The great housing puzzle

At the start of the 1980s, brokers were responsible for placing around 80% of insurance household premiums. How times have changed. First, during the housebuyer boom under successive Thatcher governments, building societies in particular increased their market share at the expense of brokers. Then, on 2 April 1985, the seeds were sown for the household insurance market to shift fundamentally: Direct Line entered the UK personal motor vehicle market, offering telephone sales.

Two years later, it added household insurance to its offering and, since then, the company has now grown to more than 10,000 employees. By 2000, the impact of direct entrants on the household insurance market was that brokers' share of the market had decreased to 45%. Research for sister publication Insurance Age found that the broker share of the household market had fallen to 30% in 2008.

As further online aggregator sites enter the fray, is the day of the household insurance broker finally over? Not according to John Seaton - underwriting director at Reading-based MMA Insurance - which issues business exclusively through brokers. He says: "Giving advice, bespoke attention and support is just as relevant now as it has always been. By demonstrating the value they add, brokers will always have a place in the market."

Nor is the sector in terminal decline according to John Kennedy, director of business development at Aviva: "It was predicted the broker market would evaporate but about five years ago it was clear that would not happen. The direct market has grown in terms of players but growth in market share has slowed with the trend declining in the shift in the market."

When the whole property market - including commercial and residential - is taken into account, statistics for the last few years back up the slowdown in the shift. According to data from the Association of British Insurers for 2004 to 2007, direct sellers have gained 3% market share and independent intermediaries have lost only 2%.

Adding value

Peter Staddon, head of technical services at the British Insurance Brokers Association, believes that this flattening out is attributable to the skill and knowledge that brokers provide customers. He highlights: "For direct providers, if you're a round pin then you'll get a good quote in their round hole but, if not, then a broker can get a better deal through a degree of market research and a basket of options, along with a more sophisticated policy than standard, to give the best option."

Ian Davies, household underwriting manager at Home and Legacy Insurance, believes the arrival of the cheaper route - round-pin-for-a-round-hole insurance - had some positive effects on the market. He comments: "Direct writers raised the profile of household insurance, particularly for contents. The advertising spend has increased the market's size by raising the profile and importance of purchasing the latter."

Since 2000, the household insurance market has grown by 53% to more than £7bn. As Davies acknowledges, while some business left brokers, many opportunities have remained. He says: "Direct writers took business away but what brokers have done is to show their market knowledge with non-standard, for instance for thatched houses. Brokers can save people time and effort by knowing which insurer to use.

"Brokers have more than one way of thinking, which gives customers a balanced view of the market, whereas direct writers give their view and product and pricing."

It is an opinion Tony Simper, managing director at Maidstone-based Woodstock Insurance Brokers, agrees with: "Our household clients find we bring value when they have an unusual situation - the non-standard insurance. For standard business it is very hard to compete on price but, with up to 70 agencies and with some looking around, you should be able to at least nearly match the premium. We find that over 88% of all clients renew with us and household is normally higher than that."

The tendency for direct providers to give a standard product that may not be in-keeping with what a customer actually needs is just one reason that the broker can look to the future with confidence.

Ian Davies remarks: "What a broker has to show is added value, service and advice with a one-stop shop facility. The average person does not necessarily know how to work out the value of their building, the re-building costs or the contents. Going through the process, a broker can make lists and if suitable conduct visits."

A recent poll suggests that the opportunity exists for brokers to stress the value of their services through giving customers advice to prevent them taking short-term risks that could lead to painful results.

A YouGov poll commissioned by the Association of British Insurers of more than 2,000 UK adults in June found that 22% of people have cancelled or not renewed their contents insurance in order to save money. A similar proportion (17%) said that they had cancelled or not renewed their buildings insurance.

Of those homes in the lowest income bracket (less than £10,000 per year), 35% have no insurance at all and only 44% purchased home contents insurance. Those households with average incomes (£15,000-£30,000) were twice as likely (82%) to take out home contents insurance as those on lower incomes.

Peter Staddon says: "Some people think of insurance as a luxury and think about cutting back. There are still deals out there and the consequences of not being insured are drastic: what are you going to do if you are burgled or flooded?"

According to Staddon, brokers can play an essential role in working with different sections of society, layers of government and the insurance industry to create the products people need and inform them of their existence.

With £12.4m paid out every day in 2007 to householders for property damage or loss of possessions, the importance of the insurance industry is clear. Richard Coleman, director of personal lines at Zurich, backs the theory that broker services are crucial.

