Despite merger and acquisition activity and tough competition from the larger players, the small broker is holding its own in a market reconciling itself following regulation. Jane Bernstein provides an insight into the smaller broker surviving against the odds
People have been predicting the demise of the small broker for years.
From the rise of new technology to competition from direct writers, there always seems to be a reason small brokers are under threat and yet they have consistently proved the critics wrong. This time, the focus has fallen on the Financial Services Authority. There is no denying the increase in merger and acquisition activity among brokers in the run-up to FSA regulation. The question is, are those that remain unconsolidated tough enough to take on the giants?
There is an argument that one route to surviving in the current environment is through innovation. But this is nothing new, as Andrew Holman, chief executive of Lloyd's broker Holmans, points out: "Small brokers have always had to be innovative."
Mark Grice, partner and head of the brokers group with accountancy firm Mazars, comments: "What the smaller broker is doing is concentrating on its strengths of service and local knowledge of both client need and products. This in itself is not innovation, it is doing the basics well. Smaller brokers can be more innovative (on a small scale) as they are lighter on their feet. They are likely to be closer to their markets and so can spot trends in customer needs and respond quickly - whether they can get the underwriters to respond just as quickly is a different matter. There is also a case for arguing that the large and small brokers can happily co-exist servicing different sectors of the personal or commercial populations."
Support from insurers
One of the age-old questions is whether small brokers are receiving sufficient support from insurers - and insurers continue to come under fire. Lyndon Wood, chairman of Moorhouse Group, comments: "There is still a lot that insurers could do in terms of speed in the decision-making process and delivering what they say they will deliver. We have experienced plenty of lip-service from insurers, which often ends up being only that."
He adds: "Some insurers do eventually deliver, while others just sit at the back looking in for no apparent reason apart from giving the impression they cannot be bothered."
Mr Grice explains that, as a general rule, service from insurance companies is not regarded as good. He comments: "They are trying to control costs and, as a result, the service they provide to brokers is not regarded as high quality. Naturally, as the smaller brokers do not provide a significant amount of income to insurers, they are likely to fall down the priority list. Obviously the higher up the food chain the broker is the more attention it will receive from the companies as a whole." Mr Grice adds, however, that, at account-handler level, a small broker may actually be a key supplier and so will receive a decent level of service.
Insurers tend to be adamant that they are keen to work with small brokers.
Axa's Colin Calder asserts: "I can honestly say we have never cancelled any agencies on the basis of size alone." Norwich Union sees small brokers as a growth area and has focused on them for a considerable amount of time, according to director of specialist business Susan Adcock. Ms Adcock adds that NU's support for small brokers includes a dedicated account management team to help brokers develop their business, risk-management advice, regulation support and a dedicated new-business commercial team.
Zurich's sales and marketing director, Dave Smith, asserts: "We are very objective about the way we work with brokers. We are not seduced by size." He adds: "What we believe the smaller broker wants is service, rather than a lot of marketing fluff. They want accurate and timely policy documentation and a good claims service."
Royal and Sun Alliance launched its Access proposition in autumn 2004.
This, explains commercial corporate director Mike Canniffe, provides a dedicated service to those brokers that have smaller commercial accounts with the insurer. Mr Canniffe says: "Our Access decision-making underwriting teams work exclusively with these brokers, day in, day out. As a result, the Access teams are continually gaining a better understanding of what the brokers want and need, thereby delivering a better service."
Size does not matter
Service levels are also of high importance to insurers when choosing the brokers they work with and most insist that size does not matter.
As Michael Lawrence, distribution manager with Highway Insurance, explains: "Size isn't really the issue here. What is important is the broker's ability to provide a good level of service to customers as well as having the right skills to satisfy us that our relationship will be mutually beneficial." Mr Calder also asserts that: "Size is not a determinator."
Kevin Pallett, managing director at Fusion Insurance, agrees that size is not the issue: "It is the ability to meet the needs of the targeted customer segment that is the key, not the size. Big isn't necessarily better - quality of service and advice are ways that brokers can differentiate themselves. Smaller brokers can thrive but cannot hope to take on larger brokers over who can place a commodity package of cover at the cheapest price. They must compete on added value."
Ronan Foley, development manager, south, of Chubb Europe, identifies a hands-on approach as one of the advantages of working with a smaller broker. He comments: "Their knowledge of the market and their client is often second to none. While we recognise that all clients are important to all brokers, we do find that on some occasions there is an added closeness to the client with some smaller brokers. They are able to spend a greater amount of time getting to know every facet of their client's business and this is an attractive option for a number of clients, especially those requiring specialist lines of insurance."
Access to markets
The broker networks claim that they are a good option for brokers who do not believe they have sufficient access to insurers.
