Commission debate

Homer: "If hard disclosure comes that's fine. The issues I worry about are things like the IT implications of billing a client with a clear breakdown of premium, IPT, fees and commission so there's a non trivial IT issue around disclosure. I think the other issue is a level playing field with direct writers because it looks as though the FSA are going to let them off the hook. By that I mean they won't have to tell the customer what proportion of their premium goes on direct mail or advertising and if a customer has a right to know what we're earning. By the same token why shouldn't clients know how much direct line is spending on advertising, which incidentally I reckon they spend 21 to 21% of premiums on advertising. For firms like Esure it's probably an even higher proportion of premium because their premiums are so low. It leads to an interesting debate – should the customer be told what the expense ratio of NU and Axa and RSA is – do they care? – do they care what my commission is? Could I therefore say to the client what the companies' expense ratios are and they make a choice based on that? It quickly breaks down to a ludicrous level. But if it does happen we'll live with it, it will be an overnight sensation but I do think the IT will be the biggest issue."

Cullum: "It's ironic that the main protagonists are the Aon's and Marsh's who've been caught with their hand in the till. But the key issue for us is, and we've had the conversation with the FSA and they sort of recognised their was a bit of a case, with financial services if you're getting huge commissions that impact the investment returns that is a seriously important bit of information – the so called reduction in yield. But if Andy recommends a NU household product with a sums insured of £500,000 on the buildings and gets 25% commission, I've got an Axa policy with 20% commission and the sums insured are also £500,000 on the buildings, if that house burns down the indemnity is exactly the same. Commission makes no difference."

Some commentators suggest this could fuel consolidation. Could this assist Towergate's consolidation programme? Homer: "There are a lot of opportunities for us to consolidate without this being a factor to be honest."

Cullum: "I think the whole burden of compliance is a factor in consolidation rather than just hard commission disclosure. It may be the final straw though for some – more regulation more IT spend to feed to insatiable appetite of those in Canary Wharf – maybe."

Homer: "We will do what we have done from day one before regulation came in that we give full disclosure to our customers of our tariff, of our charges and we always tell them if you want to know how much commission we're getting or if you want to know if we're getting a profit share on a portfolio then you can ask. So we already disclose what the policy fees and what the charges are and if they want to know the cost of getting advice from us beyond your contract we can tell them an hourly rate. Most brokers do say upfront what the terms of trade are and for us this goes in terms of business letters to clients."

Cullum: "Bronek Masojada [chief executive officer of Hiscox] believes wrongly so, that it will enable him to lower commissions. He genuinely believes it will force brokers into accepting lower commissions. And many carriers believe that. It won't happen but they seem to have this fixation that if you disclose that you're earning 20% commission that somehow destabilises your client relationship."

Given the support hard disclosure has from the large carriers, Lloyd's and the large brokers there seems to be a good chance it will come to pass – do you think it will?

Cullum: "Yes we do, we think it's inevitable but it's not an issue for us."

So you think brokers are bashing their heads against a brick wall?

Homer: "The difficulty for us is if we go round saying 'get real it's going to happen' we might look as though we don't care, or we're just arrogant or that we are actually for it. Should Stuart Reid stand up and be counted, [see PB viewpoint, November P17] of course he should."

Do you want to buy Stuart Alexander?

Cullum: "Yes, Stuart has got a nice business, he's a good operator is Stuart."

Homer: "Everyone is for sale, there's only a few people like Paul Meehan who keep going on record to say he'll never sell to us well fine, I'd like to go on record to say we don't want to buy him. We try to have good and respectful relationships in the market and we will obviously cross swords but we do it off the record and I'll call Chris Giles or Paul Meehan or Grant Ellis or whoever and it never sees the light of day. If you think about all the activities we've done over the last few years, the substance of the complaints about Towergate haven't really stood up to scrutiny; the protocols and Fusion etc. We get a bit of flack but we've paid our dues, we've been in this industry for 35 years. Peter went round on his knees asking for money to do this and we've risen without trace. Towergate is seen as being too big for its boots but 10 years ago we couldn't get any money to do it. And because we have an edge – we're competive but if anybody had got anything of substance on us now it would have come out. We're just ordinary joes that are doing a decent job of changing the model and people try and see things that just aren't there."

Technology

What happened to e-Towergate?

Homer: "That set up some very important components so we've got an IT system, we've got a call centre in Colchester which will start to e-enable our relationships with existing customers but it's not a fully fledged marketing machine yet but in 2007 you will see much more of that."

Cullum: "We've got lots of quote and buy sites. If you went into Google and typed in business insurance you wouldn't recognise it as Towergate but there are a lot of white label Towergate sites for van insurance plus."

Homer: "Vanguard, vaninsure no fuss minibus etc. We're experimenting out there but there's not been any great kick in the curve of SME's trading on the internet yet from anybody. We've got it covered."

It is greatly anticipated though isn't it? Homer: "What's failing is not the technology it's the sales and marketing and I think you can piss a lot of money away on this – on search engine optimization - price per click has gone through the roof and trading on the internet has become quite expensive. Brands don't mean anything – people will buy from anybody if it's on price and why would we want to sell on price? So picking your way through a strategy that adds real value and service to customers is where we're at and it's a sales and markeing focus. But you're going to see some significant names join us to drive that strategy next year."

