Declining commission levels take their toll

For consolidators and networks, the air has chilled. Economic conditions are sobering: the harder market has so far failed to materialise and clients are either buying less cover, or worse still, going under.

While consolidators' earnings have been hit - and some have worrying levels of debt - smaller independents typically have lean structures and little debt.

Clare Ryder, managing director at consultants Salient Solutions, commented: "Insurers have been looking at brokers and networks; something that was overdue. They've reduced some consolidator commissions or maybe pulled back on areas like credit hire referral fees in personal lines. Ultimately, it is about who is making money and who isn't."

Since Giles' public spat with Aviva over commission, the broker has reduced its book of business with the insurer considerably but the insurer insists that it is ploughing more resources than ever into brokers.

Aviva's director of business development, John Kennedy, said: "Yes, we've cut commission in some cases but our independent brokers are in a position to earn more."

Broker Independence Group - a new venture aimed at smaller firms - and the existing Club 110, now both offer profit-share deals. Kennedy added: "We're also putting more into support services, which help brokers save money. I would call on brokers to judge for themselves."

Simon McGinn, director of broker markets at Allianz, said that brokers with solid books of business need not fear cuts in commission. He commented: "We support our independent brokers. If they're losing us money then that's something else but we certainly aren't targeting them. Independents are not low-hanging fruit."

Examination

However, network propositions have been questioned. McGinn said: "We're rebalancing our account. Some networks overestimated their value." He argued brokers need to switch onto reality: "It's fine if a broker wants compliance support as a reason for joining a network. However, expecting to earn higher commission for being in a network can be disproportionate. I think brokers can expect a better deal if there is loyalty rather than simply a transactional relationship."

Some networks are realistic about commissions: Our Network has 250 members and managing director Paul Brierley highlighted: "If you can provide insurers with good business then you can earn more, though I don't agree with being greedy. We might offer around 19% when the going rate is 17%. I don't think commissions of 35% are justifiable, that's why things are changing. We now have insurers knocking on our door: we see benefits in moderation."

Lyndon Wood, chairman at Moorhouse Group, said: "The problem with consolidators is that many failed to consolidate. They haven't made savings and at the same time are being squeezed." He added that there are still commissions of 25-30% around but that brokers focused on organic growth are in a safer place. He believed that the consolidators might be forced into selling some businesses off.

Jonathan Davey, director at SSP, commented: "Insurers have gone back to cash flow underwriting and the adage 'turnover for vanity, profit for sanity'. Sensible levels of commission will still be paid but times have changed. Small is the new big."

Changing attitude

Smaller brokers are being seen as more attractive to deal with by some insurers. Rod Lynn, owner of Hove-based broker Scullard and Prosser, added: "Commission cuts? No. However, I deal with the same insurers and wholesale brokers on a long-term basis. I've told those that focus on direct business where to go. You should live within your means; run a tight ship, look after your customers and you'll be fine."

Barbon Insurance Group's chief executive officer, Martin Oliver, said that this has been challenging - although last month saw growth. Oliver commented: "Insurers are showing they're much quicker to act if an account is losing money. They also don't like the fact that consolidators may be running managing general agents and creaming off the best business. On the other hand, with some good schemes, commissions are unchanged and insurers want to talk business."

David Grier, managing director at technology provider Alphatec, said that it is vital to have a clear idea of what each client brings in and that decisions such as moving clients to fees if commissions have been cut could make sense.

Brokers are known for their resourcefulness and many will still be earning adequate commission, even though the consolidator gravy train has spilled off the rails.