Personal Lines Broking: Challenges on the horizon

In spite of seemingly relentless predictions of its demise, the personal lines broking channel is one of the success stories of the insurance industry. It has survived regulatory and market changes, as well as increased competition from direct insurers and, more recently, aggregators, over the past 30 years. Now, the sector is preparing itself for the next wave of challenges. 

“Some brokers have fallen by the wayside, but those that have succeeded have responsive business models that have adapted to customer requirements,” says Toby van der Meer, retail managing director at Hastings Direct. “It’s all about listening to the customer.”

The ability to adapt is also recognised by Gareth Brady, chief executive at Hughes Insurance, who puts this down to characteristics of the sector. “Many of these businesses are entrepreneurial-owner managed,” he says. “They can shape-shift when required and adapt more quickly to their customers’ buying patterns.”

The way in which successful broker businesses have stood up to change illustrates this adaptability. As customers’ expectations have evolved, so too have the methods of transactions, with brokers moving from branch-based sales to telesales and, more recently, to online and aggregator-based sales.

And, while some have favoured a straight shift towards online, others deliberately  retain a mixture of sales channels in recognition of customers liking to transact in different ways. This is the case at Swinton, which retains a network of 570 branches around the UK and Ireland and is on the lookout for more venues to extend its coverage.

Threats turn to advantages
“We have a massive web presence but many customers like to be able to walk into a branch and talk to someone that understands the market,” says Steve Chelton, head of claims at Swinton. “Even when someone buys online we’ll invite them into a local branch — this level of customer service results in good retention rates.” 

Some of the market threats have even turned out to be advantages to some personal lines brokers. A good example of this is the growth of the direct writers. When Direct Line launched in 1985, promising to cut out the middle man, many predicted this would see brokers becoming extinct.
But, according to Carl Shuker, CEO of A-Plan Insurance, while direct writers suit some customers, there can be disappointment. “People want the reassurance that they have the right cover — not just that they’re fulfilling their legal requirements. Brokers are able to offer this peace of mind,” he says.

The more recent threat of aggregators was also seen as spelling the end for the personal lines broker. By allowing consumers to compare prices easily and quickly, it was predicted that there would be even less need for a middle man.

But, while the aggregator model may have led some brokers to exit the market, many of today’s brokers have turned the price comparison model to their distinct advantage. “Aggregators have been a godsend to personal lines brokers,” says Tom Cooper, executive director at Igo4. “By being included on an aggregator, not only do you have access to their distribution, but you also get to piggy-back on their brand spend. They’ll display your prices millions of times a month for you.”

Central to survival
A key component in the personal lines broker’s survival has been their ability to pick the markets in which they want to operate. In particular, niche markets are proving ever more popular, allowing a broker to offer a service they might not be able to readily obtain from a direct writer or an aggregator.

As an example, Mark Game, head of London market broking and City underwriting bureau at Brightside, says his firm focuses heavily on niche markets, including commercial vehicles and distressed motor. “There’s less competition in these markets, as customers would find it difficult to obtain a decent quote through other channels. And, because we use a robust validation process, we’re able to secure better products and prices for them,” he claims.

Another niche market some brokers are actively courting is telematics. Again this is likely to appeal to customers, such as young drivers, that may struggle to find affordable cover from more mainstream insurers.
Cooper sees huge potential in this area. “It’s still a ‘hearts and mind’ piece and you have to think about how the customer will react to having their driving patterns monitored,” he says. “But, when they find they can save £300 on their insurance, this will change.”

While some have gained success by catering for more niche audiences, other personal lines brokers have taken the strategic decision to court more mainstream business.

Andy Dunkerley, marketing and finance director at Be Wiser Insurance Services, says this is the strategy at his firm: “There are more than 33 million potential customers out there looking for motor and other personal lines insurances. It’s a competitive market but there’s lots of business there.” 

Whether appealing to the mass market or carving out successful niches, technology will inevitably underpin the success of today’s broker businesses. Its role is increasingly important in everything from customer service to counter-fraud strategies.

“We use technology to ensure the customer has a good experience when they buy insurance from us,” says van der Meer. To get the basics right, Hastings Direct uses off-the-shelf technology, then customises this to enhance areas such as data analytics, counter-fraud and the online customer experience. “Because it’s customer focused, it makes a difference to our bottom line,” he adds.

As well as developing robust sales and customer service platforms, technology is also helping some brokers fine tune their marketing campaigns. This is the case at Be Wiser, where Dunkerley says management information is invaluable when it comes to getting the most from its marketing spend.

“The days of saying ‘50% of my marketing is successful, I just wish I knew which 50% it was’ are long behind us,” he says. “We measure the effective return from each campaign and, if it doesn’t make money, we drop it quickly.”

