Despite constant predictions that internet and telephone shopping will revolutionise the way insurance is bought, Sam Barrett explains how local, service-driven brokers could be making a comeback
A few years ago, remote purchasing through the internet and call centres was set to revolutionise the way we bought everything, from our weekly shopping to our home insurance. We would never need to leave our homes again and the traditional high street would disappear.
Today, the high street appears to be seeing something of a resurgence. While internet and telephone shopping has carved out a decent share of the market, some people are turning their backs on the giant brands in favour of smaller, local businesses.
The same appears to be true in the broker market. "There seem to be similarities between the way people buy groceries and the way they buy insurance," says Jamie Marchant, marketing and communications director at Groupama Insurances.
"People are turning their backs on the huge supermarkets and going local, and while numbers are declining in the broker market, many are adapting to the new market forces. So, in spite of the predictions of their demise, there are some successful small brokers out there serving the needs of their local communities."
In addition to those who have successfully sustained their businesses through change, Mr Marchant says there is now a growth in start-ups among the broker community. This has been driven by earlier consolidation in the market. "As the agreements with the consolidators have ended, some of the brokers who sold their businesses are setting up new ones," he explains.
Keeping business local certainly seems to suit customers as well. Research conducted by Swinton Colonnade found that customers who buy their insurance over the internet like the fact they can pop into a local branch if there is a problem. Some of the remote distribution channels have also come under criticism from the public.
Nick Bowyer, marketing director at Swinton Colonnade, explains: "Call centres are unloved by the British public; people want a higher level of service. Selling insurance face-to-face is a fabulous way to distribute it, with a particularly high retention rate."
Mr Marchant is not alone in his predictions about the resurgence of the local broker. Several other insurers are keen to maintain or increase their support on this level. "We've got 14 regional offices, with the last of these opened in Cardiff in September 2005," says Stephen Albutt, sales and distribution manager at Allianz Cornhill. "We're happy with the current network but we are always reviewing it and opening additional offices is something we are considering."
Although many insurers are predicting a bright future for small, high-street brokers, some appear to be forecasting a very different outcome for the broker distribution channel. For example, Axa Insurance recently cut back on its regional offices, closing five branches this year in Cardiff, Carlisle, Maidstone, Sheffield and Southampton, as part of a restructure of its commercial distribution network. It cited process improvements and consolidation within the broker market as the reasons for the closures.
Simon Burgess, managing director of British Insurance, believes this retrenching by insurers is understandable. "It takes a lot of administration manpower to maintain a relationship with a broker so it makes sense for insurers to focus on their key accounts and give them incentives with deals and so on," he says. "The 80/20 rule applies in the broker market, so it's not unreasonable for insurers to withdraw agencies and support from the less profitable brokers."
The cost of servicing a broker relationship has come under further scrutiny with the introduction of Financial Services Authority regulation. Increased regulatory requirements, such as having to provide additional documentation to ensure a compliant sale and contract certainty, are likely to have pushed up the cost for insurers.
Mr Albutt says the industry is about to discover the true extent of these additional costs: "Regulation puts a tighter framework on the relationship between insurers and brokers. There is certainly some cost to this and we will find out soon whether it's really made it more expensive."
When costings become more apparent, it could put further pressure on insurers to assess the economies of the business relationships they have in place.
Increased regulatory costs have also put pressure on brokers, especially those at the smaller end of the scale. The British Insurance Brokers' Association found that an average of 3.70% of a company's annual income is spent on regulation but this varies from just 1.13% for firms with an annual income in excess of £100m to 5.20% for those with incomes less than £100,000.
Subsequently Mark Grice, partner and head of broking at Mazars, says that this has driven consolidation in the market. "A broker needs to be a reasonable size to operate efficiently in today's market. The cost of regulation is proportionately greater for smaller brokers so there's been consolidation at this end of the market," he says.
While regulatory costs may be putting pressure on the smaller end of the market, Mr Grice does not rule out consolidation among the larger brokers. There have already been a few examples of this, including the recent purchase of the high-street arm of Budget by Swinton Colonnade earlier this year. "It's a dynamic market and whatever size you are someone will think you should be bigger," Mr Grice adds.
Others also point to brokers as driving the consolidation. For instance, Mr Burgess believes that many brokers are finding themselves forced to question their business future after failing to respond to the pressure being put on them by the direct writers. "I'd only ever consider buying insurance through a broker but few are differentiating their services sufficiently to survive," says Mr Burgess.
