A new wave of niche commercial underwriters is on the way - not just because small to medium-sized enterprise rates are good but because their founders believe intermediaries are fed up with being tied to slow-moving consolidated giants. Ed Vinales reports
Commentators say that in recent years the small to medium-sized enterprise sector has propped up insurers' balance sheets, while much of the rest of the market has endured a period of soft rates. So it is little surprise that this market has seen a raft of new entrants this year, including M4, ABC, Iprism and Insynergy. Dubbed 'the class of 2006', many of these outfits are led by individuals who have broken free of the shackles of major insurers - most notably Royal Bank of Scotland Insurance - and decided to go it alone.
So what is the driving force behind these start-ups, and why do they think they can do it better than long-standing insurers? Phil Bunker, broker director of ABC, the multi-line commercial intermediary backed by Liverpool Victoria, explains that the SME market is hugely profitable and currently underrated largely because the independent brokers are fiercely competitive.
"SME insurance business has been propping up the other lines of Allianz Cornhill and Norwich Union over the past few years," he says. "We will launch next year expecting to make a profit because existing insurers are hidebound by current deals and high commission rates. Our strategy will be to select brokers and to work with them to attack business that they don't currently hold. Traditional insurers cannot work in this way since they risk upsetting other parts of their agency base."
Anticipated rate rises are one possible explanation why this year has seen so many start-ups. However, queried for a pricing forecast, a spokeswoman for Norwich Union says: "We agree with the general market view that there will be no big increases in commercial rates in the next year. This is partly to do with the fact that capacity has increased."
As a representative of part of that new capacity, Mr Bunker says that it is obviously good to establish a business when rates are on a slow rise, but he does not accept the view that this is the reason for the new entrants. So why have these underwriting agencies and intermediaries launched this year, and what specific market opportunities have they spotted?
Charles Earle, chief executive of Insynergy, which will begin trading later this year, says: "Successive mergers and acquisitions in the industry have created large, unwieldy companies, often with legacy computer systems that prohibit them operating with the full benefits that new technology provides to underwriters, staff or brokers."
He says that because Insynergy is starting with a clean sheet and no legacies in IT, management attitudes or staff, it can offer a committed response to the needs of independent regional brokers. Quick responses to intermediaries' requests, it seems, is the crux of the matter - and it is something that M4 Underwriting also hopes to capitalise on.
This company has described its approach as a 'retro' offering, which, says managing director Don Oakley, means traditional underwriting supported by new technology. "Our strategy is to focus on the broker as the customer," he says. "We will take into account the broker's relationship with their client and take great store in the broker's opinion on the management of risk."
Mr Oakley explains that research by Datamonitor shows that mid-market brokers want access to decision-makers. He adds that if M4 can supply them with a quick, high-quality service, they will use it again: "We are aiming to deal with less than 10% of the market. We won't deal with the nationals or the consolidators, but also not the smallest. M4's distribution strategy will extend to fewer than 150 brokers, and we will offer exclusive access to our quote in every case." He explains this will be achieved by offering terms to the first broker in each of the underwriting agency's selected localities that comes to them with an acceptable presentation.
Mr Oakley emphasises the importance of delivering quick turnaround times to brokers, something all the new start-ups say they are trying to achieve: "One of our primary goals is to offer brokers a flexible and competitive approach, which will give them a real edge over their rivals." However, he adds M4 will maintain profit by a strict adherence to its philosophy: "We aren't afraid to walk away from business should we feel it doesn't fit with our plans."
As part of Liverpool Victoria's strategic plan to be a top-five insurer by 2011, Mr Bunker says that ABC is developing "a new system" with a third-party supplier that it hopes will give it a significant market advantage when the company begins trading next year. Clearly reluctant to give away too much, he adds: "Our supplier isn't ready yet, but as we are not bound by shareholders we are under no pressure to announce our start date. Having said that, we have set an internal date for our launch but we're not revealing it just yet."
Another start-up to espouse the virtues of electronic distribution is Iprism. Adrian Harris, director of the underwriting agency, which has gained the backing of 12 as-yet-unnamed insurers, says: "Market research and our experience suggest that brokers do not see the full benefits of electronic distribution. Iprism supports I-market and Polaris because they set industry standards that will enable brokers to realise these benefits, including reduced administration."
He adds that the emergence of underwriting agencies - which have a lower cost base than insurers - is indicative of the market's drive to cut operating costs but he sends out a warning to anyone thinking of getting involved in this market. "Brokers only give you one chance to impress them. We have set a target deadline date, it's sometime in November, and we have to make sure we are ready," he says.
