Looking forward - Unlocking the future

With oil prices escalating once more, continuing instability in the Middle East and the English cricket team actually beating the West Indies in a full test series this year, any business trying to predict the future is a brave one indeed. Where once five-year plans were all the rage, these days the average chief executive must find it difficult enough to map out the company strategy for the next five months. Still, past experience can provide a reasonable guide to what works and what does not and this is especially true of the UK insurance broking industry, which has changed dramatically in the past decade and continues to undergo a period of profound change with the onset of regulation by the Financial Services Authority.

Naturally, the advent of state regulation is one of the primary factors that people in the industry think will reshape the UK insurance broking sector over forthcoming years, and perhaps not before time. After years of prevaricating, resisting and finally accepting - often through gritted teeth - all are agreed on its importance and impact, which will be felt through accelerated consolidation as brokers decide to sell up, retire, merge or join a network to cope with the costs of the new regime.

"Regulation is providing fundamental challenges at the moment, but I believe it will ultimately improve the confidence and reputation of the industry. A stronger, leaner and fitter broker distribution channel will emerge in the future," claims Eric Galbraith, chief executive of the British Insurance Brokers' Association.

He accepts that there will be a degree of consolidation, but is not at all pessimistic about the industry that will emerge out of the mine of regulatory turbulence.

"There are issues around the cost of regulation, and I am sure we will see more comment emerge concerning costs, but it will strengthen the industry," he insists, adding "there are challenges, but we must maintain our focus and ensure we service the needs of the customer."

Brendan McManus, commercial director at Royal & SunAlliance, agrees that there will be further consolidation: "I think that will happen from 2008 onwards, because I think that is when regulatory procedures will begin to bear on brokers."

He adds that, from his point of view, one of the largest areas to impact brokers will be the growing importance of technology, which he claims will highlight a lot of frictional costs, helping brokers to reduce their costs.

McManus is reasonably sceptical about the impact that technology has played in the lives of insurance brokers so far, which is interesting given the attention paid to new releases of products by the major software houses.

"I think that technology has been more or less a hygiene factor," he says of its place in the insurance broking sector thus far. "The kind of software available has propelled brokers along at the same level of evolution."

"We are going to experience a period of real technological change over the next five years, and the early adapters will have the advantage," McManus adds.

Market reform

Bruce Carnegie-Brown, chief executive officer of Marsh in the UK, ties in the onset of statutory regulation with fundamental reform of the working and technological processes of the London market.

"There is a unique set of catalysts currently driving the need for market reform, impending FSA regulation not the least among them," he explains.

"Contract certainty at inception and a more streamlined and cost-efficient back office are two vital issues that the London market in particular needs to address. Technology for its own sake is not enough - we must ensure that the markets are happy to undertake the processes and mindset changes necessary for such reform."

He urges the London market to really get its teeth into embracing reform, claiming that Marsh is currently working on projects with a variety of insurance markets to eliminate redundant processes and improve the quality of service to clients in future.

"Delays in agreeing on wordings and issuing policies increase the risk to both insurer and insured and adversely affect the quality of service provided by the industry as a whole," Carnegie-Brown bemoans. "Critical to this improvement is a greater need for the industry to embrace technology in both the transmission of data between clients and markets and in storing data electronically - where it can be secure permanently - rather than in paper form where it can deteriorate or be lost."

Steve Jackson, head of non-marine at Lloyd's broker Cooper Gay, suggests that technology will also have an ever greater impact on the way risks themselves are assessed.

"The tools to quantify risks will become a lot more sophisticated," he says, commenting that, at the moment, the actual qualitative analysis of a risk can be a little sketchy and, in the London market, has often been no more than the acceptance of a risk on the basis of hearsay.

The effects of a move towards a more technological and actuarial approach could be far-reaching, he adds: "Underwriters have at their disposal a wide range of support and technical models, such that the personal touch will become diluted. We will end up with a much more level playing-field in terms of pricing. We may even end up with complete transparency in pricing, with brokers at Lloyd's looking at a screen and finding out the spot price, for example, for an earthquake in Mexico."

