Market Watch - Networks: Opening connections

There are many reasons that brokers look to a network. For some it is a question of buying power, for others access to markets; some look for help with marketing and compliance, while others focus on human resources and finance support. Nick Houghton, managing director at Broker Network, believes a good network can deliver on any of these, a crucial platform for success in such straitened economic times. He explains: "Brokers are finding it tough and insurers are making it more difficult to trade with them. They've shed staff and centralised resources, making it harder to have a relationship."

While commissions can be part of the issue, Houghton stresses that there is more to a successful network than this alone. With each member independently responsible for their own business, a network can act as a consultancy to support putting the right structures in place. He highlights: "We distil the good ideas from 700 brokers into a package and formula to help brokers have a successful business."

Commission
The issue of enhanced commission cannot be ignored. Brokers are understandably keen to secure the best terms they can though, with insurers facing the same soft market challenges, Houghton stresses partnership over confrontation: "For networks to survive they have to add value, it is not about beating up insurers. We see it as a triangle, with each party taking value from the relationship: if they don't, we will cease to exist."

Bluefin is another network seeing increasing interest from brokers. Managing director David Hopwood cites a variety of reasons for such strong activity, adding: "The key condition is the economy; insurance brokers are suffering. Clients are downsizing their businesses and failures are affecting the bottom line. Brokers see networks as a way of filling the income gap. Being part of a network gives security and comfort." The network, formerly known as Layton Blackham Business Solutions, was sold to Axa in 2007. Hopwood says that part of the attraction is the access it gives to insurers, which also benefit in turn. He points out: "It is a cheaper way for insurers to see smaller brokers of similar natures and specialisms: they range in size but are consistent by type of business."

Another layer that the network has been able to develop has been in sales and acquisitions. Following the credit crunch, brokers have, in many instances, found it hard to secure funding to grow their businesses. Hopwood states: "We are doing more today than a couple of years ago in business and sales planning. We've helped brokers acquire locally, assisted in the process such as with contracts, agreements and accounting support. Depending on what the broker needs to borrow, we look at the business plan and can help."

The need to add value with expanded offerings is a point taken up by Jonathan Evans, managing director at Martinez & Partners. When his firm was formed, he carved out niche areas such as high net worth and nightclub insurance and felt there was not a lot of value in joining a network. He explains: "We had compliance and systems taken care of. People were offering standard suites of products for broking and there didn't seem a great deal of point in paying for it."

Evans accepts that networks have a role for many brokers and, while still not a member of one, feels they are moving in the right direction: "Networks have matured and have become more attractive to join; industry people realise that they add value, though it depends on the type of business."

Another element that networks are focusing on to add value is IT. Houghton claims that most brokers use only 10-15% of their systems' functions and that part of a network's proposition is to help train members to extract management information properly. An offering that set up its entire proposition around one system, from CDL, is 1 Answer Network.

Spectrum
In 2009, the company, which considers itself to be the only true personal lines network in the market, refined its proposition to supply associate membership for those brokers that did not want to change technology providers but still wanted product access. Trevor Cutts, business development manager at 1 Answer, explains: "From a broker's perspective, we enhance commission and achieve products and markets that they could not on their own. In a tough market, brokers are looking for every opportunity."

Cutts believes that, over recent years, insurers have pulled away from high-street brokers, making 1 Answer's offering to manage and distribute products to members with better deals and commissions all the more important. He argues: "One of our biggest challenges in personal lines is to get more and better deals from insurers."

Technology has impacted personal lines brokers in two directions: along with improved processes has come the challenge of the aggregators. Cutts is hopeful for the future, saying that the network is targeting 60 members by the end of 2010. He explains: "It is going full circle: insurers have to write for underwriting profit and that doesn't happen on aggregators. I'm hearing that business will come back to high-street brokers because what they write performs better: brokers manage and understand customers, which adds value to insurers and protects their interests."

At the other end of the business spectrum sits Marsh ProBroker, which was announced as an offering at the beginning of 2009 and is now looking to expand. Martyn Denney, networks leader at Marsh, joined in May, attracted by what he calls "the opportunity to do something different in the market." He explains: "Networks have been around for quite a while; my view is that a lot of me-toos came out in the last six years."

Denney believes that Marsh ProBroker's ability to draw down on the intellectual information within Marsh to create differing products, alongside its purchasing power and fee structure, makes it special. ProBroker does not charge an upfront fee, though it does not attempt to say that everything is free. Denney explains: "We want to stand out for being transparent, we don't bundle the services together; that allows us to make each deal bespoke."

