What s critical for the broking industry? Mazars Insurance Broker Survey 2006

Transcription

1 What s critical for the broking industry? Mazars Insurance Broker Survey 2006 This report is designed to provide an insight into the UK insurance broking industry, identifying issues and opportunities and providing predictions for the future. In association with

2 For the fourth year, Mazars has canvassed the opinions of a wide range of CEOs, directors and senior managers in the insurance broking industry in order to identify the critical issues facing businesses and assess future trends in the sector. The survey is developed in conjunction with the British Insurance Brokers Association (BIBA), the UK s leading general insurance organisation. We would like to thank them for all their support in promoting the survey and assistance in making it a success. We also appreciate the time and thought executives have devoted to completing this survey. Mark Grice, Head of Broking Group, Mazars LLP The British Insurance Brokers Association is again pleased to be involved in such a significant survey. This survey helps us to highlight development of the key issues that are affecting the general insurance industry in the 21st Century. We are grateful to all those who have taken part and thank Mazars for its initiative in undertaking this survey. Mazars has a long standing association with the insurance market, and it is therefore appropriate that it is looking to the future. Eric Galbraith, Chief Executive, BIBA

3 Contents Page Key findings 2 1. The competitive position 4 2. Consolidation 6 3. Regulation 8 4. Human capital Information technology The future Methodology and the composition of the survey sample 16 This independent research was conducted by Mazars in conjunction with BIBA Mazars LLP Andrew Hubbard Head of Insurance andrew.hubbard@mazars.co.uk Mark Grice Head of Broking Group mark.grice@mazars.co.uk Phone: +44 (0) insurance@mazars.co.uk BIBA Peter Staddon - Head of Technical Services staddonp@biba.org.uk Leighann Burtrand - Communications Coordinator burtrandl@biba.org.uk Phone: +44 (0)

4 KEY FINDINGS The competitive position Overall the view of respondents is that the middle market is becoming increasingly congested with players. The bottom end of the market is being squeezed by the direct and internet insurers and brokers with the larger intermediaries seemingly downsizing the size of accounts they are targeting. The fall out from Spitzer has only materially affected a tiny minority of players, with the majority registering no impact. The potential for mandatory disclosure of brokerage receives a sceptical response as to the benefits to consumers and there is a fear that this will ultimately lead to fee based remuneration. Consolidation Acquisitions and mergers are an increasing issue for respondents because of the perceived need to spread geographically. As in 2005, the vast majority of respondents think that the trend of a reducing number of players in the market will continue. The increasing size of broking firms is reflected in the profile of respondents - those employing less than 10 has reduced. A softening market, which the majority of our respondents see continuing in the next 12 months, will add to the pressure as businesses struggle to maintain profitability. Regulation At the time of our 2005 survey the authorisation process had just been completed. This year s survey arrived at a time when the FSA s regime had been in place for approximately one year. Have attitudes changed? One year on, the criticism levelled at the FSA by respondents has not abated, and in many areas it has worsened. The majority of respondents now consider that the FSA has a negative impact on their clients. Half of respondents believe the impact on their business has been negative and, as for the industry as a whole, since 2004 those who believe the impact has been positive has nearly halved. The work required to comply is seen as onerous. The treating customers fairly principles are not seen as adding value to client service, and the cost of regulation is seen as excessive. Overwhelmingly, respondents considered the possibility of mandatory disclosure of brokerage as detrimental to their business. 2

5 Human capital A reluctance to make qualifications mandatory in 2005 has moved significantly in the last year with 50% now believing mandatory qualifications to be beneficial to the industry. Staff retention remains a key business objective but some respondents are reporting increased recruitment activity. Although the majority of respondents have not detected a change in the quality of candidates, of those that did, significantly more reported a decline rather than an improvement in quality. Off shoring is not an option being considered by the vast majority of respondents. Information technology Respondents this year registered a slight shift towards an increased need for IT investment to improve client relations and contribute to profit. Worryingly, respondents highlight a lack of innovation and product development from IT suppliers. Respondents are taking disaster planning more seriously. There has been a significant decrease in the number of respondents who have never tested their plans, whether this is a response to recent terrorist events in London is difficult to tell, but it is definitely a move in the right direction. The future This year respondents are becoming increasingly concerned about the impact of the global economy and what that might bring in the next three years. In terms of contract certainty, respondents want to see insurers doing more. There is also a feeling that trade associations should be more active in this area. As for insurers service, respondents are seeking improvements in service standards and policy production. To a lesser extent claims service is also seen as an area for improvement with some highlighting a lack of enthusiasm by insurers to settle claims. 3

