A place in Europe

As businesses in general are expanding beyond their UK base, brokers are having to adapt to accommodate the more pan-European strategies of their clients. Before rushing into cross-border deals, however, there are several challenges to consider, as well as many options when it comes to choosing a route into Europe.

According to Paul Merlino, Willis' chief operating officer for continental Europe, the main benefit to UK-based brokers in having affiliations with European brokers, or having offices in Europe, is that global or UK-based brokers are able to offer their European clients the flexibility they require. Merlino explains: "When you have physical offices in Europe, your clients have the benefit of being able to choose what suits their needs best from a range of products - including Euro policies, controlled master programmes and co-ordinated local programmes. Brokers that don't have an on-the-ground presence are only able to offer their clients Euro policies. The other major benefit is the high quality of service that local European offices are able to provide."

However, in an era of increasing technological advances, is it really vital to have a physical presence in a country or can a high-tech UK-based broker rely on e-mail, internet and video conferencing? John Needham, financial services audit manager for CLB Littlejohn Frazer, observes: "On certain commercial business, possibly at the larger end of the scale, having multiple locations will help it attract clients. It is an attractive proposition to a potential client to have local presence and it reassures clients," adding that having a local presence also shows commitment to a region or country.

Technological advances

According to Needham, technological advances help with communication and service delivery but unless the product is simple, or the client has simple requirements, then the technology will not overcome the requirement to have knowledge of the local market or custom. He explains that the competition for large accounts among the large brokers is high and, therefore, many put effort in by travelling or visiting such clients, meaning that face-to-face communication is the order of the day.

One view is that ironically, technological advances have had the effect of increasing the need for a physical presence. Merlino observes: "Technology-savvy clients are now demanding real-time answers. This is something that only brokers with European offices are able to provide quickly and efficiently. Technology is no substitute for servicing clients' wants face-to-face."

Needham adds: "In many cases, once a piece of business is placed, multinational companies deal with their insurances through the office where the client relationship is initiated. Other broker offices may only get involved in the administration of the policy, for example, appointing professionals in the event of a claim."

For those brokers that do choose to explore opportunities outside the UK, there are various routes into Europe. David Hough, executive director of the Lloyd's Market Insurance Brokers' Committee, points in particular to the use of networks, which have seen involvement from some medium-sized UK brokers. Hough observes that this is one route through which smaller regional brokers can extend their reach.

Needham warns that it is never straightforward to set up an overseas operation, simply due to geographical and language barriers, even after overcoming local legal and compliance issues. As far as the start-up route is concerned, Needham points to the potential for firms to team up with new teams or local experts. He explains: "It is a lot easier to have local resource or knowledge than to have to learn the ropes. Even appointing local professional advisers can be difficult - again due to geographical and language issues. A broker may end up paying for a branded, more expensive firm simply because it is a name it recognises and it does not know the local experts."

Needham adds that the easiest route is to acquire or invest in a business that is already established but warns that: "In any of these scenarios, the overseas operations will place a significant demand on the UK management team in terms of monitoring, support and financing."

Regardless of your chosen route into Europe, there will inevitably be certain obstacles to overcome. Perhaps the most obvious are those related to cultural and linguistic differences. "Cultural differences are one of the biggest challenges that the multi-national broker faces," asserts Merlino, who points to the fact that clients still value face-to-face interactions, particularly when it is with someone that speaks their language and knows their culture.

Patrick Thomas, European sales director for Aon, points to the top end of the business world, commenting: "At that level, it is valuable to have someone that can make those contacts and talk to these large multi-national companies in their own language initially. There is no question that if you are trying to do business with Italy, most Italian risk managers and finance people tend to be Italian-speaking and not comfortable discussing risk and insurance in English."

It would also be vital to understand the legal and regulatory requirements in whichever European country you establish a base. "Each European country has different rules," says Needham, who points in particular to issues surrounding the formation and staffing of a new company in a new country. "Again these requirements are different in each country," adds Needham.

