Taking an active role.

- Insurance Age staff
- 11 Apr 2002
- Indicative reading time: 6 minutes

Mike Williams tells Diane Smyth how the British Insurance Brokers' Association has come of age and why a strong broker voice is more important than ever.

The British Insurance Brokers' Association is celebrating its 25th
anniversary this year and chief executive Mike Williams believes the trade
body has come of age. The Association of Insurance Intermediaries and
Brokers formally joins BIBA on 12 April, meaning 80% of insurance sold by
brokers in the UK is sold by BIBA members.

"We now represent the whole range of brokers." says Mr Williams. "We've
had a huge change. A few years ago, BIBA was seen as the city-based
behemoth looking after the big boys."

He believes a powerful broker voice is essential in the new regulatory
environment, adding that he would like to see a single voice for the
industry.

"If we are going to have a super-regulator, we need some kind of
counterbalance," he says. "Size matters. All the regulator and the
Government are interested in is understanding the majority view - the
majority has the potential to cause the most problems."

Lobbying role

BIBA can use its voice to lobby the Government and regulators and, says Mr
Williams, will try to influence the Financial Services Authority
rulebook.

BIBA also has a presence in Brussels, via the Bureau Internationale
Producteur d'Assurance et Reassurance, the European trade body for
intermediary trade bodies. He explains: "It helps us lobby in Europe and
keep up to speed with what's going on. It's essential to take an active
role as Europe gets its regulatory act together."

BIBA also has close ties with the Independent Financial Advisors
Association, its counterpart in the IFA market. Mr Williams believes this
link will become increasingly important as the single regulator encourages
brokers and IFAs to move closer together.

"Really the two sides were artificially separated by regulation five or
six years ago," says Mr Williams. "If you've got one regulator and broadly
one approach to the regulation of financial services, it makes sense to
capitalise on economies of sale, development, compliance and IT."

He believes this convergence will be restricted and slow to take effect,
however. "Regulation was not the only thing that made people split their
businesses - there was the whole issue of pensions and endowments
mis-selling," he says. "Brokers set up a wall between themselves and
financial services because they didn't want to expose their entire
businesses."

Mr Williams predicts ambiguous products such as private medical insurance
and term life will be more noticeably affected, however. "These kinds of
products currently sit somewhere between general insurance and life but
they could be forced into one camp or the other. We will have to wait and
see."

Waiting game

Brokers will also have to wait and see what happens with regard to
remuneration through commission, which the FSA is currently scrutinising
in the IFA market. "The regulators are concerned that the amount of
commission, as well as things like profit shares, could influence the
brokers' choice of carrier," says Mr Williams. "There is a deep suspicion
in their minds."

Mr Williams does not believe the FSA should apply the same suspicions to
general insurance, however. "It's tarring us all with the same brush," he
says. "General insurance is just not the same. If you have a claim it will
usually be paid. With a long-term investment, such as a pension, there is
much more emphasis on the ongoing performance of the product."

Mr Williams says brokers are also "wedded" to the commission concept,
having used it without problems for the past 400 years. "Brokers are
concerned insurers will use net premiums to jack up the prices," he adds.
"And the smaller brokers who work on very tight margins would really have
to justify themselves if they had to sell on fees. They would no longer be
able to use profitable areas of insurance to subsidise the less
profitable."

Similarly, the insurer ownership, or part-ownership, of brokers could be
up for scrutiny. "I'm not convinced that insurers buying chains of brokers
and equity stakes is an entirely good idea - whatever the insurer says
there must almost always be a powerful influence and reduction of choice,"
he says. "With the new regulation coming in we could see the tied agent
model coming back into fashion."

Mr Williams warns brokers to keep an eye on the insurers though he
believes the insurer consolidation seen over the past couple of years is
coming to an end. He says: "Groupama couldn't find an appropriate buyer
and then, I suspect, the French owners looked at the hard market and
thought 'There's an opportunity to make some money here'. If you can't
make money in the current market you never will."

Entrant risks

The hardening rates are encouraging new insurers, wholesalers,
underwriting agents and service companies to set up shop but, warns Mr
Williams, these new entrants bring their own risks. He says: "Brokers need
to be sure they check out these companies and the established companies.
Some brokers are getting desperate to place business and are putting their
clients with the newer entrants without asking enough questions.

"I had a broker phone up the other day asking how secure an insurer was -
brokers should be checking that out as a matter of course," he
continues.

"Brokers should be checking their annual accounts, where they are
domiciled, what they are outsourcing to the middle men, what happens to
the premium once it has been collected, whether the client will be covered
if the company goes bust, what other brokers say about it, its general
reputation in the market and whether claims are being paid promptly.
Brokers also need to make sure they have service agreements with all the
insurers they work with."

