Few in the insurance industry would disagree the broking world has changed significantly during the past few decades. Two generations of brokers met to talk about the impact of the major developments on their business. Ralph Savage reports
The insurance broking market is, in many ways, unrecognisable from the one in which three of our panellists began their careers; however, the views they expressed at Post Magazine's broker roundtable proved no less contemporary than their peers.
With so much knowledge and experience in the room, there were some valuable lessons and insight into how the client/intermediary/insurer relationship should and should not work.
A status check was a good place to begin and all those present agreed that Financial Services Authority regulation had passed uneventfully, save for a few grumbles from personal lines customers growing tired of paperwork. "If you were running a compliant ship before the formal date, things haven't changed a great deal," began Ron Forrest of Perkins Slade.
Robert Worrell, of Hull's Insurance Partnership, added that compliance with previous initiatives had given them a grounding in what to expect: "We have embraced so many initiatives - Investors in People, Continuing Professional Development, ISO 9001, the General Insurance Standards Council - that we were used to it. In the main, it's the way our business was running anyway."
Graham Gomm, of Sutton Coldfield-based Gomm Insurance, was the first to note the irritation with which personal lines clients have greeted regulation: "We are a broad-based family brokerage - our personal lines clients are really getting a bit miffed."
Indeed, harking back to 'the good old days', Aquilo's Mike Eve hypothesised about how it might have been: "I think the banking sector had the same problem - where you'd get 30 pages of small print. All I want is for a bank to lend me £100, ask for £5 interest and have it back in a month."
"Without the need to show a passport," agreed Mr Forrest.
On a more philosophical note, Mr Forrest suggested the market's complaints about bureaucracy were ironic and that it has tried and failed to self-regulate. "We are driven by the European Union Insurance Mediation Directive and there's not been an alternative," he said. "One of the great regrets is the industry - having gone through a period of self-regulation - didn't really regulate itself very well. In one sense, self-regulation failed and didn't meet the task. It would have been perfect had the GISC been rubber-stamped and been told, 'just carry on as you were'.
"Clearly, self-regulation hadn't embraced enough people in the net and hadn't been wide enough. I have no problem with the new regime - it's healthy, it gives you good discipline and consumer confidence."
Peter Blanc, managing director of broker FMW agreed with Mr Forrest but remained hopeful that the FSA would loosen its grip: "The FSA has said it is going to review the rules and try to remove some of the bureaucracy from the system. Everyone in the industry should try and make sure that happens."
He continued: "The vast majority of consumers so far would have noticed nothing more than a lot more paperwork. Unfortunately, to most members of the public, the financial services industry has a tarnished reputation."
By now, the discussion had taken on a life of its own, with even the basic legal principles of commerce open for debate. Mr Eve - whose London market experience informs his opinions, much like Mr Forrest - declared that regulatory pressure was one of the ways for insurance to rid itself of embarrassing scandals. "What other industry is there where you don't get the documentation until seven months after you've paid the premium?
It's that sort of stuff the London market takes for granted, but then you have about $4bn (£2.1bn) (referring to the current World Trade Center dispute) hanging out to dry because someone hadn't written a policy wording correctly."
Taking up the baton, Mr Forrest added: "That inefficiency derives from the legal principle underlying it in the UK - utmost good faith.
"If you are working on that principle, it doesn't matter that the policy wordings take seven months - it should all turn out right in the end. In the US, they don't have that - it's caveat emptor. Under those rules, it's only right you should have all the documentation issued in advance."
With minds now looking at matters across the Atlantic, the subject of Eliot Spitzer's investigation into alleged bid-rigging and broker commissions reared its head. Mr Blanc offered his thoughts ahead of Mr Eve and Mr Forrest: "It's been quite cleverly played by the likes of Marsh and Aon, whereby they've diverted attention from the real issue - bid-rigging - and blamed it all on contingent commissions."
Out of proportion
However, Mr Forrest countered: "I don't think they've been smart at all. If you look at Marsh, I'd agree about bid-rigging but to pay $850m on something it didn't think was a wrongful practice to try to obfuscate the minor criminality of a few people was out of all proportion.
"If either Aon or Marsh really believed that contingent commissions and overriders and profit shares were legitimate and not illegal, why use them? If they did believe they were good practice for more than 50 years, why didn't they defend them more rigorously? The fact is, they were hard to defend, because they weren't linked to the work that they do."
"Shouldn't it boil down to caveat emptor," argued Mr Blanc. "Do large corporate buyers need the regulator to fight their corner? If I was a company like Tesco, I would demand to know precisely what I was paying for."
