Healthy competition

Insurance brokers have been written off ever since Peter Wood had the bright idea of selling motor insurance direct to the public in the early 1980s. But, over the past 20 or so years, brokers have shown great resilience and adaptability. The number of high-street personal lines outlets may have reduced, but the commercial broking sector is as strong as ever. That said, there is little room for complacency as many pressures and challenges remain, not least the arrival of statutory regulation at the beginning of 2005. But, despite the scaremongering, it is clear that brokers are not just going to throw in the towel.

Ensuring survival

It is probably fair to say that few brokers openly embrace working under a regulatory regime. At the same time, it is also true to say that many will be in a position to cope with regulation. In essence, regulation will effectively codify existing good practices and require that procedures are modified or extended simply in order to introduce consistency across the industry.

The practicalities of compliance under the Financial Services Authority, however, are only part of the picture. According to research house Datamonitor, two-thirds of commercial brokers believe the greatest competition comes from other brokers. Around 17% are worried by the threat from banks and building societies, with 15% concerned that direct sales might begin to have a greater impact (the balance comprises self-insurance and alternative risk transfer). Statistics from the Association of British Insurers confirm that brokers consistently account for between 85% and 88% of the market.

The personal lines arena is, from the broking perspective, much more vulnerable to outside attack. As noted, the population of high-street firms is under threat. Those that remain tend to be national organisations backed up by hefty centralised resources - the likes of Swinton and Budget.

Personal lines has become a commodity market, economies of scale are clearly vital, and the arrival of regulation will only exacerbate this through process and systems efficiency.

In 2004, the high street saw the departure of one of the main players in the broker market as Hill House Hammond was closed by its parent, Norwich Union. Commenting on the move, Patrick Snowball, chief executive of NU, said HHH's business would be transferred to the firm's direct arm: "We have seen significant changes in the way customers buy their insurance.

Many customers now understand their motor or home insurance needs and will shop around themselves for the best deal. The number of customers who shop on the high street to arrange their insurance has also fallen significantly as many prefer to deal directly with insurers by telephone or via the internet."

Other brokers were heartened by the NU move insofar as it removed a competitor from the market. Firms that retain a high-street presence argue that, with widespread disillusionment with call centres, demand for face-to-face marketing will increase. The fact that Barclays Bank has announced an initiative to increase the number of customer-facing personnel in its branches suggests this is not wishful thinking.

Threats remain, however. Tesco has more than one million personal lines policyholders and the other supermarkets are building their presence, fuelled by access to customers at the point of sale. Affinity marketing through utility companies and financial services operators is growing apace. And the internet is proving a powerful marketing weapon as access grows throughout the population.

Surviving brokers are harnessing communications technology as a way to counter this last challenge. They believe that the internet is a great leveller and that it gives them a platform to compete with the biggest firms in the business. Some might counter by saying that 'e-shoppers' will want the comfort and security of a major brand, but many of the main brands in direct motor are only three or four years old, and some are much younger.

Clearly, purchasing decisions will rest on price, clarity and impact of marketing and overall quality of service. If the playing field is level, brokers should have no fear of the competition. And, in this regard, regulation will be a benefit because buyers will know they are buying from a regulated firm and thus enjoy the comfort and security that attaches.

One consequence of the imminent arrival of regulation has been the development of general insurance networks. These offer centralised compliance, including meeting FSA capital adequacy requirements and buying professional indemnity insurance. They also offer administration facilities, easing the burden on brokers and adding benefits in terms of marketing support.

Proliferation of networks

Networks have proliferated in the financial services market to the extent that they themselves have begun to consolidate. It is also likely there will be further development of general insurance super-brokers operating at a regional level. These are likely to grow organically and through the acquisition of smaller firms in their locality.

An alternative to joining a network is to retain a compliance service company, which monitors the firm's constitution and activity vis-a-vis FSA requirements but does not interfere with operational activity. Indeed, the broker retains all responsibility for achieving compliance, fulfilling capital requirements and arranging PI cover.

Another model is provided by the Folgate Partnership, which takes minority shares in brokers with a minimum commission income of £1m. In return, the brokers can benefit from a capital injection, access to Folgate products, compliance, IT, marketing and training support.

