The road ahead

Oliver Laughton-Scott, managing principal and founder of IMAS Corporate Advisors, points to continuing innovations in technology as a major factor that has and will continue to bring great change to the industry. "We live in a technological world where the ever-lower costs of using the telephone, credit cards and interactive computer systems led to the direct revolution. The web has been an enormous factor behind the success of Tesco entering the market as a branded supplier, for example."

He adds that, while the direction and impact of technology is uncertain, data-mining is an area that will differentiate companies in the near future.

"Is someone who buys organic food, eats lots of fruit and vegetables and buys environmentally friendly products a significantly better risk? If it turns out that they are, this will give those organisations that can profile customers a key competitive advantage," he explains.

Laughton-Scott also considers technology to be drawing the industry towards what he calls reality-based insurance. "In 10 years, technology will exist for the public to be personally microchipped - reducing processing times for passengers at airports, dramatically cutting credit-card fraud, automatically paying congestion charges, etc. Motor insurance costs would be based not only on actual mileage, but also on how the car was driven, where it was being driven, at what time and by whom."

Concerning regulation, Laughton-Scott predicts: "This will have remarkably little impact after the initial workload. The main impact will be at the peripheries of the industry, with businesses selling insurance as a sideline being forced out of the market as costs of compliance make it uneconomical."

He continues: "Consolidation will continue to be driven by access to and cost of capital issues for buyers and by age for sellers. If technology converts small to medium-sized enterprises to effectively larger premium personal lines businesses, there will be wholesale rationalisation of the smaller end of the market, as happened with personal lines insurance, and a move to direct insurer provision. Technology will be the driver, not regulation. We continue to see a steady stream of new companies being set up and prospering. Consolidation is under way, but so is regeneration."

Andrew Paddick, director general of the Institute of Insurance Brokers, says: "Regulation will be the major issue for the next 12 months. We are currently surveying each of our 1000-plus members to determine their intentions with regard to Financial Services Authority compliance. So far, we have contacted 200 members, of which 92% plan to become directly authorised. Those that are not applying tend to be the very small firms that are looking to sell or as yet haven't decided what to do."

He adds: "I believe we will see a fallout of 10% post January 2005. Brokers are fiercely independent and do not make very good employees, and this is a disincentive to mergers. However, we are going to see an increased number of acquisitions. Most brokers are in their 50s and 60s and, as they approach retirement age, many have no succession plans. Family succession is rare these days and many do not have competent management in place to take over so they will be forced to sell. In 10 years, at least 50% of brokers will have sold up and retired. The value of brokerages will increase after January 2005 because they will be authorised and should be in good shape. Competition acquisition activity will also push prices up as demand exceeds supply."

Paddick also considers that, unless brokers are really geared up for personal lines, the competition will be fierce and the supermarkets will have consumed much of the market share. "There is a lot of talk about SMEs being snapped up by direct insurers but I believe only a small proportion will go direct. SMEs need and want the expertise of a broker - there is no substitute for face-to-face advice. However, it has to be economic to provide a service and businesses paying less than £1000 in premiums will probably go direct. Brokers that are capable will make the most of online trading and can seize this market as they are more efficient and have more knowledge than the big insurers."

Paddick also predicts that many networks will prove to be unsustainable.

"We are already seeing a number of networks fail. They are unlikely to succeed in general insurance because the margins are not there, unlike in the independent financial adviser sector where large commissions are paid. It is no good trying to create a large consortium and asking insurers to pay increased commissions, as they are not playing the game."

Doug Phelan, business development manager at Rubicon, says client expectations will drive many future changes. He explains: "It is important for brokers to focus on what they are good at. However, with clients expecting greater service, outsourcing can be used to provide non-core activities such as personal lines and risk management, marketing and claims management. It is about selling more to customers and improving the service offered."

Visionary IT

With regard to the changes that regulation will bring, he says: "The full impact of regulation will not be known for two to three years and what happens during this period will probably shape the market from then on."

Tony Vince, chief information officer at insurE-com, reiterates Laughton-Scott's vision of great change through technology: "It is hard to believe that, 20 years ago, most of the IT that that is taken for granted today didn't exist. Personal computers were rare, the Windows operating system didn't exist, the internet and email were unheard of. The only certainty about IT in 20 years time is that we won't recognise it from today and that it will perform functions that we cannot even imagine.

