Marsh mellow

With a background in the banking sector, Bruce Carnegie-Brown is in no doubt about the breadth of the challenge of joining the insurance industry. With the objectivity of a chief executive officer who is new to insurance, he underlines, for example, the 'striking difference' in IT development in insurance compared with banking. "This is mainly due to earlier investment in IT in banking compared with insurance," he states, adding: "There has been a huge amount of investment by insurance firms - and I don't think this is now a resource issue - but many companies have not yet got back any value."

Carnegie-Brown observes that, while IT issues have progressed up the insurance agenda, a lingering despondency is hindering progress: "Much resource has been invested in IT initiatives - it is now about execution. While awareness of the need to embrace technology has increased, there remains a lack of confidence and a lack of a sense of urgency."

Furthermore, Carnegie-Brown adds that this lack of confidence is something that particularly affects brokers. "Brokers are too defensive about the value we give to clients; in fact, in many ways, insurance provides more value to its customers than banking," he asserts.

One area in which Carnegie-Brown considers that the market needs to improve discipline concerns insurance policies of greater duration than the typical one year. "If interest rates go up, people don't go and shoot their banker. Banks and mortgage brokers offer clients a range of options depending on how they think markets will perform, for example, with fixed-rated mortgages. However, insurance policies longer than one year were popular in the early 1990s but, after a while, clients started to go back to their insurers to renegotiate the terms because better prices began to emerge in the market.

"Now three and five-year policies have dramatically reduced, but there still needs to be greater discipline to prevent clients breaking contracts. After all, in any other area of financial services there would be penalty clauses for doing so, so why should insurance be any different? Brokers have a critical role in offering options to clients, through advice and recommending products, to put them in a position to make an informed choice."

Broadly, Carnegie-Brown says his main priority is 'unleashing the power that exists in the organisation', with an emphasis on its service proposition.

However, while it may reasonably be assumed that insurers' service delivery to a firm such as Marsh would be gold-plated, surprisingly, he echoes a concern voiced by brokers much smaller than Marsh about insurer service as a barrier to better meeting clients' needs.

"As a keenly client-focused industry, poor service standards from carriers gets in the way of being able to provide the quality we would like to provide. We are in continual talks with carriers to address this and, although they are more receptive than ever before, the issues are enormous.

We therefore resolve things issue by issue, such as addressing the claims piece, then the wording, and so on." Having said that, Carnegie-Brown concedes that broking must simultaneously get its own house in order in terms of service to end-clients, being 'better partners' and not becoming preoccupied with that provided by insurers.

However, Carnegie-Brown warns that some offshore insurance companies are making a convincing stab at improving on the status quo - often with a greenfield site and to their competitive advantage - in addressing this.

"We are finding that some offshore firms are not only selling products at a reduced cost but also with an improved quality of service," he adds.

Realistic expectations

Another issue of which brokers should be aware when managing clients' expectations is to ensure that their own expectations are realistic, particularly with regard to cost. He adds: "It is naive to believe we can continue passing on price reductions to clients and financial services has been unique in passing on consecutive reductions in very particular conditions." Carnegie-Brown is also concerned that some service is categorised as 'value added', when some basic services should be standardised, which clients should be able to expect. He also adds: "Too many brokers pursue the specialist route in offering bespoke services but they are not so automated and there needs to be clearer differentiation between bespoke and commodity offerings."

By way of explanation of his ethos about service, he says: "When I deal with carriers, I take the simple view that they provide three things: security, price and service. I think the capital question is either a pass or fail and, unfortunately, at this point in the cycle, too many insurers are close to the threshold. I don't think any insurer should major on price, they need to be competitive but this should not be a major driver. But service is different as this is what the competitive differentiator should be."

Carnegie-Brown also explains why he considers the need for transparency is critical to insurance. "Unlike banking, there is a lack of observable data available to clients. In banking, there is information available about, for example, the movement of stock prices plus information that provides indices and benchmarks. But, in insurance, many of these tools are not visible to clients who therefore have difficulty comprehending the rationale behind what is being done."

With regard to the market cycle, Carnegie-Brown says that 2004 is significant.

"There was transition in 2003 with some prices softening, but what is crucial is determining at what point a correction becomes a free-fall. The ultimate test will be whether insurers will withdraw capacity to maintain stability. The consistently profitable insurers like Berkshire Hathaway and AIG have achieved this. While, at present, there is equilibrium between the demand and supply of capital, rates are quite stable and, while insurers are rebuilding their balance sheets, they cannot afford to reduce prices. However, the jury is out on what will happen in future. The hard markets are over and I hope the industry will maintain its discipline."

Carnegie-Brown also adds that Marsh, as a seminal global risk management company, along with other risk management providers, now has a better foothold for this business in the UK following the hard market. "The hard market certainly focused minds in boardrooms throughout the UK and firms are now used to being involved in managing and taking on their own risks.

I think, as a result, there is opportunity now to grow a more sustainable risk management business even in a soft market.

