Tough at the top
Martin Friel chairs an in-depth power hour that covers burning issues from recruitment, the state of the regional market in Ipswich, the national picture for insurers and brokers and how the industry will exit its current phase in the cycle
How is business in Ipswich? Are you feeling the effects of the economic downturn yet?
Paul A: Nationally, there are high-level issues like Woolworths, which has had a huge impact countrywide and locally. In terms of individual businesses, I insure a lot of the pub business locally - individual tenancies and sole traders who are running their own businesses. They are all under massive pressure at the moment.
Paul S: The feedback we have had from brokers in the region is that they are expecting their retention rates to start declining as businesses are closing. That will have an impact on the new business they are going to have to attract and that will then impact them financially. It's not just the percentage of their book but how much those individual clients are worth. If a broker's average policy is £4,000 and it loses a client whose policy was worth £100,000, that's a lot of new business to write to fill that gap.
Chris: That will be very much driven by the sectors that have brokers operating in them. At Axa, we write a significant book of construction business and already we are seeing wage rolls and turnovers being reduced in line with contractors not getting the work they perhaps expected to. While you might keep that client, you might only retain them at a vastly reduced premium level. This will have an impact on our brokers in that sector, as we have seen a number of businesses actually ceasing to trade.
Tim: We have certainly seen the effect on the fleet market. We are not losing customers but they are reducing the size of the fleets they are running, so that obviously affects our overall turnover. They are looking to do one of two things: either run their existing vehicles longer or have fewer vehicles on the road.
Chris: That in turn has a knock-on effect on the claims insurer experience because older vehicles tend to produce more. In a time when businesses are attempting to control costs, the maintenance programme can fall by the wayside.
Paul S: On the positive side, brokers expect growth: 80% are looking to grow on what they did last year, which is very positive. Yet the question will be how they do this. The ambition is there but it is unclear whether brokers are willing to make the changes they need to.
Tim: The key there is profitable growth - anybody can achieve growth. We are all looking at whether or not we can grow profitably.
Chris: From the discussions we've had, the majority of brokers recognise the need for rate increases and support carrying them out. I think brokers that have the necessary skills to carry and sell those increases to their clients will be the successful ones.
Paul A: In the current climate, it's not necessarily the easiest thing to be selling rate increases.
Chris: Rates have been dropping steadily for three or four years now and clients are almost conditioned to expect a reduction on renewal and, right at the point when many of them need a reduction, we are looking to take it in the opposite direction. This is one of the biggest challenges that the industry is facing right now.
Paul A: What do you think was the main driver behind the market bottoming out and now driving it to turn around?
Chris: We've seen rates falling steadily and the major insurers have released as much of their reserves as they are able to. As rates have been coming down, commissions have been steadily rising and if you put all that into an equation, the time has come to start forcing through rate increases.
Paul A: But does the market need an event to make it start climbing more steeply? I can see it rolling around at the bottom for a while because some markets are trying to push rates up a bit but right now I'm not at all sure what will happen.
Chris: That's a great point, Paul. One of the big failings of our industry is that we have to look for a major catastrophe to provide a catalyst for change. When you look back to 2001, we had Independent and the events of September 11; they triggered the last hard market. As a professional industry, it doesn't feel right that we can't manage ourselves in such a way that we can't get our businesses onto a consistently profitable basis without a catastrophe or major incident.
Is there not a danger that, although the industry needs the rate increases, this is the kind of thing that could push small businesses that are already under pressure over the edge?
Tim: That's true and that will also provoke small businesses to shop around, whereas they used to feel loyalty to their brokers.
Paul A: And it's not just small businesses that will be affected - large businesses will be too.
Tim: At WNS, we are already seeing more tenders coming in from people who never used to go out to market and benchmark. People are shopping around and if rates go up, that's going to increase the propensity to shop.