6 1. THE COMPETITIVE POSITION The competition Respondents report that their biggest threat comes from larger brokers, closely followed by direct insurers (see figure 1.1). Direct insurers are attacking the SME business market. They come in for criticism for not underwriting, just guaranteeing to beat another quote. Surprisingly, only a small minority of respondents regard retailers as a high threat, 57% state they are no threat at all. Similarly, passported insurers do not seem to be worrying respondents as 94% regard them as a low threat or no threat at all. However, they are criticised for buying business and are seen as having the advantage of only having to comply with regulations in their own country, most of which are not regarded by respondents to be as tough as the FSA s. The Broking profession does a professional high quality job that has been marred due to high impact selling based on price alone..we need to return to customer focus. Banks and Building Societies seem to be making little headway into the customer base of our respondents, with 24% (2005:18%) regarding them as no threat. However, some respondents reported cases of banks using their customer base to sell insurance by reducing charges in other areas, giving rise, as they put it, to a non level playing field. Figure 1.1 The competition From the following groups, which presents a high threat to your business? Banks / Building Societies 8% 18% Direct insurers 22% 38% Global insurance brokers 7% 19% Larger brokers 12% 47% Brokers of a similar size 8% 30% Small brokers 1% 5% Retailers Passported insurers 11% 6% Percentage of responses Source: Mazars

7 Overall, respondents feel that the middle market is becoming increasingly congested with players, such as the internet and direct insurers. They are believed to be taking away the personal lines and smaller business. Meanwhile the larger intermediaries are seemingly downsizing the size of accounts they are targeting. Remaining positive, however, some smaller brokers report that local knowledge and personal service are still the key to client retention. Spitzer This year 58% of respondents have not been affected by Spitzer and the market fall out at all, with only 38% reporting a marginal impact. The 2% that are materially impacted obviously represent the listed respondents to the survey, and London has seen a number of rounds of redundancies from the global players as they come to terms with a new business dynamic and a reduction of income. Conflicts The FSA s concerns over how the industry deals with conflicts of interest currently has had little impact on our respondents, with 46% reporting no impact and a further 48% only a marginal effect. Comments made by brokers about the mandatory disclosure of brokerage were mainly sceptical as to the benefit to the consumer with some expressing concern that this would ultimately lead to fee based remuneration. Future profitability Respondents are pinning the future profitability of their business on cost control (23%) and Client Relationship Management (CRM) programmes (22%) (see figure 1.2). CRM programmes are seen as a key strategy as a number of respondents have commented that national players are trading down in terms of the size of client in which they are interested and also because local competition tends to fish in the same pond. If your client relationships are sound you are much more likely to retain clients. Figure 1.2 Future profitability What strategies have you implemented, or plan to implement, to support the continued profitability of your business? Other 3% e-commerce 8% Branding / name awareness 11% Review of growth strategies 18% CRM programme 22% Review of costs 23% Improved / new products 15% Percentage of respondents Source: Mazars 5

8 2. CONSOLIDATION The insurance cycle In terms of the insurance cycle more respondents this year (64%) are predicting a softening in the market, up from 42% in A softening market will add to the pressure on the margins of brokers, many of whom are currently struggling to make sufficient profit. Growth plans Acquisitions and mergers are a significant issue in the minds of our respondents, up from a combined 35% in 2005 to 55% this year (see figure 2.1). Similarly, increased geographical spread is seen as a greater need than in 2005 with 30% of respondents having it as part of their growth plan compared to 17% in too much consolidation of insurers and brokers. Costs Looking at costs, the majority of respondents (79%) consider the area that is most likely to increase in the coming 12 months is staff remuneration. This reflects the tight market for quality people which the industry is experiencing. The second most popular area of expenditure increase is information technology with 59% of respondents anticipating an increased spend. A combination of expenditure to assist FSA compliance combined with the general need to keep up with the latest technology are seen as the reasons for this. Figure 2.1 Acquisitions and mergers What strategies have you adopted, or plan to adopt, for growth? New routes to market 25% 31% Increased geographic spread 17% 30% Merger 7% 12% Acquisition 28% 43% Percentage of responses Source: Mazars

