Homer's odyssey

Following the setting up of the Folgate Academy, Andy Homer, chief executive of Folgate, can say with greater ease that his and Peter Cullum's futures do not lie with the fast-growing multi-faceted group. Commenting on this latest venture, he says this was partly to redress a misconception in the market about Folgate's longevity.

He explains: "It is known that both Peter and myself could have retired some time ago - we did not need to set up Folgate and, at some point, we will want to do other things - possibly in non-executive or voluntary roles - and wanted to ensure its succession and continuation. The academy was set up partly to stave off criticism that Folgate was just our plaything. We have a range of staff with different skills but many have not undertaken joined-up management training. And we won't blight someone by putting them in a management role too early."

In the meantime, Homer also states that all is going well with another recent Folgate venture, the acquisition of Hill House Hammond Business, the commercial arm of Hill House Hammond. But, generally speaking, he says that Folgate is changing gear after the initial sound and fury of the intense acquisition programme, which established the group.

"There are probably six smaller deals on the table and we may do a few more spokes this year but we now have a good regional spread. We have spent a lot of time building the business and talking to the press but we now want to ensure our staff know where the business is going and bed the operation down," he says.

However, he refutes the criticism that Folgate is just another national broker, which insurers do not really want. "Folgate is not just a broking operation, a fact that this comparison overlooks. It also has an underwriting agency, with Lloyd's capacity, a wholesale operation, various network propositions and a compliance arm so the comparison between the nationals, in this sense, is a poor one."

Network sustainability

Following the flurry of broking network start-ups late last year, Homer also says that he does not consider the market can sustain all the propositions currently being offered, adding that he expects only four or five will survive. Concerning Folgate's own Masterplan network, Homer hints that the group is ready to grow it - if it is able to attract enough interest.

"We are a much more diverse group than we were two years ago and, because we are now more diverse, we have the flexibility to emphasise growth with Masterplan - if that is where demand is."

On the subject of the market generally, Homer observes that the process of brokers applying for registration with the Financial Services Authority has actually slowed the growth of networks. He also cites strong growth of the UK economy - with gross domestic product growing at 2% to 3% per annum, as positively affecting brokers. He continues: "With commercial lines broking there is enough natural growth for commercial lines to be prosperous in future. Hopefully, there will be stability in the market and I think commercial broking profits will continue to rise."

Homer also sees opportunity with the rapid growth of what he calls very small to medium-sized enterprises for brokers - despite the threat of direct packages. "If a small business client is exporting abroad and has some claims experience, it is difficult to do this without advice. However, the market serving VSMEs may segment and it is possible that direct writers may take some market share. But there is also a possible opportunity for brokers with this through affinity schemes. A broker could offer facilities via a trade organisation to its client base as all members pose similar risks."

Furthermore, Homer considers the demand for direct players will only support a handful of providers. "In commoditised markets, such as petrol or coke, there are normally two or three dominant players and, by that token, I consider there is room for four or five direct players in insurance.

These, in my opinion, will include Tesco, Asda, Norwich Union, the Royal Bank of Scotland and Saga. Then there are organisations such as the Automobile Association, which straddle the divide between direct and broking.

"A lot of people don't want to deal with a call centre in India and there is a definite and healthy future for intermediated personal lines. Insurers like Fortis and MMA know this and, while a substantial number (of customers) will take the direct route, motor and home insurance won't ever be 100% direct," he exclaims.

Best case scenarios

He also explains why he considers the number of direct writers to already be levelling off due to the logistics involved in running a successful direct operation. "Take Direct Line, for example. It has around five million customers and most insurers would agree that the best case scenario is if 90% of a book is retained.

"For Direct Line, this means that, even in this best case scenario, the business is losing 500,000 customers a year - the equivalent to a book of business. That also means it has to gain half a million customers a year just to retain its current standing and, if the conversion rate is around one in five, that means 2.5 million people have to contact them to maintain their position. This is precisely why Norwich Union is going offshore - it is because of the dynamics behind being a serious direct player. The costs are huge, especially when it is also taken into consideration that it costs between £30 and £50 in advertising spend to acquire one policy."

He also says it is not surprising that some insurers have decided not to pursue the direct route given the costs involved and the size of the direct writers already established.

