Broker Management Forum

Richard Adams: As we are in the thick of another soft market, it seems a good place to start by looking at the thing that poses a challenge to brokers in communicating varying insurance costs to clients. What are the panels views?

Paul Dickson: The insurance industry is subject to these cycles and the position we are in right now is no different to what we have seen before.

Catherine Taylor: I agree it is inevitable, it is basically market forces. The cycle comes round, it is not a surprise to me and I do not believe it is a surprise to many brokers.

Richard Adams: Cathy, as an insurer, can you give us your opinion on the main factors influencing market cycle at present?

Catherine Taylor: There are a number of issues that affect it, the market forces and competition, which is our common enemy. There is certainly the availability of capital at the moment and we have had a benign claims period. Reinsurers are making some profit now and not all insurance companies have hiked their reinsurance costs. There are better returns on equity and there are improving efficiencies in most insurance companies as well. So, while claims costs are rising, there is no doubt that insurance companies are taking advantage of the fact that their profitability is allowing them to be softer on their rating. I do appreciate that this does not bring consistency into the market but it is the reality of the competition at the moment.

Lloyd Hanks: Shareholders play a key part in this. Clearly the squeeze is on, average claims cost is increasing, general expenses are increasing and yet we are not seeing the appropriate increase in rates. The profits of 2004 and 2005 have been eroded away and I can't really see any significant change until 2007. The 2008 forecast is pretty good.

Paul Dickson: Let's challenge the received wisdom here because there is another way of seeing things. Are rates soft? A lot of people will be thinking what an idiot, of course they are. However, if insurers maintain that they are actually making profits, then perhaps all we are seeing is evidence of the market at work. It is absolutely vital that participants in the market, insurers and brokers, follow the market that they themselves influence and help to create. I think there is a little too much grimacing over the soft market, yes it is unpleasant but is it any different to the market for oil? Petrol is now down to 92p a litre and a month back it was 102p a litre. We must follow the market. We do not know if insurers are chasing market share and it is costing them, and they are using the opaque nature of insurance accounting to conceal this. On the other hand they could be using a strategy based on sustainable market rates based on lots of hard work and lots of underwriters doing their job properly. Underwriting is the key here because, as brokers, we regret what we see as an almost terminal decline across insurance companies in the quality of underwriting. Given that insurance is about underwriting I remain slightly sceptical about the state of the industry.

Richard Adams: Cathy, is the quality of underwriting in decline?

Catherine Taylor: Well Ecclesiastical, as a niche insurer, is protected by the cycle to a degree. Insurers are quoting today on risks that two or three years ago they would not quote on at all and are giving competitive figures. Many brokers find it staggering that where they could not get a quote a few years ago are getting one today. We are seeing players in the market coming after our niche business where they have never handled it in the past. We see them putting pricing on it that can be quite alarming to us, as we have many years of statistical expertise. The reality is they will not really know whether or not it has cost them for maybe three years, hence the cycle again. We will support our brokers if they are under attack, we will do what we can to defend it but stand back if we feel it has gone below a certain level.

Lloyd Hanks: The fundamental issue for insurance companies is to write for profit. Whether you are a niche or composite you have to write for profit. Sadly, I am not seeing that and am worried that they are looking to write for volume and not for profit. It's wrong and that is my concern for the next 18 months until the market is realistic again.

Catherine Taylor: We have talked about the availability of capital but with competition we have got new players and they are big players, people who have got very strong backing such as Towergate and Primary Group. They are new in the business, they have got to get some market share. As any new entry into any new market, price plays a big part in levering its way into it.

Lloyd Hanks: It is of concern to me that some of these new entrants have to write business at unrealistic levels of pricing. Brokers should look very carefully at these new types of carriers that are coming in and ask have they got sustainability? I understand competition, and brokers quite rightly want to have the edge on their competitors but let us look at the longevity here.

Richard Adams: Paul, you mentioned earlier that Henri de Castries said he expected the peaks and troughs of future cycles would be less pronounced because insurers have got better experience of managing the cycle. Do you as a broker buy that?

Paul Dickson: I buy into the good intention behind that and believe it will filter through to reality. The incredibly complex beast that is an insurance company will become a more transparent organisation and insurance companies are becoming more transparent, not as much as I would like them to be. That would improve the ability of shareholders to put pressure on the insurers to stop using questionable devices, such as the constant revision of claims provisions, to help them improve the look of the balance sheet.

Richard Adams: How can brokers actually manage their clients' expectations across the cycle.