Local offices

Merlino emphasises the importance of having a local office when faced with various countries' rules and regulations. He observes: "Eastern European and Southern European countries outside of the European Union have different sets of insurance rules - in fact, even within the EU there are some discrepancies - and only by having a physical presence there, will a broker understand these rules and therefore be able to provide its clients with the best possible advice. If you do not have a local office, requests have to be filtered back to the headquarters, and this will take a lot more time as local legal or regulatory issues may need to be addressed."

It is worth considering that some geographical areas may be more attractive than others. Thomas observes that some countries like the Netherlands have a huge over-capacity of brokers, agents and insurers, explaining: "It can be a constant battle to make yourself heard among a relatively small pool of accounts against an over-population of local brokers." Thomas adds that conversely, areas like Spain and Italy are still generally agency or direct, rather than broker markets, and there is still much potential development for brokers.

According to Merlino, brokers interested in more rapid growth opportunities are "looking eastwards" and are setting up offices in countries like Poland, Romania, the Ukraine and Russia. Merlino warns that while the returns on investment in these countries are higher in the short term, brokers also run higher risks. "This is because as brokers move eastwards out of the EU, they run the danger of using insurers that are not properly capitalised and regulated. The advice of a multinational broker with on-the-ground offices is, therefore, of paramount importance to avoid such pitfalls. Another risk that brokers run in these countries is that loss prevention is inconsistent and the possibilities of loss, including catastrophic loss, are high."

Pan-European activity

UK-based brokers looking to Europe are certainly not alone, and there has been some notable pan-European activity. Hough believes much of this stems from brokers responding to the needs of their clients: "What we are seeing are the smaller UK brokers becoming more interested, as their local UK clients develop operations around Europe. So let's say a mid-sized company in the north of England, which is serviced by a local Manchester broker, decides it is going to establish an operation in France, that broker might seek to establish a correspondent relationship in France."

European activity also needs to be put in context of the more global outlook. Needham comments: "Where brokers have been looking overseas there has been more interest in pushing into emerging markets, where firms may see more opportunity through overall economic growth and increasing demand for insurance, rather than particular products, for example, in India, China and the Middle East."

According to Merlino, "Most brokers that want to invest in Europe have already done so or are in the process of doing so. In the future, while Europe will remain a popular option, more and more brokers will also try to simultaneously break into the BRIC (Brazil, Russia, India and China) markets."

There are certainly some significant challenges to overcome for brokers looking to investigate European - and indeed global - opportunities. However, this should not necessarily be a deterrent for UK brokers and many certainly believe it can pay dividends. Merlino observes: "Ultimately, if you want to provide top quality, flexible service to global and local clients, it is vital to be a multi-national broker."

CROSS-BORDER MERGERS AND ACQUISITIONS

Cross-border deals in Europe eclipsed domestic transactions and accounted for the majority of merger and acquisition activity in the financial services sector during 2005, as organisations sought new growth opportunities through acquiring second 'home markets' in Europe, or by making acquisitions in European emerging markets, concludes a new report, Financial Services M&A 2006, by PricewaterhouseCoopers LLP.

Cross-border deals accounted for two-thirds of all total transactions by value - 67% in 2005, up from 62% in 2004 and 32% in 2003. Cross-border activity was spread widely across all parts of Europe, and included both corporate and private equity bidders from the US. Emerging markets represented 15% of activity in 2005, up from just 2.5% in 2004.

More generally, European financial services deals were up 73% on the previous year to EUR78.9bn (£53.5bn), making it the second most active sector in M&A after energy. Average deal sizes were up 50% during the same period to nearly EUR400m, an upward trend that has continued for the past three years. No one country dominated European FS deal activity. Germany, Italy, the UK and Ireland accounted for approximately 58% of all FS deals, a marked contrast to 2004 where the UK and Ireland alone accounted for 63% of total activity. M&A activity in the European banking sector more than doubled in 2005 and banking was again the most active financial services sector, accounting for 61% of all deals.

Nick Page, partner in the transaction services financial services group at PricewaterhouseCoopers LLP, said: "Large, mature financial institutions increasingly face more limited growth opportunities in home markets and their size makes domestic transactions increasingly difficult due to potential competition concerns. This has led to acquisitive companies searching for cross-border opportunities in the higher growth markets of CEE, Russia, Turkey and Ukraine. We anticipate that this will continue to be an important feature of European financial services M&A in the next couple of years."