With regard to the mid-term stability of the market, Homer says there is an element of truth in the theory that, because all the chief executive officers of the major insurers are relatively young, they will try hard to resist the feast and famine cycle extremes of previous years. "When profits are good, investors want to pile on board in droves - capital chases profit but with over-capitalisation prices drop," he says.

"Other dynamics at work in the market that influence its outlook," he adds, "include the fact that insurers' and reinsurers' balance-sheets are not as strong as they were at the end of the last hard market. Also, inflation is low and there is still stock market volatility. Excess capacity is not being put in the market at present and the threat of terrorism is also having an effect, such as life reinsurers that want to limit death-in-service cover. This is just one illustration, but it demonstrates the increased caution among reinsurers about exposing their bottom lines and this is having a dampening effect on the cycle. And I believe that, until reinsurers have rebuilt their balance-sheets, there won't be an oversupply of capital."

He adds that, while there has been a correction of some rates, as they were put up sharply in the last two years, rates generally are holding up and, while there is an occasional burst of competition, this is localised and therefore the exception to the rule.

Last-minute applications

With regard to reports that the FSA has so far received a low number of applications for authorisation from brokers, Homer strenuously refutes the idea that this is due to broker complacency. "As far as Folgate is concerned I do not see that at all," he states, adding: "I have 24 applications to look over and there is an enormous amount of work being performed by brokers in completing Annexes 1 and 2. Each broker we are working with is at least halfway through the process and I suspect many applications will be submitted at the last minute in much the same way people book their holidays late. I do not see this as apathy towards the whole regime at all. If the big insurers contact brokers on 14 January requesting their registration number, it will not be a trivial matter if they do not have a licence by then."

The fact that brokers will not be able to trade without a licence from the FSA is not a point Homer considers brokers have missed. However, he continues: "General insurance brokers that do not have an independent financial advisers arm may not fully appreciate the impact of regulation. Some may be being slightly optimistic but no one can afford to lose a single day now."

The move by several insurers to underline commitment to brokers in their distribution chain lately has often been accompanied by comments praising them for their resilience, a sentiment that Homer shares. "If a broker has managed a business through an insurance cycle, they really have earned their spurs. There are a lot of newcomers to the industry but brokers know how difficult it is to survive well through a fluctuating cycle."

Homer's prediction that there will be 100 broking groups remaining in the next five to seven years has been criticised in the past, however, he stands by this. "These groups will include the likes of Unitas and, within these broking groups, there could be up to 3000 members. This will account for 80% of the commercial market and, while there are thought to be currently around 7000 brokers, the market will eventually collapse into fewer controllers. The large brokers will get larger, with the top 25 controlling 50% of the market, while the medium-sized players will just survive."

Conversely, Homer also sees the continued existence of small brokers.

"There will always be smaller brokers - not all are cut out for world domination and, like the village lawyer, many will just tick over because that is what suits them. If a broker is receiving £150,000 in commission from £1m worth of collective business, they could still draw a decent salary after paying overheads."

Training and competence

Just how decent that salary would finally be could also come down to a broker's training and competence costs. Homer explains: "There has been and continues to be significant legislation change. Health and safety requirements, European human rights legislation and the 4th European Motor Insurance Directive require training for staff to be compliant and up to date. The T&C regime is an area that will be expensive."

With regard to Folgate's T&C provision for its widely varying network of hub and spoke brokers, Homer says it is has purchased a licence providing access to Axa's web-based Campus. Folgate also uses the Chartered Insurance Institute's Assess program.

Overall, Homer is satisfied with Folgate's rapid progress, having achieved its second profit targets and won the approval of backers RBS. However, with the race among Folgate's finest already jostling to be part of its succession planning, it remains to be seen how much of an appetite Homer will have to stay around for much longer to fettle the business now that the excitement of creating and establishing it is all but over.

CV

2003: president of the Chartered Insurance Institute

2002: appointed chief executive officer of the Folgate Partnership

1999: chief Executive of Axa Insurance following the acquisition of the GRE Group

1998 and 2000 also executive director of Sun Life and Provincial Holdings

1998: chairman of the Motor Insurers' Bureau

1998: chief executive of Axa Provincial 1998 appointed general manager, corporate and London Markets upon the merger of Commercial Union and General Accident

1998: appointed a trustee of the Insurance Ombudsman Pension Fund

1996: UK General Manager, CU

1976: qualified as a chartered insurer

1971: began career with CU as a management trainee.