In fact, BIBA has just taken legal advice on the broker's duty of care to
its clients and what can reasonably be expected of it. "Brokers need to
consider both common and case law and where they stand in relation to it -
no one is expecting everyone to be perfect but brokers who place business
with an insurer without doing the reasonable checks could be in big
trouble."

Mr Williams would also like to see the FSA encourage more
whistle-blowing.

"I think it's the FSA's responsibility," he says. "Imagine what would have
happened if all the rumours about Independent had been brought to the
market. We have a responsibility not to start market stampedes but brokers
have to realise that they have a duty to protect both the client and
themselves."

Brokers also need to take time out to plan their strategy, says Mr
Williams, as "just hoping everything will be all right will not work". Mr
Williams advises brokers to get out, grow or join a network. He also
predicts new broker-formations in the future.

Network trends

"Some brokers have sold up but others have been joining networks and I see
that trend continuing over the next few years. It does cost money to
belong and they do tie brokers into joint agency agreements, however,
meaning the brokers can't necessarily be as entrepreneurial. Some brokers
find that very hard to take. On the other hand, they give brokers
leverage, meaning they can access products and technology, give help with
compliance and so on."

All in all, he says, brokers have to weigh up the pros and cons carefully,
asking whether they are giving up control or enhancing the value of the
business for when they come to sell. "Different networks have different
arrangements and brokers need to find one that suits them. Folgate's
hub-and-spoke model could become a good exit route for smaller brokers - I
suspect that they can become a hub and then sell up entirely when they
want to retire."

He warns brokers looking at selling up to think carefully about their
run-off professional indemnity arrangements. This market is currently very
hard and some brokers are finding they cannot get cover at all. "The BIBA
professional indemnity scheme premium went up by 60% last year and we
expect it to rise by another 40% this year," he states. "If I was a
broker, I would insist that the organisation acquiring me provided the
cover or provided me with indemnity."

Mr Williams also predicts that the relationship between brokers and
insurers will evolve over the next couple of years, radically affecting
who does what. "The market has been saying for years that the duplication
of effort we have at the moment wastes resources. Now we actually have to
do something about it," he says. "Insurers, brokers and software houses
are all looking at the process and I wouldn't be surprised to see an
agreement where insurers simply provide the capacity and brokers do all
the administration."

The future could even see the insurers' regional infrastructures
dismantled, he predicts. "Do insurers really need all their regional
offices? They need capital, underwriting skills and efficient service. If
they outsource their business responses to call centres, customers have to
fit into one of nine scripted options."

Mr Williams is not enthusiastic about brokers underwriting, however,
believing it leads to a fundamental conflict of interest. "I used to wield
the underwriting pen when I was a broker, underwriting contractors and
truck business, but I've got a very purist view. I believe that brokers
should broke and underwriters underwrite and never the twain meet. In
practice it is difficult not to exceed or abuse the underwriters' levels
and for the insurers it is, I believe, rarely a happy experience. The
broker's job is to sell. It is the underwriter's job to be far more
sceptical and cautious."

Mr Williams believes delegating underwriting authority to brokers only
serves to magnify the insurance cycle, with insurers willing to give the
pen to brokers in a soft market in order to win market share. "In
practice, all this tends to do is depress the market still further. Then
the accountant looks and realises the company is losing money and prices
go up with a bang. The insurance cycle continues year after year and no
one ever seems to learn. As the cycle turns again we will see the pen go
back out to brokers."

Falling numbers

Mr Williams concedes it has been, and still is, a difficult market for
brokers. He points out that there were between 11,000 and 12,000 general
insurance broking companies when he joined BIBA in 1995, and now only
4500. Furthermore, he says: "We are hearing broker numbers will drop down
to 1500 over the next seven years. Nobody knows if that's true or not but
if numbers keep dropping the way they have been over the past few years it
is entirely within reason."

Mr Williams says insurers' division of brokers into preferred and less
preferred categories has made it tough for smaller brokers, pointing out
these brokers have to do something "pretty extraordinary" to move up a
league. He is pragmatic about this move, though, and states: "It's here to
stay, despite one or two honourable exceptions."

He remains optimistic about the future of general insurance brokers,
however, pointing out that brokers' share of the commercial lines market
has actually increased over the past few years. "Insurers just can't give
the same kind of advice on commercial lines. It depends on a personal
relationship and understanding. Brokers don't have to compartmentalise
clients and they know that two seemingly identical risks can need two very
different solutions, depending on the personality of the client."

"Brokers perform a function that no one else can, which is why I think
they still have a future," he says. "I hope so anyway, or else I'm out of
a job."

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