James Gamble, sales and marketing director at Misys General Insurance, comments: "Evidence would suggest that the smaller broker continues to have an uphill struggle to gain access to insurers and satisfactory service levels.
One of the benefits of network membership is the comfort in numbers and collective trading and the benefits that this brings - access to products, advantaged pricing and remuneration."
Grant Ellis, chief executive officer of The Broker Network, points to access to markets as a vital issue and a main attraction for brokers in joining a network. He adds: "The other driver is growing and marketing your business. All the big players are marketing - and they have the resources to do it. If you are a small broker, just waiting for the telephone to ring is not going to be enough. You have to be out there marketing your wares."
In the run-up to FSA regulation, there was a rush of activity among new start-up networks, with the main aim of helping members to achieve FSA compliance. Mr Ellis agrees that: "The network model is perfect for helping achieve compliance," but asserts that it should not be the only reason to join a network.
Paul Bryant, HR and training director for network Cobra, believes that compliance assistance is vital. He agrees that not everyone joins for this reason alone and points to the significance of issues such as access to markets. But, he emphasises that compliance should not be seen as a short-term reason for joining a network. "To coin a phrase, the FSA is a journey, not a destination, and there will always be ongoing requirements in relation to the regulator," says Mr Bryant.
Interest in small brokers
There has certainly been an increase in the interest shown in small brokers, whether from insurers, networks or other groups designed to provide help.
Ten Insurance Services is among the latest start-ups aimed at the sector.
It launched in February with the aim of helping smaller brokers compete with the nationals and the increasing number of consolidated entities.
Founder member James Sharp believes that what smaller brokers do best is looking after and servicing their clients and what they may need assistance with is the bureaucracy around that, including compliance documentation.
One of the advantages smaller brokers have always held is the ability to offer personal service and to be recognised as a strong local presence, thereby winning customer loyalty. "It is a dilemma that we at Oval face," says Oval's managing director, Jeff Herdman.
"We will grow by acquiring brokers that have a very strong local presence. For the brokers that we have acquired, we are keeping the local team together but offering a greater range of services to the clients. Oval's policy is to maintain the local brand for as long as possible."
Mr Canniffe believes that, despite the merger and acquisition activity, the small broker is still very much in existence. He comments: "While there have been a number of high-profile consolidations in the market, the fact is, in terms of numbers, the majority of brokers remain small and independent. Offering customers a greater choice of professional brokers must be considered a big positive for our industry."
Despite the recent spate of consolidation, the smaller broker still seems to be very much alive and kicking. Ms Adcock, comments: "At the end of the day, customers will decide who will succeed going forward. Customer expectations are getting higher all the time. The proposition that a smaller broker has to offer in terms of service, advice and contact is critical to a lot of customers and their proposition will set them apart."
The small broking sector has so far survived its latest challenge in the form of FSA regulation and the main question remaining appears to be what form will the next challenge take.
Lyndon Wood, chairman, Moorhouse Group
Being in control of your own systems has great advantages such as giving you the ability to change today rather than in a few months' time and £20,000 later. We have found great benefit from developing our own systems. Analysing your systems and improving on them helps efficiency throughput, thus allowing greater profitability, which, in turn, helps to compete at a higher level and retain business.
Andrew Holman, chief executive, Holmans
The bigger you are the more vital technology is. But it makes a significant difference, whatever size you are.
Neil Atkins, group marketing director, Sirius
Outsourced IT solutions with flexible payment options have meant that smaller brokers are now able to take full advantage of sophisticated IT systems traditionally only used by larger brokers to run their business. This, in turn, has given the smaller broker the ability to successfully compete against much larger brokers.
Smaller brokers tend to invest in IT to increase the level of customer service they can offer and improve internal efficiencies. Technology helps them to be more productive and take control of their business. As such, most smaller brokers look for a solution that manages their entire operation - from back-office administration to marketing and quotations, claims and risk management.
James Gamble, sales and marketing director, Misys General Insurance
All brokers, small or large, use technology to streamline their business processes and improve efficiency irrespective of whether they are consciously competing directly with their rivals. Quite often, smaller brokers do not have the economies of scale to play in their larger rivals' markets, but there are occasions when smaller brokers compete in niche markets or focus on personal service to achieve differentiation.
Laura Waples, head of marketing, Insure-com
We have witnessed a steady increase in the number of smaller brokers adopting new technology. This is a reflection on an ever-changing insurance market where FSA regulation, changing consumer attitudes and broker consolidation are just some of the issues affecting the long-term future of the high-street broker. Smaller brokers are fighting back and are realising the full potential of the technology now available to them and are increasingly adopting technology as part of their overall business strategies in order to maximise their business productivity, capability and growth potential.
The huge efficiency gains available by utilising technology outweigh the cost in securing a competitive edge on their rivals.
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