Paul S: From brokers I have spoken to, they know that rates have to go up in some form but also that they have to explain to customers what it is they are doing. They need to communicate before the renewal, as otherwise the renewal with the increase will just come through the post without any explanation as to why that has happened. Brokers are looking to explain the value they bring.
Tim: That's right Paul, though to some extent there will be scepticism from customers and that will manifest itself in their shopping around to see what is out there.
Chris: There are two points I'd make there. The more professional brokers will have been managing their client's expectations - they will be well versed in this so, when they do approach their clients with the news, there are no shocks at increases. Also, the more sophisticated buyers of insurance will have been looking to their broker for some kind of steer on where the market is going: they have to manage their own finances.
Is this a broker's environment that we are heading into? Are clients now remembering exactly what brokers bring to the table?
Tim: What is true is that people will go for quality when it's within range and you are a company that has been successful in belt tightening and are not up against the wall. If you are struggling, you are in a completely different scenario in the insurance market and many small businesses in the area will soon be in that position.
Chris: Construction business is big in Ipswich; the haulage and transportation industry is big in both Ipswich and East Anglia. Food manufacturing is another one that is prevalent in the region, as is leisure. All these sectors will face challenges in the coming months.
Keith: A lot of the haulage industry is populated by one-man bands and they will suffer. I'm not sure how apocryphal this is but I read recently about a top insurance executive talking about the number of dropped TVs increasing sharply. He had looked at it over a five-year period and there was a clear spike.
Jeff: Crawford's counter-fraud team saw a 115% increase in fraudulent accidental damages claims, which is a phenomenal amount. We fully expect to see this increasing in our liability division and the injury market. One of the by-products of the economic situation we are in is that we are seeing an increase in these spurious claims; we see more and more of them, so there is a need for more high-quality investigations. A bespoke product needs to be provided,which, in effect, results in an increase in costs.
Tim: Is the problem just that these claims are purely fictitious or is it that the claims are over-inflated?
Jeff: It's a mix of the two. In injury we see more of the malingering kind of claims, whereas accidental damage tends to be more fictitious. We are getting to the stage where people are looking for sources of cash and they see accidental damage or injury claims as a good way to get it.
Do you see this as a temporary blip that will only last as long as the economy suffers?
Jeff: We will see this trend last as long as the economy is the way it is. The other thing we have seen on the liability side is that the more people are made redundant, the more we see historic claims coming through. For example, someone may have had a work accident in 2006 - in the past they may have been loathe to put a claim through but, as employee-employer relations deteriorate, we are seeing more of these coming through.
Keith: That's not to say they aren't genuine, just that they have not come forward with them up to this point.
Jeff: There is nothing to say they are spurious but there is certainly an increase in claims of a historical nature.
Tim: I don't think we have seen the full bow-wave of recession hit us yet. We are still looking to recruit but we are having real problems in the Ipswich area and there are some major insurers and financial services providers in and around Ipswich. We are not laying staff off as an industry yet but it is quite difficult to recruit highly skilled people from the insurance sector in here at the moment.
Chris: Do you think there is a brain drain into London?
Tim: There always has been in Ipswich, as it is commutable. But you've got to be mid-management to make that financially viable: you have to be in the mid £20-£30,000 range to make it work. In Ipswich, there tends to be more operational-type centres, so if you are operationally led and want to follow that route then there is a career available within the Ipswich area. If you are more technical or managerial then you probably have to go to London. That's been our experience.
Chris: I know it is an issue in the town and we are finding it difficult to hire people of the quality that we want.
What level or quality of employees are you all looking for?
Paul A: Good quality office staff - client service executives - are in short supply. You just can't find them.
Chris: I was talking to a broker who was recruiting for an operational role and he was having to look at taking someone on from outside the industry who had no experience in insurance.
Tim: To a degree, we are suffering because it has been so easy in the employment market. People at a graduate level, the ones we want, have found it simpler to get a job on good money in another sector. We will bring the same people in and tell them they need to go through two years and work their way through the business; they just don't want to do it.