To ensure it has the information to make these pressurised decisions, Be Wiser links its software — Cheshire Data Systems — to IBM’s Cognos software, to drill down through the details to determine which marketing has been most successful. “The cost of new business is key to success. If you can’t write it at an economic rate, you won’t last long,” he adds.   
Technology plays an important role in helping brokers reduce fraud. Many have validation processes to check customer data and will also ask for further evidence of driving licences and no claims bonuses to help reduce the incidence of fraud.

Reducing fraud has several advantages as Chelton explains: “By being more inquisitive, we’re able to deliver better quality business to our insurers. This improves our relationship with them and leads to better pricing and products for our customers.”

Long-standing experience is also important in the market. For example, Brady is incredibly proud of his firm’s 35-year history and the benefits it brings to the business. “This gives us long-earned integrity,” he says. “Customers trust us and value the service we provide.”

And the statistics back this up. Hughes Insurance has more than 140 000 customers across its insurance portfolio and, as well as covering one in five motorists in Northern Ireland, where it is a fast-growing commercial broker, Brady claims that a large proportion of this growth is as a result of its reputation. “Because we have built trust with our customers, we are successful in offering other products to them and getting a positive response both in commercial lines and household insurance,” he says.

But while some brokers have history to help them gain consumer confidence, this hasn’t stopped new entrants to the market. Among those firms with much shorter lifespans are: Brightside, which started trading 10 years ago; Be Wiser, which has been in business for five years; and Igo4, which was founded in November 2007.

Cooper claims that although the business is only just growing out of its short trousers, this gives it a number of advantages. “Being a relative newcomer to this sector is not without challenges, especially in the first few months, but we’ve found we can be more fleet of foot than our competitors. Most importantly, we can make quick decisions on advertising and marketing opportunities and we’re not burdened by legacy systems,” he explains.

As an example, he points to the fact that his firm was able to invest in an advanced operating system, CDL Strata. This enables online servicing but brings other benefits, such as a mobile app to enable smartphone users to obtain quotations, and web-based training for employees, which can be faster and more cost-effective to deliver. “It was a bit of a leap of faith,” he admits, “but on the good days we prefer to call ourselves pioneers.”

Opportunities abound
While those on the inside can see the opportunities in personal lines broking, it is also appealing to private equity investors, with a number of deals taking place over the last few years. These include an investment of £15m in broking group Oval in 2003; Darwin Private Equity’s acquisition of The A&A Group in a management buyout earlier this year; and A-Plan’s private equity-backed management buyout in 2008.

For Shuker, working with private equity investors has been a very positive experience. “The investors are very supportive and, although they challenge us, this is always in a constructive way. We’ve been able to expand significantly, opening 10 new branches in the past two years,” he says.

While such financial interest has enabled growth, the presence of private equity investors is also regarded as an endorsement of the sector. Private equity investors look for profit, seeking out solid sustainable business models with strong growth prospects. Shuker adds: “Private equity investment shows there’s faith in the sector.”  

As well as attracting new entrants to the market, and appealing to the private equity investors, personal lines broking is also proving attractive to professionals from outside the sector.

A good example of this is van der Meer, who joined Hastings in June 2011. His previous experience had been gained outside of insurance, notably at internet bank Egg, and most recently at Money Supermarket, where he was responsible for the money and broker lead businesses, plus front and back office operations. “Insurance broking is full of good, experienced people — and is also attracting talent from outside the industry. This is very positive for the sector,” van der Meer adds. 

But while there are plenty of examples of personal lines broking businesses that have successfully evolved with the market, none are complacent. Especially not as new challenges are on the horizon that could potentially threaten the viability of these businesses. 

Crackdowns on add-ons and referral fees will force change in the market but Brady says this shouldn’t come as a significant shock to anyone in the market. “In every industry, including personal lines broking, if your practices are unsustainable you’ll be found out,” he says. “We’ve made sure our business is transparent and we don’t have to rely on income from other avenues, such as the claims channel.”

However, even those firms that will escape overhauling their business model to survive these changes are likely to see greater regulatory scrutiny. The incoming Financial Conduct Authority will have a greater focus on business models and how these protect the policyholder. Brokers will need to ensure they can demonstrate the customer is at the heart of the business.

But few brokers are daunted by the potential challenges on the horizon it seems. “We’ve dealt with all sorts of threats over the years,” says Chelton. “In each case it’s a matter of embracing the change, adapting and carrying on.” 

Further, however the market evolves, Shuker says his firm’s mantra will hold true. “Look after your customers, insurers and staff,” he says. “Give your policyholders what they want; write quality business; and give your employees career prospects and rewards for looking after policyholders. By doing this, you’re creating a sustainable future.”