is a lateral thinking industry, it is a 'stand on your own feet' industry and I'm not sure how we will do that. Getting and then keeping staff is a major issue. Both we and Oval have been poor (at training) and would like to be better. With scale and resource and perhaps some help from insurers would be the way forward.

Paul Picknett: But is it not true that, in the past, brokers could fish in the company market for their staff? In those days there were structured training programmes for people in insurance. For a number of years there was a dearth of talent and that was a traditional pool for brokers.

Phillip Hodson: My son has gone from working for me to work at Willis because they offered better training and salary.

Richard Sheikh: Most brokers are guilty of not training. We want someone with knowledge and experience. Brokers used to get the top staff from insurance companies. The FSA will require that people are competent.

Peter Beddis: But that is the wrong reason, because you are forced to do it.

Ashley Canning: This is perhaps where the provincial broker can make a difference. I do not think I know anyone who planned to work in insurance and, somehow, we must challenge that kind of mentality.

Alec Finch: We are doing nothing as an industry to work in schools.

Ashley Canning: But it has to change. Most schools have a careers department and local insurers or brokers should be in touch with them. It sounds idealistic but it would really make a difference.

Stuart Reid: Maybe some of this will happen if the broking market consolidates. They will have more time and energy to spend on training. We have actually done more than most, we have Investors in People and take that very seriously. A lot of insurance companies have been very helpful to us with regard to training. But it is outrageous that we have not done anything for schools. It needs to change. I would like to hear what the Chartered Insurance Institute can do about it because I think they could be doing a lot more.

Richard Sheikh: The head office needs to provide the local institutes with more information. Certainly the CII could do a little bit more to promote insurance as a career.

Alec Finch: And the CII can do that.

Peter Beddis: We have the opposite view of all this. Our retention rate is very high. We recruit from graduate fairs and we do not simply encourage people to take CII examinations - it is compulsory. As a result we have a very low turnover of staff and have people who are progressing through the business. We keep in touch with the local university.

Richard Sheikh: Is this you or the CII?

Peter Beddis: We do it ourselves and we have been very successful.

Steve White: My son is 17 and looking at a commerce degree - he can get accountancy, actuarial, etc., but there is no mention anywhere of it leading to a career in insurance.

Alec Finch: I was asked to talk to General Certificate of Secondary Education pupils recently. My first port of call was the CII office - I just wanted a short video or some sort of support material. There was nothing.

Paul Picknett: A few years ago I spoke to students at a university about a career in insurance and, again, there was no material. There is no support. But I was able to explain that I had worked in four countries and done a range of different jobs. I had students coming up to me saying they had no idea there were so many career paths they could follow within insurance. We are not communicating that to young people.

Stuart Reid: It is a serious problem and it is not getting any better. We were talking about reputation. We do not seem to have that one voice and it is extremely disappointing.

Richard Adams: Do you think The Association Of British Insurers has a role to play?

Richard Sheikh: But they work for insurers. Training is the CII's role. I am glad that BIBA has taken this seriously. Although it is a trade association.

Steve White: We are very keen to help.

Alec Finch: Nick Prettejohn gave a speech at the CII conference last year and all the statistics he used were expressed in dollars. He had to go to the US to get any information. No UK organisation can give you an overall view of the market.

Richard Adams: Are enough quality brokers coming into the market?

Peter Beddis: Something interesting happened to us last year when one of our team won the Young Achiever of the Year award and, within a week, she had been taken out to lunch by Marsh and Aon. It really annoyed me and I called my counterparts at both companies and had a word with them.

Ashley Canning: We have been recruiting for some junior positions within the company. We have received CVs for older people who are perhaps changing industries and are now looking very closely at them. It might be better to get bright young sparks but these older candidates come with a much better work ethic and are far more mature in their approach.

Richard Sheikh: They also won't have itchy feet. Youngsters often get itchy feet.

Stuart Reid: Perhaps we should have an 'old achiever of the year' award.

Ashley Canning: It's a change of policy for us. We were shooting ourselves in the foot by saying they were too old. We may pay a bit more for older staff but it pays off. I think the time has come for us to shift our horizons. It is prejudiced and it is wrong.

Richard Adams: Stuart, you were mentioning that there are not enough skills.

Stuart Reid: Yes, certainly a lot of senior positions have traditionally been filled by brokers recruiting from insurance companies because their training tends to eclipse that done by a broker.

Peter Beddis: One of the keys when talking to someone about their function is the appraisal - you must do them every six months. It is partly about what you think of the employee and what they think about your business and the industry in general. What do they like and dislike? It is amazing what comes out of these conversations. You can talk about what they want more help with.

Ashley Canning: You can gain a certain amount of loyalty that way. I think it is great that the workforce has been given a voice. We have found that it's very successful. Some fight against it but they tend to be the ones who move on.

Richard Sheikh: Occasionally, there is someone having a moan about a boss but you have to encourage them to be honest.

Ashley Canning: The real key is to have regular dialogue. It is an ongoing process.

Richard Adams: What are your views on the outlook for the market and for brokers in particular? What are you most concerned about?

Stuart Reid: Short-sighted insurance companies. Rates coming down.

Ashley Canning: It's ridiculous. If only we could have a bit more stability. It makes it difficult for us to answer questions like this because we do not know what is around the corner. We should be better than that.

Stuart Reid: Reputation is getting me down. Clients are telling me that everything I told them for the last two years is rubbish.

Richard Adams: Will direct writers get a slice of the market?

Stuart Reid: Yes, in the private commercial market. The niche markets and mid-market commercial will be OK for a good time yet.

Richard Sheikh: What was being written about insurance for scaffolders was coming down from 10% to 5% If you look in the City, the new companies are coming in, but Lloyd's is not increasing its capacity. It is looking for quality business. Whose fault is it? Is it the brokers' fault or the insurers' fault that we have a soft market?

Stuart Reid: Without the offer you would not be able to sell it. If a broker has a large risk and his client decides to remarket his business, it could be argued that you would have to explain price as against cover. On a £5000 commercial risk? It is not necessarily the new entrants that are reducing the market. What upsets me is that it is the big players. The ones who have been saying let's hold this market. And they are not.

AT THE ROUND TABLE

GUESTS

Peter Beddis - Beddis and Partners

Ashley Canning - Keelan Westall

Alec Finch - Alec Finch

Phillip Hodson - Oval

Paul Picknett - Groupama

Stuart Reid - Stuart Alexander

Richard Sheikh - Camberford Law

Steve White - BIBA

HOSTS

Professional Broking

Richard Adams - editor

Alex Broad - editor in chief

Nicolle Farthing - senior reporter.