Smart operator

Smart and Cook hit the headlines in March after its three-year search for the right venture capitalist resulted in 3i supplying a £57m boost - a process that, managing director Paul Meehan says, took the firm's focus off acquisitions. However, he is quick to add that S&C, firmly under the auspices of himself and chairman Geoff Cook, is now firmly back on track and back to one of its traditional core roles as a Yorkshire-based consolidator.

This has seen S&C already complete two deals since 3i and a total of 32 acquisitions in 12 years. "We currently have 13 deals on the go," says Meehan, who is hopeful of completing at least half of these by the end of the year. S&C's appetite for consolidating in earnest directly reflects Meehan's own and, despite being well into his 50s, is showing no desire to slow down.

"Perspective is a funny thing; in seven years I may be burnt out, but right now it is impossible to tell - I think you know when it is the right time to stop," he says. However, it would be unsurprising if Meehan remains in the driving seat for longer as, by S&C's own projections, a float is expected in the next four to seven years - something he not only intends to see through but also to be around for afterwards.

In the meantime, he continues: "There is much to be done to ready the business for the future. It is currently too big for a management buyout and too small to float, as is our stated aim."

Meehan, along with Cook, masterminded S&C's growth from a single-site office with 20 staff and a £1.5m gross written premium 12 years ago to the 13-branch, £120m GWP outfit with 350 staff that it is today. This is a challenge he has obviously thrived on and, not surprisingly, has made him a strong advocate - even a champion - of insurance.

Creative recruitment

"This is a fascinating industry but it has to be more creative in how it attracts the right talent," he says, citing the recent initiative by Jardine Lloyd Thompson as an example of creative recruitment. In a student scholarship scheme run at the University of York, JLT offered assistance for the penultimate and final year of study for two students, plus a two-month summer placement with the broker.

"The two undergraduates that were selected from 50 applicants do not think insurance is boring," Meehan exclaims, adding: "I think, from the point of view of the insurance industry, the public's perception leads it to have an undeserved view of itself. But is accountancy really more 'sexy' than insurance? I have no problem sitting down with a young trainee and selling them insurance; you get to advise corporate enterprises on how to protect their interests, managing risk and help people protect and run their businesses more effectively. And it's a great and engaging challenge."

However, Meehan's enthusiasm for the challenges of insurance broking is almost matched by his disappointment with the Financial Services Authority as the incoming regulator. "By the time the consultation process for Consultation Paper 174 began, regarding risk transfer and the handling of client funds, the FSA had already made up its mind. Risk transfer has always applied but there was a lack of case law to support it. And, even though we stepped in with our legal team to explain why it had to happen and why it should happen, by then it was too late."

Meehan also argues that it was an option available to the FSA in the Insurance Mediation Directive, Article 4.4, which would have given the regulator sanction to avoid uncertainty by declaring risk transfer compulsory and insurers responsible. "The FSA missed a big opportunity with this. But regulation has moved common practice away from being the custom, which has worked for years and has run into problems," he states.

He is equally scathing about the FSA's handling of issues concerning the regulation of secondary intermediaries. "The secondary market will be a mess, and what will insurers do in November or December when they need to know about January renewals? Some think that a lot of this business will go direct but I can not see that a great amount will. In terms of brokers stepping in to help secondary players, there are not too many propositions around. Any more propositions will have to arrive very shortly as brokers will have to get the compliance in place in order to administer it and the clock is ticking."

Regulatory requirements

Meehan says S&C did not consider administering a scheme for the regulation of secondary intermediaries. "We want to stay core and this was not a consideration even though we are big enough to do something like that. I can see why outfits like The Broker Network (BNL) did not do anything along these lines, even though there are possible synergies. It comes down to the fact that the regulatory requirements on BNL or any administering firm would be onerous in the extreme - being considered 'high impact' by the regulator, leaving operators with no margin for error. History has already shown in the investment market that Misys and DBS came unstuck because of this."

For these reasons Meehan considers his reluctance to be representative of brokers that are in a position to provide solutions to secondary intermediaries, as they too are worried about the loss of control over their business process.

Another common regulatory grievance of brokers, expressed by Meehan, concerns the compensation scheme. "As things stand, insurers can trade with an agent, who could be a crook, but it is brokers that pay for any failure that results through the compensation scheme. If insurers grant brokers access to that power, there ought to be a corresponding responsibility and culpability attached. This is a major shift of the goalposts and brokers can lobby until they are blue in the face about this and other inconsistencies, but to no avail."