He comments: "People with more to protect have more of a propensity to seek advice but we should not give up on the standard personal lines. In the standard channel, the product is important and it is an imperative purchase for their most valuable assets."

John Kennedy, director of business development at Aviva, believes that insurers will continue to play a crucial role in the broker market, particularly regarding special offers - long a thorn in brokers' sides. He comments: "Our job is to supply to brokers the direct offering. Our challenge is to close the price differential and to put typical direct offers into the broker market.

"Through a web-based mechanism accessed online, Aviva will deliver a parallel offer to whatever is in the direct proposition at the time. For example, if it was free contents with a buildings policy, this would be on offer to all brokers."

According to Kennedy, if the system pilot is successful then it will be rolled out to all brokers before the end of the year.

Channel choices

Where Aviva will not be competing is on aggregators - a channel yet to be understood fully in terms of its effect on brokers. Some experts say it should not be feared because the same high-quality service that protected brokers in the household insurance market when the direct sellers arrived will be a shield and platform in this new arena.

Tony Simper explains: "Electronic purchase is interesting because you don't have the opportunity to build up a relationship and you are unlikely to speak to the same person again. We have strength of service: customers can ring up and speak to the same person twice."

Gocompare.com is the only online aggregator that is a member of Biba. Business development director Lee Griffin is well aware that household insurance is not driven exclusively by price.

"Less than 50% of customers buy at the lowest price; there are other things to consider like brand and level of cover," he says. "It used to be that comparison tools were price driven with very little product information, even including excesses. We introduced more details around 18 months ago on the likes of accidental damage and home emergency cover to allow for greater product comparison, many of which are now standard within the comparison industry."

Industry figures show that comparison sites handle approximately 500,000 home quotes a month in a mix of standard household policies for buildings and contents.

Historically, customers have shopped around for car insurance more than they have household but it is hard to pinpoint simple, individual reasons for the differing levels of switching. Some say it has been due to people being used to seeking motor cover on the basis of price while others believe that people have greater emotional attachment to their homes than their cars and so tend to seek quality over price. Perhaps it is because people are more likely to buy and sell cars more often than houses, so have more natural opportunities to switch. Many of these explanations are not mutually exclusive, though.

In July 2009, comparison websites generated three million motor cover quotes - six times that of home insurance. Quite a gap remains but, despite the historical differences, the situation is changing.

Griffin continues: "Our research in January shows that 50% of home owners do compare prices using an aggregator when their renewals come through. For car insurance, that figure rises to only 58%, which shows the gap is closing and there is an appetite for home insurance comparison services.

"A sustained television advertising campaign about household insurance has been attempted over the past six months. The likes of Churchill and Direct Line have been advertising for years, so it's too early to say how far the market could grow."

As we have seen, not all advertising has necessarily been bad for brokers, particularly in personal lines. Aviva is increasing its advertising to encourage consumers to visit brokers. Richard Coleman, director of personal lines (SME) at Zurich remarks: "Our level of support hasn't dropped. For instance, our adverts highlight the need to understand what you are buying into: Zurich HelpPoint highlights what you buy from us is help in times of trouble."

The advertising budgets for direct sellers and aggregator websites comprise a price-driven marketing spend with which brokers cannot compete. Instead, there are many ways in which brokers can continue to differentiate themselves and their offerings from the price-focused players.

Partnership approach

One way of highlighting efficiently the expertise, skills and advice that a broker can offer is to work with affinity groups.

Steve Bartlett, managing director at Heath Lambert's wholesale division, explains: "Trying to compete head on with Direct Line is difficult for the majority of brokers. You need to think smarter and for us that means doing it a different way.

"We work in partnerships. We've negotiated special products with special rates designed to reflect the needs of people with a medical condition and, as a broker, we have access to a range of insurers."

He continues:

"Everybody has local connections they could look to promote. For example, we work in partnership with East Anglia's Children Hospice, which in turn promotes our product. They earn out of it, too."

The ongoing impact of direct sellers, combined with the more recent arrival of aggregators, should not spell the end for brokers in the household insurance market. The ability to meet the specific needs of an individual is a strength recognised by all types of player. Kennedy comments: "Brokers pride themselves on customer loyalty and retention, which the aggregator model struggles to achieve." By continuing to differentiate themselves from the crowd through high-quality advice that earns respect from loyal customers, price will not become the only factor.