Chris: I agree, Tim. It's almost like we have become very, very comfortable. If you look at the starting packages for the guys you are talking about - they are relatively young, they've got the car, the laptop, the Blackberry, the mobile, a base salary of £30-£40,000 - the hunger is not there. Where is the incentive?
Jeff: Although we have been fortunate enough to make some good-quality personnel acquisitions nationally, I wonder if the difficulty is down to people's reluctance to move around given that they have some security at their current employers?
Paul S: The hunger thing is important. I came into the workforce during the last recession of the late 1980s, early 1990s and you absolutely had to prove that you wanted the job. In the next few months, it will be interesting to see if graduates start looking around at other options if they don't get the job or the salary they think they are going to. Recessions focus people's minds.
Tim: One thing that is influencing it is that students are walking out of university with, say, £12,000 of debt already, so working up through a company over two or three years isn't as attractive.
Does insurance come into its own at a time like this? How far is it counter-cyclical?
Chris: Good brokers will prevail in a hardening market. I also think it is a most testing and rewarding time for an underwriter. In a soft market it is sell, sell, sell, yet in a hardening market the underwriter regains some of the control. The challenge the industry has, I suspect, is a high percentage of junior to low-level senior underwriters have never seen a hard market. The way an insurance company manages its way through a hard market, both in terms of results and the way it manages its relationships with brokers and policyholders, is absolutely critical. Insurers need to recognise this and give their underwriters as much support as possible, though I'm not sure it's there.
Paul A: I agree totally. There are a lot of people who won't know what has hit them when the next hard market comes around. In a soft market, I think some brokers take a bullying approach and that doesn't work in a hard market; a broker needs to take a consultative approach and be able to demonstrate why it is that an underwriter should take on a risk at the price the broker is suggesting.
Tim: Looking to the rest of this year, successful people will be the ones that have to work hard to maintain and grow their businesses and some of us have been here before, though others have only been used to growth. Times are different and people will have a greater understanding of their business expenses and will have tighter controls in place. We can no longer carry fat; we're going to have to be on top of our internal expenses systems.
Chris: How many brokers do you think truly understand their costs? The nationals are probably more advanced than other segments but I don't think even they have it right.
Tim: I don't think brokers have had to understand it and what will make them do so is a move away from commissions towards fee-based income.
Paul A: If the market does turn up then broker commissions will increase and they still won't need to understand their cost bases.
Looking forward to the next couple of years, is this a period where the industry as a whole has to pull back its growth plans or is it just a case of being more careful about how you grow?
Paul S: Everybody is talking about growth but it would be interesting to see how they achieve that at the end of the year. It will be the ones that have already started preparing and making the investments that will prosper; those that haven't won't. There is a lot of ambition out there to do something - the question is, are they going to follow it through?
Chris: In terms of insurers, there will be few chief executives keen to sign-off plans that don't show an element of growth. The buzz-words within insurance companies will be profitable and controlled growth and it's how that is achieved that will determine our success in getting out of this phase of the cycle.
Paul A: The one thing that will enable growth, particularly for regional brokers, will be a hard market with premiums going up. Investment rates will push it but I still think it needs something else to make it harden the way it did in 2001 and I've no idea what it's going to be. It might be the liquidation of an insurance company; there have been a few scares recently.
Tim: From my perspective, it really is a Darwinian survival of the fittest. Those businesses that get through the next year or 18 months are going to be in great shape to grow in the future. But I believe there will be quite a few casualties, not only in the local market but nationally as well.
GUEST LIST
Paul Abbott Director of Willis Corporate Risk Solutions
Keith Gaston Partner, Plexus Law
Chris Greaves Area manager, Axa
Jeff Heasman Senior liability adjuster, SLS - a Crawford company
Tim Rankin MD, WNS Assistance
Paul Sage Regional development director, Ignition NBS.