9 A consolidating market The impression that they operate in a consolidating market continues to be held by our respondents with 87% expecting the number of insurance intermediaries to reduce in the next 12 to 18 months, a similar percentage to last year (see figure 2.2). Whether the continued consolidation of the broking market is good for the consumer remains an interesting question. The views from our respondents suggest that the emphasis by the direct and internet sellers on price alone will eventually not be good for the consumer as the high street broker will be driven from the market and there will be nowhere for the consumer to go for advice. Some argue a smaller, better resourced market of brokers will be good for consumers. Figure 2.2 A consolidating market Over the next 12 to 18 months what do you think will happen to the number of insurance broking companies in the UK marketplace? 1% 8% 4% Increase (2005:1%) Decrease (same as 2005) Remain unchanged (2005:12%) Unsure Source: Mazars 87% Drivers for success This year 87% of respondents still see the future success of their business to be strongly allied to their people. However, respondents commented on the increasing competition to retain quality staff and, sadly, some respondents who have spent a lifetime working in the broking industry stated that they would not recommend people to go into the profession today. Attracting, retaining and rewarding key staff remains a challenge for all in the industry. This year information technology has overtaken cashflow and credit control as the second most important operational driver for respondents. Margins In terms of future margins, a large percentage of respondents (78%) are concerned with regulatory cost, however, this was down from 84% in Following closely behind at 71% is the soft market followed by employee costs at 66% (2005:57%). Hopefully the Government s review of the FSA s operations will bring about a re-think of the burden being placed on the industry, which will result in the concerns over regulatory costs dropping down the agenda. In terms of regulation respondents still comment on gold plating and level playing fields whereas only a few acknowledge that regulation is here to stay and should be embraced. Succession As far as succession is concerned respondents (36%) believe that the best way forward is to promote from within in order to secure the future of the business, however, exiting the business via a sale is also considered to be an option by 31% of our respondents. The reasons for the sale route are unclear but could be due to the lack of internal talent or the plentiful supply of buyers in an active and consolidating market. Transaction pricing Respondents (48%) believe that, in terms of transaction pricing, in the coming year profitability will be more important than income level. Whilst commercially this must be the right answer there appear to be players in the market who are willing firstly to buy income then use their size to enhance income from insurers and, secondly to use their infrastructure to reduce operating costs. 7

10 3. REGULATION FSA regulation is too prescriptive for the small and medium-sized firms. In 2005 we asked the market about their perceptions of the impact of the FSA on the UK market and their clients, because by that time the application process was over and the majority of the respondents were authorised, or at least had been advised by the FSA that they were minded to authorise. When our 2006 survey arrived the FSA s regime was one year old. Impact of the FSA In terms of the impact on clients, in 2005 there was a balanced position where respondents were equally divided as to positive/negative effects. However, a year later we see there has been a significant shift into the negative camp with a ratio of approximately 5:1 (53%:12%) stating the impact on clients is negative (see figure 3.1). Since 2004 there has been a steady decline in the percentage of brokers who think the impact of the FSA on the industry is positive. Today those thinking the impact is positive represent only 25% (2005:37%, 2004:46%). In terms of the respondents own businesses, half reported the FSA s impact as negative with 39% positive. Figure 3.1 The impact of FSA Regulation What do you perceive is the impact of FSA regulation on the overall UK market and your clients? UK market Your clients Unsure 10% 13% Unsure 1% 6% None 8% 12% None 34% 44% Negative 42% 53% Negative 25% 53% Positive 25% 37% Positive 12% 25% Percentage of respondents Percentage of respondents Source: Mazars 8

