Analysis: Commission costs and conflicts

In May, Aviva cancelled all its agency with Penta Capital-backed consolidator GRP, amid reports that GRP brokers had been seeking an increase in commission.

The bust-up triggered a flurry of insurer activity over the newly available slice of GRP’s gross written premium, which GRP says now totals over £650m, up from £550m reported at the end of 2017.

Allianz stepped in to cover Higos’ SME business in June. Soon after, Axa took on commercial combined and fleet business and contractors insurance portfolios for GRP’s Green Insurance Group, while Allianz and Zurich struck up agreements with Sagar, McGrady’s and Abbey Bond Lovis.

Post understands that GRP’s demands for extra commission from Aviva may have backfired, as a trusted source says that at least one of its brokers has failed to meet initial commission demands with one insurer.

When asked about GRP’s rates of commission by Post, the majority of the replacing insurers expressed confidence that the deals made commercial sense.

A Zurich spokesperson said: “In terms of commission, while we won’t go into specifics here, we will only transact in a way which meets our usual approach and terms of doing business.”

Allianz director of broker markets, commercial & personal, Sarah Mallaby said: “We will continue to consider any opportunity, provided it makes commercial sense to do so for all parties involved.”

Axa declined to comment.

Wider issue

GRP declined to comment on the specific dispute with Aviva. However, GRP CEO Mike Bruce said the wider issue with commissions was in many cases larger insurers trying to bully smaller brokers into accepting far lower rates.

He said: “It’s no secret that smaller brokers on average earn lower commissions than larger brokers, so our acquisitions do expect to see an increase in their remuneration. The reason for this is that some insurers can use their size and muscle to make independents accept lower commissions.

“Lower commissions reduce smaller brokers’ overall value, should owners wish to sell their businesses and create value from their life’s work.”

Bruce said GRP’s approach was generally to achieve consistent commission levels across the group.

He said: “As part of our operational integration, we aim to harmonise commissions, both within and across insurers, for all of the GRP businesses. Having a uniform approach to commission ensures consistent treatment of clients and reduces any potential conflicts in placing business.”

However, he added: “If one of our businesses has an underperforming portfolio from an insurer’s perspective, we work with the insurer to agree a corrective plan which may include a local reduction in commission.”

“If we are delivering profitable growth to insurers and clients are happy with the premiums being quoted and the products and service delivered, it’s reasonable to conclude that the commission must be at a level that’s acceptable to all parties.”

Commission can be a sticking point for smaller brokers, who may look to networks to help beef up their remuneration.

Broker Network CEO Andy Fairchild said: “When brokers join, they expect us to have some important collective influence in the market. Indeed that’s often one of the reasons a member signs up, and of course what goes with that are products, services and commissions derived from this collective strength.”

He added: “We do negotiate collectively, of course we do, that’s part of our ‘strength in numbers’ and it’s what supports the independent SME brokers who make up our membership.”

End of an era?

The Aviva and GRP split follows two years that have seen the meteoric growth of private equity-backed buyers and some big changes in how consolidators and insurers do business. Further changes could be ahead and for some, they have been a long time coming.

“The Aviva approach to GRP was a dramatic and significant step in the insurer/consolidator relationship history and was a signal to the market that insurers want to see value in any broker relationship they engage with,” said Paul Anscombe, Seventeen Group managing director and Insurance Brokers’ Standards Committee chair.

He added: “Sometimes, as we’ve seen with Aviva and GRP, some of the insurers don’t play ball and it is getting tougher. But the model traditionally has been that an upside when acquiring a smaller broker is increased commission levels.

“I do not see this as the start of other breakups in this space but more detailed planning and commitments will be made between insurers and brokers making acquisitions.”

Brokerbility chair Ashwin Mistry urged insurers to take a different approach when doing business with the consolidators.

He said: “I would favour the insurers taking a much more mature view, rather than reacting to land grab.”

Imas partner and M&A expert Olly Laughton-Scott agrees that consolidator commission demands are hitting the market: “All consolidators play the enhance commission game but the extent to which they do so varies quite widely.

“However, insurers should be aware that rewarding consolidators with higher commissions provides the commercial case that is driving the consolidation of the market, not something that insurers welcome.”

PIB

The other big M&A-hungry consolidator is PIB, which boosted its GWP to £500m in April with its 14th purchase in 21 months.

However, PIB’s model varies from GRP’s in key areas, and they do not always compete.

CEO Brendan McManus said sometimes seeking higher commission from insurers can damage relationships and harm the company’s business model in the long term.

He added: “We haven’t seen massive uplifts in commission when we have bought a business, but neither do we really seek them. We are trying to set our stall out by acquiring new customers and growing our business organically.

“It is lovely to think that we can get more and more commission out of people, but it’s not realistic. In the long term, my vision for this business is we will grow because we have got very supportive carriers who can make good margins from the business that we generate for them.

“We’re trying to grow our business that way and we are also trying to position ourselves with the insurers that we are not trying to pick their pocket all the time for commission. We want to work with them to make sure both broker and carrier have profitable lines of business that are growing and try to increase our margins over a period that way rather than go straight to commission.”

McManus said the consolidator wasn’t always averse to accepting low commission rates because of issues of volume.

“It is all about what is right for the client,” he said. “If it’s the right product and the right service for the client, then we would place it in the market with the low commission.”

Aviva has expressed a similar sentiment. Talking about how the insurer selects its broker partners, managing director of intermediaries Phil Bayles said: “Our distribution strategy is about working with brokers who put their clients first and want to work in partnership. That is a partnership that works for the client, the broker and the insurer. That is our distribution strategy. Therefore, if we come across practices that don’t meet our criteria, then we are happy to not distribute our products through that broker.”

He added: “For us everyone has a choice. Brokers don’t have to work with insurers; insurers don’t have to work with brokers. Our criteria for working with brokers is: Does the broker put the client first? Does the client want to work in partnership with the insurer? With us? And where we don’t see that, we won’t work with them.”

Niche acquisitions

Anscombe said it is generally easier for consolidators to maintain higher commission rates with niche brokers.

He added: “We have seen consolidators target specialist broking businesses as they believe this offers them greater opportunity to grow profitably compared to a general book.”

In recent months, we saw GRP purchase bloodstock specialist Anglo Hibernian and PIB acquire childcare broker Morton Michel.

However, that has made it tougher for smaller independent brokers to grow acquisitively.

Laughton-Scott said there were simply fewer targets available. “The emergence of well financed, well connected and ambitious PE-backed vehicles has seen the competition for assets sharply increase.

“This has made it more difficult for private-owned brokers to compete. This applies to commercial brokers as well as niche specialists. Higher prices also means that making acquisitions significantly increases the worth of private brokers, so they are still acquiring, albeit possibly smaller entities.”

Perhaps as a way of pushing back against the wave of private equity-backed consolidation, Anscombe expects insurers like Aviva to give backing and advice to help independent brokers in their growth plans.

He added: “It is an opportunity for an independent broker who wants to grow and is interested in making an acquisition. Insurers will really go out of their way now to help independent brokers to acquire a business. It is a real opportunity. It is an interesting space and we will see more activity.”

In terms of consolidators’ own efforts to grow, much talk in the market has been that it will be difficult for GRP to acquire smaller brokers that already have established relationships with Aviva.

However, McManus believes the point has been overstated. He said: “Look how easily it replaced that business with other carriers.

“There may well be some people that are considering selling who have got such a close relationship with Aviva that it might put them off GRP. But I can’t think of many circumstances where that would be the case.”