He believes that there needs to be an industry-wide drive to promote brokers as well as the introduction of a professional qualification to give them more credibility with the public: "Brokers need to capitalise on their independence and promote the fact that they offer a high-quality service that is well worth considering."
Another problem that has dogged the distribution of insurance in recent years has been the almost mono-obsession with price. Since the 1980s, direct writers have pushed their ability to undercut competitors, often at a loss. On top of this, the introduction of internet-based comparison sites has enabled consumers to shop around for the cheapest deal much more easily.
There has been some evidence of a move away from this recently, with insurers pushing their service rather than the price. Additionally, there is greater public awareness that an insurer offering a low introductory price will often recoup its losses with a price rise at renewal.
This inequality will be further balanced out in the next year or so. Michael Lawrence, sales and marketing director at Highway, explains: "Direct writers have been able to spend a lot of money winning business but we will see them having to put their prices up in the next year. This offers opportunities to brokers."
Due to this, Mr Lawrence believes brokers will be able to maintain their market share of personal-lines business. "This type of business is mainly bought on price and, with prices increasing among the direct writers, brokers will be able to be more competitive," he says.
Dave Parry, intermediary-development director at Zurich, points out that brokers will be able to benefit from this change in market dynamics. "Customers are beginning to appreciate that cheapest isn't always best. There is a strong customer desire to be treated as an individual and a broker can respond better to this than the big brands. Paying more can get them a better service and brokers need to promote this more," he says.
Mr Parry does not believe that many brokers are promoting themselves effectively, saying that only 10% are pushing the benefits of their service to consumers.
Meanwhile, technology has revolutionised the way insurers service brokers and their customers. Mr Marchant says that electronic platforms have made it easier to conduct business with smaller brokers. "It is more remote but, as long as it works well, it can enable brokers to have a lot more control over the business they are writing," he explains.
It is also invaluable for the more straightforward cases, allowing underwriters and administration staff extra time to concentrate on the larger or more unusual risks.
Telephones have also proved invaluable at maximising business relationships. For example, while Allianz Cornhill is committed to providing regional offices to support brokers, it has also increased capacity in its telephone account management. "Our research has found that brokers that aren't managed produce less business," says Mr Albutt, "but by putting this in place we are able to provide a level of service that is appropriate to these brokers. In return we've seen an 80% uplift in business."
However, no one believes that technology can completely replace human contact. Mike Crane, director of operations at NIG, says his firm is committed to maintaining an extensive local presence and it has a network of 21 regional offices throughout the UK, each with its own underwriters.
"There are definitely benefits to being close to brokers and the business they are writing," he says. "As our underwriters understand the area, it saves the broker having to explain some of the local anomalies that can affect insurance. This prevents a lot of frustration."
If the high-street broker is enjoying something of a mini-revival, this could result in other brokers rethinking their strategies. The emergence of new distribution channels in the last few years saw some brokers setting up new operations to enable them to compete in each of these channels.
"There was a mad rush for brokers to get into all distribution channels; for example, setting up internet and call centre operations. However, we're increasingly seeing them playing to their strengths and going back to the distribution channels that they are good at," says Mr Lawrence.
As a result, several different business models are evolving to satisfy customer demand. Among these is the brokerage that incorporates its own underwriting agency, such as Towergate.
Clive Nathan, chief executive of underwriting at Towergate, says there has been an increase in the number of underwriting agencies. "If this is happening there will be less need for insurers to run regional offices. We rely less and less on the insurers' back offices," he adds.
The internet is becoming a common way for brokers to transact commercial business. Traditionally an area where face-to-face sales dominate, Mr Grice believes that online sales will grow for smaller commercial customers as understanding grows, products become simpler and convenience becomes the most important driver.
There is certainly room in the market for these different models, especially as one factor remains key. "Customers want choice," concludes Mr Nathan. "They don't want to be told how they can buy insurance - they want to be able to pick and choose from buying face-to-face, online and on the telephone. While this is the case there will always be a place for every type of broker."
A huge well done to all involved with organising our Remembrance Day event on Friday, including our Corporate Real Estate team. One of them, Ibrahim, took this incredible footage of poppies dropping as he (along with others) leaned (safely!) over the gantry to let them go. pic.twitter.com/pSbapkWBBR— Lloyd's (@LloydsofLondon) November 12, 2018
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