11 Level of work in respect of regulation One year into regulation, when asked about the level of work required to satisfy the FSA s requirements, respondents opinions remain firmly in the too onerous camp (81%) (2005:85%) (see figure 3.2). Respondents experience with the FSA It is not all doom and gloom for the FSA. A healthy number of respondents (45%), when asked about their experiences of dealing with the FSA, thought the experience had been good or very good. By contrast only 8% of respondents claim to have had a bad or very bad experience. Arrow visits The majority (86%) of this year s respondents have yet to receive an Arrow visit from the FSA. Of those that have received a visit, 87% consider the FSA to be either extremely helpful or helpful, with only a small minority stating them to be unhelpful. Some further encouragement for the FSA. Treating customers fairly Respondents generally consider that the FSA s treating customers fairly principles do not add value to customer service (57% responding that they do not). Client confidence in the industry The majority of respondents (81%) do not consider that regulation of general insurance intermediaries by the FSA has made any difference to client confidence in the industry. Cost of compliance This year 69% of respondents think that the cost of compliance will rise over the next 12 months, whilst only 3% anticipate a fall in cost. Cost of regulation on profits One year into regulation, the views of respondents have not changed on how much impact the cost of regulation has had on profits, with 19% reporting an impact in excess of 10% of profits, whilst the bulk of respondents (42% in 2006 and 2005) believe the impact to be in the range of 5% to 10% of profits. Even at 5% the cost is significant at a time when the insurance cycle is seen to be going into a soft period. Mandatory disclosure of brokerage Overwhelmingly, respondents believe the possible mandatory requirement to disclose brokerage will be detrimental to their businesses (61%). Only 3% considered the move to be positive. It will be interesting to see how the debate moves over the coming year and whether brokers can retain their current position. Figure 3.2 Level of work required to satisfy FSA regulation What are your perceptions about the level of work required to satisfy FSA regulations? Unsure 1% 1% About right Too much 14% 18% 85% 81% Percentage of respondents Source: Mazars

12 4. HUMAN CAPITAL Mandatory qualifications Respondents are divided on the issue of mandatory qualifications with 50% believing professional qualifications to be necessary whilst the remainder are either unsure (5%) or not in favour (45%). This shows a significant swing of 10% in favour of mandatory qualifications, suggesting that respondents see qualifications as a differentiator and a way of increasing the standing and professionalism of the industry. The handling of compliance Respondents report that compliance is handled primarily by staff with other responsibilities. Only 28% employ dedicated staff. Unsurprisingly, the least popular strategy for handling compliance is outsourcing. There will be a shortage of younger people entering the industry we will become boring. Staff turnover The vast majority of respondents (77%) have found that staff turnover has remained at the same level as last year, with only 14% reporting increased activity. Staff migration seems to be taking an even higher profile these days with broking houses, in some instances, ready to take legal action against competitors who poach teams. It will be interesting to see the outcome of current actions and what the trend is for the future. Quality of candidates In an industry whose future is dependent on talented people it is concerning that there is a trend towards a reduction in quality staff. When recruiting staff, some respondents (50%) have not noticed a change in the quality of candidates. However, those that have detected a difference believe the quality to have worsened. When asked what the industry should do to attract good talent, a significant number of respondents believe the industry should get involved with schools, emphasising the positive aspects of insurance as a key driver of the economy and of entrepreneurial opportunity. Some even suggest developing further education courses and including insurance as a syllabus topic in Business Studies GCSE and A levels. Graduate recruitment Our responses show that graduates are not moving into insurance in any significant way, with 69% of respondents not employing any graduates in the past year (see figure 4.1). Some commented that with commoditisation and over regulation they did not think it was possible to attract good talent. 10

13 Off shoring Off shoring is not a high priority for the vast majority of our respondents. This year 95% have not considered this an option. This is unsurprising given the relative size of the respondents to the survey. Training and competency systems Respondents remain confident that their training and competency systems are either adequately or well documented (combined 90%), marginally down from a combined 94% in Methods of training In terms of training delivery the most popular methods reported by respondents is on-the-job training, followed by online training. Figure 4.1 Graduate recruitment How many graduates did you employ last year? 21 or more 1% 11 to 20 1% 5 to 10 3% less than 5 26% None 69% Percentage of respondents Source: Mazars 11