Marsh, like fellow American broking giant Aon, has traditionally been an aggressive acquisitor and consolidator but, while Marsh never sleeps in this regard, Carnegie-Brown does not consider it an opportune time to acquire at the upper end of the market. "The market needs to consolidate further at the low end and, incidentally, it is unusual that the top end should have contracted first. We are currently experiencing a hiatus as brokers ready their operations for regulation and I think there may be some significant opportunities in around two years' time. The Financial Services Authority will act partly as a filtering process as potential targets will have become stronger and more professional as a result of regulation."

Competitive advantage

Marsh's efforts to embrace regulation has seen its core compliance team, including a compliance officer in nearly all of its 30 branches, double in the last 18 months and is expected to double again before 2006. The cost of compliance for Marsh in the UK will also double as a consequence of FSA regulation. A substantial part of this increase will be regulatory fees. Carnegie-Brown says: "Regulation is a great opportunity not only for brokers but all insurance firms to reposition and differentiate themselves. For example, Marsh is taking the opportunity to gain competitive advantage in becoming compliant more quickly and we are now a month ahead of some of the other big players. While we hope we already operate above the standards set by the FSA, we welcome the additional objective impetus through regulation to monitor and ensure that standards are uniform and improving."

He continues: "While we are the best in our industry, our industry is not very good, but regulation can help greatly improve standards and we all stand to benefit from that. While there is plenty of room for improvements, I sincerely believe in the value of delivering insurance - I couldn't have joined without that belief."

As part of the general malaise among intermediaries and insurers cited by Carnegie-Brown, he has also observed that the fact that the industry will be regulated by the FSA is a source of disappointment: "The fact that self-regulation failed is not unique to insurance - it also failed in banking and stockbroking," he notes.

With regard to the general outlook for insurance in the UK, Carnegie-Brown observes that: "The market here is more evolved than in Europe. In the US it is different but insurance is connected to where countries are in terms of economic development. In the UK and the US, brokers and intermediaries in banking and insurance have a greater role to play. Also, in developed countries, these intermediaries are playing with bigger stakes. But, as far as the UK is concerned, there is continued growth of gross domestic product per capita and healthy capitalisation of the stock market, which gives an indication of strength."

Like many, Carnegie-Brown says that Marsh is keeping a watching brief on the development of networks. "We don't deal with any at the moment but I wouldn't dismiss it. As the European networks develop, they may penetrate new territories, which may allow access to new clients for us but without the start-up and infrastructure costs. However, while networks offer smaller brokers access to scale how is it decided which firms within it receive the revenue? It is very difficult to segment and make this work due to inevitable internal competition. The other issue we would have is determining whose client it is. We would be very nervous if we didn't have access to our clients."

Carnegie-Brown cites the high point of the last 12 months as the recovery of industry profitability and the rebuilding of capital, but reiterates that the ongoing issues with the quality of the service proposition - such as policy delays and IT interconnection - are a low point.

While Carnegie-Brown confirms gradual progress is under way in this area, he cites another of particular concern with the emerging challenge of the so-called compensation culture. This poses a particular challenge for brokers in helping senior management clients mitigate personal risk.

"I think compensation culture is a fact, it is US-led and there are some serious consequences for its migration to the UK. This is partly due to socialist bias in European Union legislation, plus the increase in litigation forcing prices up is a double negative for this economy.

"For example, UK corporates are currently vulnerable due to legislation coming out of Companies House, which makes it impossible for directors to indemnify themselves. In the past, directors were deemed to be acting in the best interests of the company. However, draft legislation will prevent indemnification in certain circumstances but it is not being made clear what these circumstances are - and it is happening now to the directors of Equitable Life.

"In the US, there is litigation, but legislation there allows companies to protect senior management. Firms can buy a directors' and officers' policy but this is becoming more expensive and selective in what a policy can cover. There are other grey areas such as whether a company could use capital in a captive to mitigate its CEO. But, the real issue is uncertainty - ask any UK director if they are adequately covered and they will not know, and how can they be expected to?"

He continues: "Most regulation is biased towards consumers because they are voters - this is not necessarily bad - but there needs to be a balance if the UK is to remain competitive against other markets"

While great challenges and opportunities clearly exist, in conclusion, Carnegie-Brown is keen to reiterate his earlier observation, made with the benefit of objectivity having joined from a banking environment, about the general lack of belief among brokers: "The best piece of business advice I could give to brokers is to have a belief in the value of what they do. There is enormous technical ability in broking and insurance generally and, provided brokers are anchored in trading properly, there ought to be greater self-confidence among the broking community and all insurance professionals."

CV

2003: joined Marsh as chief executive officer

2000L: relocated back to London as head of European debt capital markets at JP Morgan

1997: chairman of JP Morgan Securities Asia, based in Tokyo

1995: chief credit officer for Europe, the Middle East and Africa, JP Morgan

1985: joined JP Morgan, taking up a variety of roles in Europe and Asia

1981: joined Bank of America, with responsibility for UK and Bermuda insurance companies

1981: graduated from Exeter College, Oxford University.