"It's quite likely the broker who spoke to that client wouldn't know," said Mr Forrest. "A lot of these payments are not client specific. They're calculated at head office, negotiated nationally and paid annually in arrears. So if you sit with any client on day one in January, who asks, 'are you getting any extra money for this?', the answer is 'I don't know'."
With the conversation weighing heavily in favour of big-ticket national broker business concerns, Mr Worrell broadened the discussion to include the regional broker perspective: "If you are adding value to a client relationship and understand the costs of delivery, that must drive the charging structure. Extreme care is needed to ensure you earn the requisite amount of revenue to maintain a professional standard.
"A conservative estimate of first-year compliance costs for a small to medium-sized independent broker would be £50,000 and for us it has been significantly more. Therefore, to give brokers this additional financial burden while proposing to delete profit shares and overriders is contrary to the public interest. Basic business economics highlight the anomaly of increased responsibilities on reduced revenues."
As Mr Worrell explained, brokers' margins are being squeezed but Mr Forrest suggested if companies are transparent in how they charge for services they will not be resented: "We are not going to take anything that could be construed as an inducement. And any extra revenue we get - and we do expect to get some - we will stipulate with insurers on our service agreements. We will expect to get our remuneration in two chunks. One will be the work you do for the client, either commission or net from a fee charged; the other will be the work you do for the insurer. We will declare that to the client."
Again, Mr Worrell contested: "There's a degree of grey in this though - it's sometimes difficult to identify a sole beneficiary of your service."
"No one in the sector seems to understand the value they bring to insurers by distributing their products," said Mr Forrest. If you were an insurance company in the UK and you didn't have a broker, you'd need a huge sales force going around knocking on the doors of every business in the country."
Profit share is another bone of contention in the broker remuneration debate and our panel proved no exception. Mark Boon of Cambridge-based LaPlaya, admitted their effect could be negative: "The question of profit share is always interesting because you can be going along nicely for a few years and then you have a large claim. We write schemes mostly and we had a big one in December - it was one of those run-offs and it just finished us for the year."
No discussion with brokers could be complete without opinion on insurers.
Had their experiences changed over the years? "We haven't been exposed to it as much as some," said Mr Boon, "but to compare the service levels on schemes to traditionally brokered business - which is about 20% of our revenue - the latter is a nightmare. Even with projects like Imarket, EDI and so on, the service really is not good."
Mr Blanc was more diplomatic: "It's hugely variable from company to company. Some are getting there and developing online systems, such as Axa Business Risk, which is pretty good. Having Norwich Union phone us with an in-house underwriter works well on some levels."
Mr Worrell continued: "You can look back with rose-tinted spectacles and what you don't factor in is the massive increase in sophistication of the buyer and the on-demand world in which we live. This is a 24/7 industry. The demands clients make of us, we pass onto insurers. I don't think they're doing that badly."
Mr Gomm's experience spans some 37 years. He offered a recent case study: "In the good old days, you could ring the company and speak with someone who knew what they were talking about and they knew what you were talking about. We had a serious question from one of our longest standing personal lines customers and, of course, it went out to India. They didn't understand what they were talking about. It's not just the money being saved, it's the cost of the time to both brokers and customers," he said.
As a predominantly personal lines brokers, Mr Gomm admitted there were some enormous challenges in the market but that he had so far competed well with the direct writers.
With the majority of the panel specialising in commercial lines, however, Mr Forrest suggested insurers as we know them may have had their day: "The real challenge now is are we prepared? Given we think that brokers have more expertise than lots of the carriers, what's the purpose of insurance?
It's that the losses of the few are met by the contributions of the many.
"Insurance companies put a huge amount of frictional cost and overhead to meet that need. If you've got a scheme and a big bulk of clients, the answer is probably to create your own insurance company. You have a pool of risk and if you look at the loss experience, I guarantee you business will be profitable.
"In which case, the challenge to us is to move towards a self-insurance environment. You manage it for them and take out the variable of insurers and their frictional costs."
Robert L Worrell, managing director, The Insurance Partnership, Hull
Peter Blanc, managing director, FMW Risk Services, Chelmsford
Mike Eve, formerly chief executive of Aon Risk Services, now director of Aquilo, London
Graham Gomm, director of Gomm Insurance, Sutton Coldfield
Ron Forrest, chairman of Perkins Slade, Birmingham, formerly head of Aon Risk Services
Mark Boon, managing director, La Playa, Cambridge.
- Loss-making GRP spent £112.6m on acquisitions over its last financial year
- Hiscox names former claims boss as UK CEO
- Hiscox's James Brady on why cyber knowledge remains a barrier
- Mike Bruce promoted to GRP group managing director
- Top 100 Insurtech: Quarter four update
- Marsh boss joins GRP-backed Marshall Wooldridge
- I work in insurance: Stephanie Horton, River Canal Rescue