14 5. INFORMATION TECHNOLOGY IT spend In terms of IT spend respondents remain focused on their core systems, with spending on insurance broking systems being the most popular area followed by document management systems. Key benefits of IT In terms of the key benefits of IT the respondents views remained similar to those of 2005 with improved operational efficiency being the key driver, closely followed by service enhancement. There has been a slight shift in responses towards an increasing need for IT investment to improve client relations and contribute to profit. Obstacles to IT success The software industry should understand the need to deliver a quality product. The obstacles to IT success remain constant in terms of implementation difficulties and technology not delivering business needs. However, a significant number of respondents (36%) consider there to be a lack of innovation and product development from IT suppliers (see figure 5.1). Respondents are obviously now looking for more from their IT providers, which will be a challenge for the software industry going forward. Figure 5.1 Obstacles to IT success What do you consider to be the major obstacles in realising IT value? Lack of motivation or product development by IT suppliers 36% Lack of quality systems documentation 12% Employee reluctance to accept new technology 21% Market IT initiatives not allowing for product / service differentiation 17% Inflexible legacy systems 21% Technology not delivering business benefits 33% Implementation difficulties 47% Percentage of responses Source: Mazars 12

15 Disaster reaction plan testing Respondents are taking disaster planning more seriously (see figure 5.2). Whether this is a reaction to the terrorist events in London of July 2005 it is difficult to say, however, the number of respondents who have never tested their system has declined from 55% in 2005 to 41% this year. At the other end of the spectrum those who have tested their system in the last six months have increased from 19% to 25%. This is definitely a move in the right direction. Outsourcing IT In terms of information technology and management information systems, the majority of respondents are keen to retain control with some 51% stating they would not consider outsourcing. However, 24% of respondents have come to a different conclusion and have already outsourced, presumably for either operational benefits or cost savings, or a combination of both. Figure 5.2 Disaster reaction plan testing When was your IT disaster reaction plan last tested to see if it worked? Over a year ago 10% 14% In the last six months 19% 25% In the last three months 16% 20% Never been tested 55% 41% Percentage of respondents Source: Mazars

16 6. THE FUTURE Regulation is here to stay. We should embrace it to make our business better. Key industry developments in the next three years Respondents, whilst remaining concerned about regulation and market capacity over the next three years, are also seen to be registering concerns over the global economy. Given the views expressed about mandatory brokerage disclosure, surprisingly transparency is not seen by respondents to be a key development issue for the next three years (see figure 6.1). Contract certainty Even though the FSA has put their proposals for action against the market on the back burner, contract certainty remains a hot topic for the market. From a business perspective, respondents consider, in the vast majority of cases, that they were doing enough to meet the market s deadline. Those that come in for the most criticism for not doing enough are, as one might have guessed, the insurers. There is a mixed view from respondents as to whether trade associations are doing enough about contract certainty, with a large number of respondents being unsure or expressing negative views. Figure 6.1 Key industry developments in the next three years Which areas do you think will be key to the development of the UK insurance industry during the next three years? Other 1% e-commerce 24% Natural disasters Insurer ratings Technology 15% 27% 29% Insurer consolidation 24% Regulation 48% Transparency 14% Market capacity 37% Customer base 24% New competition 32% Global economy 30% Percentage of responses Source: Mazars 14

17 Insurers service Going hand in hand with contract certainty, the area that respondents would like to see improved the most in the next 12 months is service standards and policy production. Another area of concern is the claims service area (53% stated this to be a concern). It is interesting to note a number of respondents highlighting what appears to be a lack of enthusiasm on the part of insurers to settle claims. Accounting issues Whilst disappointing, from an accountant s point of view, it is unsurprising that respondents do not consider accounting issues to be of significance in the development of their businesses. 15