Efficiencies
While declining to say how many brokers Marsh ProBroker is targeting, Denney confirms that it is looking for brokers with small and medium-enterprise clients: "In three years, we want to be in the top three: we need to have scale by 2013 and everything we do along that route has to make a difference to all our stakeholders."

Denney highlights improvements, such as time-savings in acquiring accurate policy and renewal documentation, that the network provides through access to insurers as key. He says: "The cost of not doing it first time around is huge. Each insurer has a dedicated team that understands the products, which makes life a whole lot easier."

Another option is Ten insurance, which was set up during the boom period of broker consolidation. Malcolm Lee, managing director at Ten, explains the decision taken in 2005: "We set up with the intention of helping people start general insurance broker businesses. There are lots of entrepreneur types that want to set up on their own. We looked at obstacles such as Financial Services Authority regulation: the real hurdle was market access."

The network utilises the appointed representative route to provide services such as compliance and a common IT system for members to use, making the network appear and function largely like a back office. Ten has grown to 56 brokers and Lee confirms that its offering of 160 agencies and Lloyd's access means that it will have a market for any risk that a commercial broker can reasonably foresee needing to place.

Consolidation
Lee continues: "We give brokers the ability to compete against large brokers to drive deals with insurers. There is no limit to the size of our model and there are a number of people out there who want to start their own businesses." Lee is bullish about the future rather than fearful of start-up firms outgrowing its offer. He cites potential clients such as executives who lack time due to already being in employment, or those with limited funds seeking to work from home using a broadband connection, as those that will draw on the offering; people who want to service an embryonic client base while keeping the start-up costs as low as possible.

Lee concludes: "The next year will be very good and the list of prospects is growing well. It is a pleasure to see people who are unhappy in a large organisation become happy by setting up their own businesses with us."

The boom-time of broker consolidation might be over, though surprise moves are not unknown: this summer, Giles-owned Ink Underwriting acquired the Westinsure network. Such moves raise a further question for potential network clients to consider: who owns the network? Denney believes that there will be further market changes, a point that Houghton supports: "The network market will change fundamentally over the next three years; some will go to the wall and some will consolidate along with new entrants. We'll end up with fewer but they'll be of better quality."

Watching the changes unfurl is sure to be of interest to brokers, regardless of whether they belong to a network or not.

The future for networks
Les Brewin, managing director at Purple considers what lies in store for networks.
What is the potential number of brokers yet to join a network?
We believe there is to be in excess of 2,000 small and medium-sized independent brokers out there that have so far chosen not to join a network.

Do brokers move among networks?
Yes, it happens, though perhaps not as often as you might imagine. The network models do vary and one size doesn't fit all, so it's understandable that a broker might, over time, find that an alternative proposition is better suited to their own business.

Have brokers ever left Purple?
Since our launch in 2008, we've grown to almost 50 members with a very active pipeline and, to date, I'm delighted to say that we haven't lost a single member. While that in itself is a decent testimonial for us, we're not complacent and know that we need to work hard to deliver an enhanced range of products and services to keep our members as happy as they seem to be at present. Above all we want our members to feel that we add value and are there to help.

Why we didn't join
Clive Galbraith, chairman at Green Insurance Group, cites his firm's reasons for not joining a network.
"We have been asked many times to join a network but have never really been tempted. As Open GI users for about 20 years, we have been members of Countrywide Insurance marketing, which meant that on the personal lines side we've used their branded products. They would probably curse me for saying so, but I never really viewed that as a network as such.

"Some people view Aviva's 110 proposition, of which I am a big fan, as a network, but as it exists primarily to support Aviva and not other insurers: it is really intended to keep people away from networks and consolidators; I would describe it as the anti-network."

"I sometimes think that the ‘fiercely dependent' phrase is overplayed by brokers because we have a symbolic relationship with insurers but it is true we have always preferred to be masters of our own destinies. Even though the benefits can be quite attractive, the networks that wanted us to surrender large amounts of financial control never stood a chance with us.

"I was once told that the average network broker had perhaps £2-3m premium income and, as we have grown to many times that size, they appeared increasingly irrelevant to us.

"I have a number of friends in the industry that have put their companies into networks and to be fair they all speak highly of their experiences, in particular the access to markets and commission deals, so clearly they work for some people.

"As masters of own destiny: never say never. That should set the phone ringing in my office."