Although possibly far fetched, given the old-fashioned nature of broking in Lloyd's even today, such a suggestion is not beyond the bounds of possibility.

After all, he points out, the banking industry is now well used to looking at a screen and having a cost price given and, where the banking industry leads, others tend to follow. Also, customers' expectations could drive greater price transparency as at the moment they have little or no idea about the reason for the premium they are being quoted and its relationship to the wider market.

Although clearly important for customers, McManus also says that whereas price has been the dominant aspect of business for brokers themselves in the past few years, in the future, gaining access to the market will become the most important factor. With capital replenished and more underwriters appearing on the scene, he suggests a number of important partnering relationships will emerge over the next few years:

"For the last four or five years there has been a consolidation in underwriting; now we are seeing a disaggregation of insurers, with a lot of new capital," he comments. "An issue that will arise is how brokers can access that capacity. Some could be left flat-footed by their more dynamic competitors."

The formation of new broking outfits could well be crucial, according to Jackson: "The big companies, after the FSA, will get bigger and bigger but, with a greater critical mass it means people will not necessarily want to work for increasingly larger organisations."

"Initially, there will be further consolidation," Jackson adds. "But, after a settling-in period of two to three years, we will see a lot of brokers setting up their own organisations again. I am hearing from friends that it is difficult to be entrepreneurial in a big broker; it is difficult to call the shots when you are working for someone on the other side of the Atlantic."

Next generation

That the discontent of senior employees will lead to the formation of the next generation of national brokers is a theme identified by Grant Ellis, chief executive of The Broker Network: "In 10 years' time I think there will be more brokers than people think. The decline of the small broker has been predicted for many years, yet they have managed to survive and even prosper.

"We are seeing a consolidation, but this is not the first time this has happened. It occurred in the 1970s, when the current national brokers were the size of the likes of Smart and Cook today and slowly played the consolidation game," he explains.

"We will see the re-emergence of new regional brokers, which will be run by some of the disenfranchised tier of middle management who find their current employer has been swallowed up by a larger entity and their opportunity has disappeared. We will probably see the next crop of national brokers come along now. There is a huge amount of capital coming in to support what is effectively a growing, but cottage, industry and turn it into a national industry. After all, that is where Aon, Marsh and Willis came from."

But what of the concept of intermediation in insurance itself? Mr Ellis feels this is definitely under pressure for those on the personal lines side of the fence.

"We will see a significant fall in numbers at first, but then a gradual rise in the number of commercial insurance brokers," he predicts. "The days of the 'stack high, sell cheap' personal lines brokers, particularly on motor, are numbered. It will be the big brands and the white-label insurers in future for motor."

McManus worryingly suggests that it is not only personal lines brokers that could have something to fear. "Another issue might be the disintermediation of small to medium-sized enterprises," he says, claiming that research suggests that more small companies want to purchase their insurance without using an insurance broker at all.

"In 10 years' time we will see something radically different. The average profile of someone running a company will be quite different from what it is today. That person will be around 30 to 35 years old and will have grown up in the internet age," he says, suggesting that the immediacy of access that the web provides could well colour the thinking of the future young entrepreneur when it comes to the provision of insurance.

Lloyd's brokers might also face a very different market to the one they have been used to, according to Jackson: "I would like to think that Lloyd's can continue to be the market that does take risks and flies by the seat of its pants, but those investors that want that sort of volatility are few and far between. Lloyd's will have to attract mainstream investors, and underwriters have to justify what they are doing. Besides, they do want to be a major player, and not just a boutique. But, whether or not a sort of sub-market will be created for brokers with smaller underwriters - a sort of Lloyd's II - I don't know."

Europe

What with the recent dramatic expansion of the European Union from 15 to 25 Member States, might this finally be the spur to greater integration?

Galbriath has the final word: "During my career we have been looking at common ground on the European front, and I expect it to become more of a focus going forward," he says, suggesting that the European agency model could prove to be too costly and one that might have a limited shelf-life.

He indicates that, in the long term, the future lean and mean UK broking system could well turn out to be the model for other European brokers to follow. Now wouldn't that be pleasing?