18 7. METHODOLOGY AND THE COMPOSITION OF THE SURVEY SAMPLE Methodology Mazars Insurance Broker Survey 2006 was designed to provide an insight into the current state of the UK insurance broker industry, identifying issues and opportunities as well as providing a detailed assessment of predictions and strategies being adopted by the respondents. We were also able to refer back to our earlier survey results to see if there were any changes in views or predictions. The survey was mailed to CEOs, directors and senior management of over 1,600 general insurance brokers nationally. The results were analysed by Mazars during March The analysis is based on 160 respondents (2005:220, 2004:217 and 2003:232), which equates to an impressive 10% response rate (2005:14%) and therefore provides a fair reflection of the market as a whole. The survey sample and the insurance brokers industry The general insurance brokers market continues to be dominated by a few global players, but there remains a body of significant mid-tier and niche companies as well as many local players and networks plus a number of consolidators in the market. Figure 7.1 Size range of sample How many employees do you have in your business? Less than 10 employees 10 to 50 employees 43% 41% 39% 39% 41% 43% 42% 50% 6% 9% 51 to 100 employees 9% % % 4% 101 to 250 employees 4% % % 3% over 250 employees 3% 3% Percentage of respondents Respondents = 160 (2005:220, 2004:217, 2003:232) Source: Mazars 16

19 Characteristics of the survey sample Whilst the number of respondents continues to indicate a representative sample of the industry, it is important to see how it is composed: in terms of respondents there is a move to larger firms, as identified by number of employees in terms of the location, there is a broad geographical spread with 40% of the respondents being located outside London and Southern England and 24% (2005:26%) operating from more than one office similarly, 26% (2005:25%) of the respondents have acquired, merged or sold part of their business in the last year respondents are primarily management-owned businesses with a relatively small percentage being either listed or unlisted PLCs. The composition of the respondents demonstrates that the results mirror the structure and characteristics of the UK broker industry, which indicates that the conclusions of this research should fairly represent the views of the industry as a whole. Other survey composition characteristics Of the majority of respondents business 63% (no change from last year) is controlled by management with a high proportion of the businesses (47%) (2005:54%) having turnover of up to 1 million. Of the survey sample 99% of respondents are directly authorised by the FSA with the remainder being appointed representatives. 17

20 APPENDIX 1. BRITISH INSURANCE BROKERS ASSOCIATION BIBA the British Insurance Brokers' Association is the UK s leading general insurance organisation. We represent the interests of insurance brokers, intermediaries and their customers, and have partner members from the leading companies in the insurance industry. All BIBA members are part of the regulated community, who pride themselves on the professional advice and range of products and services they offer, always focused on the clients individual needs and requirements. BIBA is the voice of the industry - advising members, the regulator, consumer bodies and other stakeholders on key insurance issues. In addition, the organisation provides training, unique schemes and facilities, technical advice, guidance on regulation and business support, and is helping to raise and maintain industry standards. BIBA 14 Bevis Marks London EC3A 7NT Phone: +44 (0)

21 APPENDIX 2. MAZARS Mazars and the insurance broker industry Mazars is an international firm of business advisers and accountants, active in both owner managed business and large corporate market segments with a strong European presence and a global reach. The firm has offices in over 50 countries, with 400 partners supported by over 5,000 staff. In the UK, Mazars has its roots in the London insurance market and Lloyd s, where we have been one of the preeminent financial advisers for over 100 years. We currently have 25% of London market brokers as clients including:- Benfield Besso Butcher Robinson & Staples C.J. Coleman & Co Limited Newman Martin and Buchan Oval Oxygen Primary Group PWS RFIB R K Carvill R K Harrison & Co Limited SBJ Tyser We also have a number of insurance broker clients throughout the UK. We make significant contributions to advising on auditing and accounting standards in the UK and to the development of International Accounting Standards. We are also authors of Insurance Brokers, An industry accounting and auditing guide, published by CCH. Mazars LLP 24 Bevis Marks London EC3A 7NR Phone: +44 (0)

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23 Mazars services to the insurance industry:- Actuarial Insurance Premium Tax advice Audit and assurance Internal audit Capital adequacy assessment Litigation support and expert witness Capital restructuring Payroll tax audits and advice Corporate finance Regulatory compliance Corporate governance Risk management Corporate recovery and Insolvency Security committees and reviews Corporation tax advisory and compliance Special investigations Due diligence and transaction support US GAAP and IFRS conversion Employee remuneration planning VAT advisory and compliance FSA authorisation HR consultancy including adhering to the FSA Training and Competence Sourcebook

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