The Unitas alliance of 11 major brokers also gives members access to shared facilities, spreading cost and providing moral support and encouragement.

One member is Birmingham broker Perkins Slade, where chief executive David Slade remains bullish about the prospects of the commercial broking industry: "I am massively optimistic. We are entering a golden age for brokers. Regulation will sort the wheat from the chaff and present truly professional brokers with huge opportunities."

But Slade remains realistic about the burdens that regulation will bring: "There will clearly be costs and lots of form-filling, which is not welcome, but we just have to get on with it. It is a question of getting good systems in place and adapting to the regime as it evolves. We have a lot of bridges to cross but we are confident that we will survive and prosper."

One of the issues that is expected to dominate broker-oriented sessions at the forthcoming Chartered Insurance Institute conference in Birmingham is how standards within the broking industry can be driven higher to help achieve compliance and improve customer service. There is a clear need for education, training and continuing professional development activity, and the CII is dedicated to providing brokers with learning and competence tools and qualifications that reflect the regulatory need to be 'fit for purpose'.

At its annual conference in September, the CII will launch its Faculty of Insurance Broking, which will champion standards and accelerate the professional development of those working in the broking fraternity.

David Slade argues that emphasis on training and competence can only be a good thing: "Very few brokers up to now have had formal procedures for this area and it is great news that they are beginning to focus on it. It can only help our efforts to recruit and retain the best people if we have a clear notion of how they can be developed professionally throughout their careers."

Quality of service can be a tricky subject, especially as some brokers feel they are, on occasion, obliged to 'carry the can' for what can be shoddy service from their insurer partners. And at least some insurers concur.

Kevin Pallett at Fusion Insurances says insurers have a significant role to play in ensuring that commercial brokers survive: "Standards of service are so poor in some instances that brokers are spending more time with their suppliers - the insurance companies - than they are with their customers.

That is crazy. Our job as insurers is to work in partnership with the broker to build long-lasting, mutually rewarding relationships with clients.

That means getting service right in terms of paperwork and having people available who can give answers and assume responsibility.

"I think we will see brokers become increasingly discriminating about which firms they will place business with on the basis of the quality of service and support they receive."

Axa's efforts in terms of helping brokers meet the FSA training and competence requirements include its Campus initiative. This resource library contains over 90 general insurance learning programmes and includes the CII's ed.ASSESS facility, which means that brokers will be able to use assessments to demonstrate compliance.

Colin Calder, head of broker development at Axa, said: "This is clear demonstration of the support Axa provides to key business partners. By using Campus, brokers can plan, direct and monitor all training and competence within their organisation. Brokers can use Axa Campus to demonstrate a clear record of competence to the regulator and clients."

Sandy Scott, director general of the CII, said the initiative will help brokers prepare for FSA regulation in 2005: "The broad range of technical learning and assessment tools will facilitate cost-effective and ongoing compliance, boost overall performance and raise standards for the benefit of the entire industry and the customers."

Technology is seen as offering the potential to improve performance by both brokers and insurers. Calder adds that direct writers will try to exploit any weakness that arises because the broker market is not fully up to speed: "We need to get our act together in terms of our electronic capability. That means delivering state-of-the-art policies online to brokers' offices. If we don't do it, we create a marketing opportunity for someone who wants to sell direct."

Improved communications

The i-market initiative, backed by a number of pro-broker insurers, aims to improve communications between insurers and brokers, eliminating errors and bringing advances in terms of speed and efficiency. The hope is that, by streamlining the process, i-market will also reduce costs and thus make it difficult for direct writers to undercut prices in the broker market.

Jon Morrell, head of distribution at Groupama - another i-market supporter - says the broker market must continue to drive the project forward: "We need to keep our shoulders to this particular wheel or we risk seeing further encroachment by direct sales into the commercial arena. It is clear that commercial customers value the professional advice and service that a broker can give, but if we allow direct writers to commoditise the products, it will be the thin end of the wedge."

Brokers are currently preparing for regulation, which means filing their applications to the FSA and creating the structures and routines that will facilitate compliance. In that regard, 14 January 2005 should not bring any major surprises. However, the way the market adapts over the following months will determine its long-term viability and the CII, with the launch of its Faculty of Insurance Broking, will be there to provide support all the way.