With regard to the current market conditions, Meehan says: "The cycle is the result of market dynamics and there is no corrective mechanism. Reinsurers' balance sheets are still in tatters after 11 September 2001 - it is a dynamic and, while there is much talk from insurers about how to prevent prices decreasing, they can only respond to what is out there. It is an inescapable fact that profitable markets create softer rates."

Meehan considers shareholder pressure to be a factor that is guiding underwriters in modern times. "In the 1980s, if insurers did not make a profit, there was little consequence for the top tier of management or their bonuses. Nowadays, shareholders want results-based profits - they do not just want to know the bottom line; they want to know how it was achieved and how sustainable it is. Of course profits have been made recently, some of which have been passed onto shareholders, but it is imprecise; it's like steering a tanker ship - by the time corrective action is taken, the dynamics have shifted again."

Meehan is also a subscriber to a view put forward by Allianz Cornhill's Chris Hanks, who has suggested that, because the chief executives of the top insurers are relatively new to their positions and would like to hold on to their jobs, this will ensure underwriting for profit continues and, therefore, help prevent a free fall in rates.

Broker optimism

But, concerning the degree to which brokers are adopting technological advances Meehan is optimistic. "Brokers are reactionary - they don't typically embrace change, but brokers and insurers can now both see the value of a single key environment."

He is also hopeful that the imarket initiative will reach its potential and believes it will build gradually towards this once trading starts.

However, he also states that more insurers should 'get off the fence', support it and get on board. "With the capability to create a myriad of roads and connections between carriers and distributors, I am convinced it will work. Once market reticence from some specialist insurers - that consider their products are too complex for imarket - dwindles and they start to come on board, I think it will gain pace.

"I also hope syndicates get into it as imarket eliminates so many errors and bottlenecks. I think it will be three years before there is serious take-up as quite a lot of brokers lack the connectivity at the moment. Not everyone is on Sirius or Acturis and there are a lot of brokers that need to get up to date with their IT to gain the advantages that imarket can offer them."

While an IT system is one of the most significant, but often fraught, purchases a broker ever makes, Meehan mentions a simple but practical method of gauging the potential value of an IT system - or any other important business purchase. "It is a straightforward but sound tip that, if a system does what it says it does, the person selling it should have no problem providing the contact details of people that had the last three installations at three-month intervals. A testimonial from someone in a similar position gives a powerful indication of who and what you are getting involved with."

Meehan also says the best piece of general business advice, or rule of thumb, while also similarly simple yet crucial, is to "Pay attention to the detail and small print." He adds: "Most times when I have something wrong, it is because I have neglected to pay attention to this. Conversely, when I get things right it is because I have made sure I am fully in the picture."

In terms of the local market dynamics in which S&C operates, Meehan says Yorkshire is much the same as other regions in terms of competition.

"There are a lot of local businesses in competition with each other, which is why the likes of Folgate have made many acquisitions here.

Client trust

"However, while it can be harder to win clients, they are quite loyal and I would say that we do not get the client promiscuity to the same degree as other regions." And this is a factor that runs to the core of S&C's whole strategy. He continues: "This is one of the reasons why we operate from a small town - to gain loyalty through reputation. This client relationship is the one thing that can not be copied by competitors; creating trust and mutuality is what it is all about - we sell a 'sleep easy' product and you need to gain trust for that to be at all effective."

Given S&C's acquisition track record, Meehan is confident that this ethos will translate into expansion in other territories. "Having done many acquisitions over the years we have a well-defined methodology for this, as you would expect, and we think we can expand without compromising this core formula."

If all goes accordingly, S&C will have plenty of opportunity to test and refine this in the coming years. This action plan evolves around growing a brokerage to £1m in revenue to gain autonomy from its parent. After that comes creation of profile and creating client trust and, Meehan adds with a nod to the reputation-shredding scandals and collapses of recent years: "Working in an ethical manner is also core."

Ultimately, Meehan's success as a professional broker is a long story, but he adds: "The secret is to hang onto your people. Retaining good staff, investing in them and getting them to buy into being part of a business that is going places is a big part of it. The other part, of course," he says with a grin, "is knowing how to make the business profitable in the first place."

CV

1991: Group managing director, Smart and Cook, Harrogate

1987: Joined Smart and Cook Group

1984: Managing director, insurance broking business, Charnley Davies

1979: Branch manager, The Bolton Group, Wakefield

1974: Insurance broker/account executive, Phipps Charnley

1970: Managers' clerk, National Westminster Bank, Bloomsbury.