Lloyd Hanks: Many brokers only see their clients once a year and that is not good enough. There are various simple measures and initiatives that could easily be put into place to embrace a client, to keep the client informed of the insurance issues that are prevailing in our market, to keep them advised of initiatives and cross selling opportunities, trying to buy the client in on a all embracing deal. I do not see that happening in the market.

Richard Adams: Is that your experience, Cathy?

Catherine Taylor: There is a big difference across all the brokers that we deal with. The best brokers have got a relationship with the client that does not involve an annual call to pick up the renewal cheque. There is an ongoing contact there and it is whatever suits the individual. It is really understanding what your customer wants. Lloyd is on the right track, that the most successful brokers do more than just the renewal.

Paul Dickson: There are lots of challenges here but it depends upon the bit of the market or the segment that your firm is involved with. If your business revolves around a niche product that has a £50 annual commission value but sold in great volumes, then trying to get a relationship with each client will be very difficult. Of course, Lloyd's view is correct, you need to look at forming relationships. It depends on your price point as to how you deal with the retention issue in particular. If we look at the commercial bit, which is the side that I know, then it is all about the relationship. The first tip I would give any firm, especially in a soft market, is to do whatever is necessary to prevent your client placing you under competition. Get in before the renewal and offer some kind of proposition so that they can buy into it before the renewal date. If you are going to be faced with the competition, do not assume that your client will support you because you have given them a fantastic service or any other perceived added value. It will count but it will not count for very much, compared to getting the price right. So if you are out on price, you will struggle, no matter how good your relationship and no matter what you have said to that client.

Richard Adams: A question submitted by Kevin Pallet of Fusion asks what ways can brokers use to stop customers purely focusing on the price? Surely this question is the key to tackling the whole problem?

Lloyd Hanks: I think that Paul has part answered that by having this regular dialogue. Let me offer an example, I have a firm of accountants that look after my finances and they e-mail me three or four times a year. They are in my thoughts and they are offering products, additional services, that keeps my interest going. When Direct Line came in that changed our industry for ever, no question. Once you buy a product from Direct Line you are on their radar and they are looking to get every single policy type from you that they can - you are on the hook and they will not let you go. I would like to see some of that hunger through the intermediated type of business that we have.

Paul Dickson: Kevin is wrong, you can erect defences against price competition but you can't defeat it. You have to follow the market as a broker, we have to know who is providing a comparable product, in other words, the core insurance solution, from a reputable insurer and competitive price. If that price is 30% below the expiring price with maybe yourselves, then that has to be put before the customer. You can do your best to maintain an existing relationship but basically price rules.

Catherine Taylor: In terms of what you do for your commercial client, successful brokers do get involved and collaborate with them, I am talking on the commercial cases now, and this involves understanding their business because we constantly find that if you really understand the client's business, they like that a lot. That does buy you some premium.

Paul Dickson: I agree if you have a fantastic relationship and it all backfires you can trade on that. Follow the prices up and down, however, a caveat is where you can win is to avoid the rubbish capacity of the insurance companies nobody has probably never heard of. If they are really cheap, maintain your integrity and when it all falls down in a year's time, you get it back. It is the AXAs, the Norwich Unions and the Royal & SunAlliances, that everybody has heard of. If they are providing genuine security you have got to respect it. And that means respect the soft price and respect the hard price.

Richard Adams: Isn't the client insuring with you and it is almost irrelevant who the carrier is?

Paul Dickson: Yes. Which is why if you have big peaks and troughs in premiums you do not have that client for very long.

Lloyd Hanks: Absolutely. Correct.

Catherine Taylor: Paul's comment about the big markets, the more reliable markets, the expert markets, is definitely true.

Richard Adams: Your concluding remarks please.

Lloyd Hanks: I would also ask brokers to use their databases and extract as much business as they can from a client, tie the client in on various covers, not just commercial but personal lines as well.By all means use different markets but actually tie that broker in. Then your renewal retention is likely to be better by having a common renewal date. It has been tried in the past and perhaps it is time to revisit that now.

Catherine Taylor: Taking some prospects out with some really good advocates is a really good idea.

Paul Dickson: My tips would be plan your strategy in advance. Cover the market and demonstrate competence in a confident fashion. Do not get into defensive situations, demonstrate confidence and demonstrate competence confidently.

Hear this debate in full, and previous debates, by accessing the archive on the website at www.brokermanagementforum.com

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THE PANEL

- RICHARD ADAMS, Editor, Professional Broking magazine

- PAUL DICKSON, Chief executive, Dickson Insurance

- LLOYD HANKS, Sales and marketing director, Aascent

- CATHERINE TAYLOR, Regional underwriting centre manager, Ecclesiastical.