Cullum: "The evidence is the SME gets so far down the transaction online then either wants some advice or looses the will to live. For the average consumer trying to buy business insurance on line is difficult and the questions seem obscure. We want to give advice on risk management, health and safety, protection and employment law."

So the toe in the water of some carriers with SME online could actually end up proving the value of the broker?

Homer: "I think so. I can't tell you who but some carriers are talking to us about the need to have someone like Towergate supporting them for the non standard inquiries. If you spend £100,000 to get people to ring your telephone and they want to have a product that Allianz Corhill, Axa or NU can't write you need to lay it off to a broker. These single carrier solutions for marketing campaigns don't do it."

Surely they have referral strategies?

"They do but they're not very good, the hand off is bad, the technology's worse – click here to ring this number is not what people want from the internet. You can come up with six questions to underwrite a factory but what are they? and what if you get that wrong – you're f****d. What price are you going to charge and if there are six questions you can underwrite on then everybody will do it and it will just become a price war."

Is there an internet backlash coming or is that broker's wishful thinking?

Homer: "Take Sony as an example. Sony are saying you will be able to buy cheaper in our shops than online because what they want you to do is to go to the shop be advised what is right for you, to know about the after sales service and they are prepared to give you a discount because they want satisfied customers and loyalty . If you sell stuff made in China on the net that is a different group of customers, that's dissatisfied customers and no repeat purchase."

Cullum: "It is quite pivotal what Sony have done I'm not sure if the ramifications have been fully appreciated. It's symptomatic of major manufacturers' views of internet sales and they are now realising all the stores could disappear because they could be eliminated through a cheaper offering on the internet. The manufacturers view is we don't want that because people look around a showroom and see something else or buy something better than they set out to.

"Brokers have got to sell the advantages of face to face human contact and advice but when their offices are shut at 5:30 the customer still has access to information and some advice. And if there's an emergency customers can they fill in a claim form on line or on a printout from the net. So e-enabling the local broker is crucial."

Homer: "Patrick Smith in his interview [see PB October edition] cited the correlation between retention and conversion in areas where there is an office. It's like the banks clicks and bricks approach. And I think that's where the strategy will be won and lost, not on aggregation and cheap insurance, it's the road to nowhere."

Cullum: "Where I think the biggest threat for regional brokers is at present is only operating five days a week nine to five, that's dead. You have to be able to have to have a relationship outside that, whether it's first notification of loss on a 24 hour basis or whatever because claims don't always happen during office hours. If a storm blows people want to download a claim form with advice and be able to send it back to you. Brokers have a lot to do in that area. It's a hygiene factor the internet is a utility people expect to be able to use it."

Cullum Capital Ventures

Cullum: "CCV has about £50m of premium run rate already. We took the view to get to our £3bn target we were going to have to do some larger deals. £5M GWP per deal was going to take forever so we created CCV to handle that bracket. And there's a different style required when you're dealing with smaller brokerages - when you're buying from HBOS It's a corporate thing and it's all terribly unemotional – it's advisor to advisor and sometimes the lawyers spit at each other but we can live with that. But buying Ma and Pa businesses is emotional stuff and we need to have the emotional intelligence to make sure they know what we want to do with their business so they will effectively be willing new partners If not then we'll leave them to do whatever else they want to do. It is the most important decision they're ever likely to make because this is their pension programme.

"So we created CCV to do those transactions but also we will take minority stakes in businesses and this is particularly relevant to younger teams that want to buy out the older vendors because the management team wants to retire. It's quite difficult to borrow from banks and to borrow on good will is very difficult. So we come along and offer a minority stake to help them achieve that and we've also got some £30 – £50m GWP transactions in play.

"Within Towergate we don't take minority stakes partly because if we ever want to do an IPO we don't want a situation where a shareholder has a majority interest in their business could technically stop us, so we've always shied away from taking a minority interest. So Tim Johnson's running that. We have 'put and call' options in place - we don't just take a 30% blind minority stake we take 30% but there is then three to five year put and call options where we can buy out the remaining 70%."

Homer: "We're investing in CCV and have a run rate of £50m already." Cullum: "We set ourselves a target of £350m in three years and the way things are going we are pretty confident we will exceed that number." Homer: "It's going to be in the top 25 brokers soon." Cullum: "It's just about there now."

Transferring business from Towergate to CCV is causing some confusion and is even perceived to be undermining CCV by some, what's the rationale?

Homer: "As with Folgate, some of the schemes would go to Towergate because they were a better fit, or were smaller or regional businesses that maybe needed a regional name maybe so we can take some of our businesses and put them in a more suitable place. For example Moffat Saunders is going to benefit from some of our smaller businesses. They keep their local brand; it's terrific and much more flexible."

One of the things the market is confused about or that stops CCV being taken seriously by the wider market is that you are on record as saying is it's going to be sold to Towergate.

Cullum: "That's probably one of our off the cuff comments – maybe Towergate will buy it. But it's not part of some Machiavellian ploy to trick people into joining CCV because they don't want to join Towergate and then in three years time flip them into Towergate that's not what we're planning to do. It's no more than a possibility."