The tide is turning in broker/insurer relationships

I’ve been struck by the recent turnaround in the broker/insurer relationship in UK general insurance.

Aviva has ceased trading with both Broker Network and Willis Networks while both RSA and AXA have made it clear they are prepared to get tough with brokers who demand too much commission. Not so long ago, action and rhetoric such as this would have been unthinkable.

For years in the general insurance space, consolidators and the broker networks had insurers over a barrel controlling large chunks of distribution.

The rationale was that insurers simply had to deal with them. Networks and consolidators were able to make it more cost effective for insurers to trade with them as, so the rationale argued, regional brokers were just not cost effective for insurers to deal with.

And so insurers found themselves in thrall to these growing businesses – they fell over themselves to secure preferential deals and were willing to pay commissions of up to and over 40% to make sure that they got a place on the panel. Some even went as far as buying their own brokers such was the fear that distribution would end up in the hands of a few behemoths.

For a while, it was absolutely clear that the broker was king. The insurer was reduced to the role of manufacturer and it was difficult to see how this could change.

But that change is definitely coming. The broker/insurer relationship is in a state of flux and it is clear that insurers feel they have the upper hand at the moment. Has the insurer worm finally turned?

It would appear so but to understand how this has happened we need look at financial results.

Millions lost every quarter
The consolidators have had a hard time since the credit crunch – their models were heavily reliant upon cheap debt but as soon as this dried up the cracks started to appear. They had engaged in little, if any, internal consolidation and this showed up clearly in the results. Millions upon millions of pounds were being lost every quarter as they struggled to manage the debt and the goodwill writedowns while trying to secure organic growth.

At an executive level, huge amounts of time were spent on managing debt and refinancing and brokers who had sold their businesses had grown tired of waiting for the promised payday, left and set up their own businesses in direct competition.

The mighty consolidators had suddenly lost their air of invincibility.

Networks too suffered. In many cases they were owned by consolidators and as such they were hit by the pressures of their parent companies. But more than that, the promises made of member independence had started to look a little shaky. Once the financial boom years were over, networks felt the accumulated pressure on their own margins that were experienced individually by their members and they started exerting more control over where business was placed. This in turn compromised the sense of independence for many members.

Cancelling agencies
All of this has been happening since 2008 and in fact recently, some of the consolidators and networks have made some real progress in getting their houses in order. So why are insurers putting the boot in now? Two reasons I think. One is that they are no longer scared of consolidators and networks. Broadly speaking, they have not delivered the Holy Grail that they promised and insurer patience has run out.

More importantly, the commercial results of insurers have made them act with all the major insurers posting deteriorating commercial results with many of them operating with a COR over 100%. They simply had to do something.

And that something is redressing the relationship they have with their large broker partners. Insurers and brokers constantly negotiate and renegotiate deals but what is different this time is that it is the brokers that are feeling the fear.

Insurers are now willing to consider what was unthinkable not so long ago – cancelling agencies. They are demanding that large brokers give more in the relationship and are once again turning towards regional brokers - those that were once deemed too expensive to deal with are now the golden boys and girls.

There are likely to be further casualties aside from Broker Network and Willis Networks unless brokers are willing to scale back their demands. Some of them appear to think that they can secure the kind of deals they would have enjoyed pre-2008 but insurers have remained firm.

A redressing of the balance of power is healthy – however it is to be hoped that insurers don’t swing that pendulum too far.