"In the short to mid-term, IT will be used to increase speed and service, while reducing cost and human intervention." He also agrees with Laughton-Scott's prediction that more products will be standardised, with SME commercial risks rated automatically in the way that personal lines are. However, he adds: "Intermediaries will remain an essential part of the process through advising and supporting customers, using their knowledge and experience to ensure appropriate cover is arranged and operating the automated process with the underwriter, which is very likely to be an IT application."

He adds: "This trend has already started, with more insurers developing web services, where the intermediaries' office systems interface seamlessly and immediately, to obtain and confirm quotes for a variety of risks. We are already seeing a huge demand for this sort of connectivity as intermediaries realise the potential benefits for them and their customers."

Vince is convinced that IT will become all-pervasive and, in order to deliver advice and support, will enable brokers to access information at any time, anywhere and not necessarily from a desktop PC. He continues: "Mobile devices with full access to all relevant information will become the norm rather than the exception. The arrival of tablet PCs, which have embedded wireless connectivity over the internet back to office systems, allow intermediaries to work more flexibly, with systems supported by intelligent PC applications. For example, dynamic data collection forms add to client and risk data already held in other systems, collecting the necessary data just once. Providing a client with an immediate set of quotes in their office will be possible and will happen within the next few years. Companies are already outsourcing IT, or using application service providers to provide IT infrastructure, which frees them up to focus more on their customers."

Vince also says that all of this is possible at present; such IT will become commonplace in the next few years and the norm within five years.

By this time, he predicts that brokers will be entirely reliant on it.

Mark Ryder, commercial director of Misys General Insurance, also shares the view that, post-regulation, successful brokers will be the ones using their IT effectively to automate routine compliance processes. He adds: "Because systems-driven automation offers a degree of protection for the business, this will help to ensure that all staff comply with regulatory requirements."

Ryder also stresses the importance of IT to help brokers mitigate against human error as processes become more automated. He too cites the benefit of this in helping release times for brokers to concentrate on the client, which is also in line with the goals of the FSA.

Despite further market consolidation, Ryder believes there will be more insurance business written in future. "I don't think anyone would argue that there won't be fewer brokers, however, there will be the same volume - if not more - insurance business to be underwritten. As a result, the remaining brokers are likely to be larger, controlling more gross written premium."

He adds: "The software houses that currently have the strongest market position will continue to absorb the largest number of brokers, leading to potential consolidation among the smaller, newer entrants."

He also ventures that, if current economic growth continues, people will have more disposable income and will buy more products that require insurance.

"This is good news, particularly for the personal lines broker. It is the brokers that have planned for growth that will continue to be the most attractive to insurers," he predicts.

Ryder too is in no doubt that technology is likely to play a major part in the future of commercial lines as it has within personal lines - replicating the efficiencies for commercial brokers and insurers.

He also says: "SME business was once an area that was often avoided by brokers because of the manual and labour-intensive trading methods associated with it. However, this will be transformed into a lucrative opportunity, through the use of electronic trading facilities.

"The development of a fully integrated electronic process will instantly improve efficiency, enabling brokers and insurers to make the expense savings and service improvements required to be successful in today's market."

He adds that insurers will continue to realise that, as the commercial market becomes more price-dependent and reliant on automation, they will look at ways of integrating systems with those of the brokers.

With regard to networks, Ryder is more optimistic than Paddick about their sustainability. "The continued segmentation of brokers by leading insurers, such as preferred status, and expense reduction means that more are likely to join networks in order to compete and receive service.

"The insurance market is cyclical, competitive and has many different distribution channels, and the resilient independent broker will continue to be very important. While some networks may become stronger, they would become so by working to the advantage of all parties concerned, brokers and insurers."

More time with clients

Lee Gladwell, Capita Insurance Services' business development director, also sees the greatest changes being brought about by the advent of new technology. "The advances in systems will probably bring about the most changes in broker firms in the next 10 to 20 years. There is a real need to improve efficiency of the brokers' interaction between customers and the underwriters in terms of both new business quotations and renewals. The more advanced technology will ensure the communications flow is slick."

In addition, he too mentions the outsourcing of policy administration, premium collections, credit control and claims management. He adds: "This will be the norm even for small broker firms as they streamline their operations so they can spend more time with their customers and less on these non-core activities. The increasing sophistication and reliability of communications technology will also fuel the growing number of smaller and regional brokers forming alliances and networks to achieve more leverage in the market place."

While specific changes are difficult to predict, one certainty is that IT will become an ever more critical part of all businesses. In preparation for this, brokers need to ensure they are working with IT companies that are looking to the future and that are developing those applications and services that brokers will need to keep abreast of the competition.