However, Kevin Pallett, the managing director of one of the market's established players, Fusion, says it is underwriting skill, not technology, that differentiates businesses from the crowd. "Electronic delivery doesn't make you a winner or a loser," he says. "That comes down to underwriting skill and good discipline."
He adds he is surprised by the wave of start-ups, as he feels that the UK SME market is already very competitive. "More supply means it's going to get more competitive and my concern is that some existing players and the new entrants could be too focused on price. Underwriting discipline is an oxymoron right now as some decisions are effectively price-led. At Fusion, we take a risk management approach: we select brokers who buy into that and we work with businesses to identify risk, help them prevent it and provide compensation when needed. If these new entrants plan to compete on price then I hope their backers are asking them how they expect to deliver a profit."
Some major insurers provide backing to underwriting agencies such as Fusion and Primary, as well as some of the new start-ups. Should they feel threatened by the continuing emergence of new firms and the possible dilution of incoming business? Mr Earle says, perhaps ominously, that insurers who feel threatened will do everything they can to defend their market position: "Some clearly want to participate in what they see as an alternative distribution channel. From our point of view, it's a big market with room for our ambitions."
He adds that brokers have told him that they see significant gaps between their service needs and some insurers' operational delivery. "In a market where there is a high degree of inertia, do insurers with a significant market share want to invest heavily in changing what they do for brokers?" he asks. "Or might they consider that inertia in the market will protect their position and they might make better returns if they improve margins by cost-cutting?"
Mr Harris offers food for thought by asking: while insurers are keen to focus their offering using the Pareto rule - namely that 80% of an insurer's business comes from 20% of its brokers - does that mean that 80% of those brokers are getting a lower level of service and attention?
It appears that the sudden emergence of the class of 2006 cannot be boiled down to one factor and is an amalgamation of several issues. However, there is some recognition that the market is calling out for a new approach. "Things have remained the same for a long time, so our plan is to change the way the market is trading," says Mr Harris.
However, Mr Earle plays down the idea that the start-ups are acting as a wake-up call to the market. "Firstly, does the market need a shake-up? We offer a service to a select number of brokers and if that's better than what they get from another insurer they'll buy it. I don't think that's a market-shaking move." Pouring further cold water on talk of market change, he adds of Insynergy, which hopes to achieve a capacity of £250m by 2011: "I don't think our ambitions are so large that we will force change on the entire market."
However, he reiterates that should the present insurer incumbents want to change, they may find themselves prohibited from doing so because of their legacy positions.
So what response do insurers give to claims that, by backing as many distribution platforms as possible, they are perpetuating a soft market as these operations compete for business off one another?
A spokeswoman for Norwich Union points out that a soft market is no benefit to them or their shareholders: "This year we illustrated our attitude to the soft market by pushing our personal lines motor rates up and we announced we are prepared to lose volume if necessary."
Steve Coates, Allianz Cornhill's commercial facilities and development manager, adds: "It is important to remember that significant consolidation has taken place in the commercial market over the past 10 years. This has resulted in a reduction in the numbers of commercial insurers as mergers, liquidations and withdrawals have taken their toll. Accordingly, many people saw an opportunity to fill a perceived gap in the market, and the forthcoming launches of virtual insurers are the product of this. Once all this new capacity has hit the market, the perceived gap will have been filled."
Perhaps with regard to M4, the underwriting agency for which Allianz Cornhill is currently sole provider, he says: "Many of these vehicles are quite small or aimed at particular products or niches, and our view is their effect on the market cycle is minimal. Effectively, these firms are trying to offer brokers choice through different products, efficient service or just expertise - and the fact remains many brokers do like dealing with small, niche players."
Meanwhile, John Castagno, managing director of direct broking at Equity Insurance, one of Insynergy's underwriters, says: "Offering customers alternative distribution routes does not perpetuate a soft market but offers customers choice in accessing the insurance company."
Time, it seems, will be the final arbiter as to whether or not these start-ups are a precursor to a wider shake-up in the way insurers reach the SME market. What seems probable is that some of these individuals have spotted an opportunity that has resulted in part because their former employers are either unable or unwilling to adapt to brokers' demands quickly enough. As Mr Oakley concludes: "We are picking up experienced underwriters because they want to join in entrepreneurial activity and use their flair."
One other question remains: as more captains of the industry seek to escape the constraints of the major insurers, who are they leaving behind to steer the bigger ships?
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