Commercial insurance article archive
Acquisition - the future of the UK insurance broking market?
The idea of companies acquiring other companies isn't a new one: the urge to expand and grow, to explore new markets and opportunities, and, perhaps more importantly, to eliminate the competition, exists for every business, and the acquisition of other companies is one way to make all of those things happen. Acquisitions happen for many reasons and while some work out, such as Capita’s purchase of privately owned personal lines business BDML in July 2000, others take time to work, for example the RBS takeover of Churchill in June 2003, but still more are less successful. Does recent activity prove that acquisitions the future of the insurance broking market, though? Let's take a look.
High profile broker acquisitions
It's certainly true to say that the past few months have seen a number of high profile broker acquisitions take place, with some in the insurance industry voicing the opinion that the days of smaller, independent insurance agencies may be numbered. Earlier this year, insurer AXA UK acquired two broking firms with a mainly commercial insurance focus: Stuart Alexander and Layton Blackham. Although the acquisition led to the merging of the two companies in question, the resulting combined company retained much of its independent broking status, with the relationships each had developed with insurers being maintained.
"We believe that this acquisition will help strengthen our overall market proposition by extending our offer to the provision of broking services to SME’s and property owners," said AXA chief executive Peter Hubbard. "It is a strategic priority for AXA in the UK to strengthen its distribution platform and gain greater access to its customers, and we believe that these acquisitions will provide a solid foundation for further growth. These transactions will enable AXA UK to diversify its source of revenues and, at the same time, benefit from the growth of the brokerage business."
On the personal lines side of the market, in early February AXA announced the purchase of the online insurer swiftcover.com from its Bermudan parent company and management. This marks a return to the direct sales channel for AXA who are said to be seeking "distribution dominance" in personal lines and completes a buying spree for the French based multinational that seems to be part of a significant trend for the industry.
Driven by the same supplier chain logic as AXA, Zurich Financial Services bought out the remaining stake in Endsleigh insurance in January 07, giving them a 100% shareholding in the company, and in December 2006, Groupama UK acquired Carole Nash Insurance Consultants. As one of the UK and Ireland's biggest motorcycle insurance intermediaries and a specialist in the classic car sector, Carole Nash was an important acquisition for Groupama, who were able to obtain access to the niche markets the broker operates in. As with AXA's acquisitions, the buyer in this transaction allowed the business acquired to continue functioning as a separate entity, with staff and customers unaffected.
"Carole Nash is a market leading business with excellent people, tremendous market knowledge and highly respected products," commented Pierre Lefevre, Chairman and Chief Executive of Groupama. "the business has a very strong brand presence in its chosen areas, and we will be supporting the existing management team to maximise the potential of the Carole Nash brand."
One of UK's household name insurers, meanwhile, Allianz Cornhill, acquired Premierline Direct and Home and Legacy Insurance Services in 2006. With Home and Legacy specialising in household insurance and Premierline a marketer of SME policies, the acquisitions allowed Allianz Cornhill to strengthen its hold on these specialist markets within the UK, and comes at a time when the company was going through a reorganisation which will see its name change to Allianz Insurance PLC in April 2007.
These are not, of course, the only acquisitions underway in the UK insurance market. At the time of writing, Aon UK has just finalised its acquisition of Footman James, and the world's largest insurance company, AIG, is said to be in exclusive talks with school fees finance and monthly instalment credit provider Premium Credit, to buy out the company.
Why insurers buy brokers
Penetrating niche markets
Although all very different companies, the reasons for all of the acquisitions described above are broadly similar. All of the buying companies are large organisations, while those acquired tend to be specialists in their fields, operating in niche markets which the larger insurers may find difficult to gain a foothold in. Rather than take on the smaller companies – a move which could result in driving down premiums – it makes sense to take them over, allowing them to retain their own brand identity and modus operandi, while bringing them under the umbrella of the company which buys them.
Buying market share
There are other reasons too, of course, why one company may wish to acquire another. By far the simplest of these reasons is the one touched upon above: it's not the business itself the acquiring company is interested in, but its clients. What easier way to reach another company's clients than by going through the company in question? In acquiring another business, you also acquire their clients, and, perhaps more importantly, the goodwill of those clients, who will already have built up a relationship with the company being over. Acquiring that company, as opposed to trying to win their clients over through marketing or special offers may seem like a drastic course of action, however it's one which can cost less in the long run and results in greater distribution of the insurer's products and policies, effectively buying market share.
Economies of scale
By acquiring other companies, the buyer can take advantage of economies of scale, and penetrate further into niche markets which may otherwise have been difficult to gain access to. If the company being bought is to be amalgamated into the company doing the buying, there may be other savings as staff levels can sometimes be reduced, while at the same time, sales levels are increased. The acquisition gives access to new suppliers, new technologies, and also lead to tax savings. They are not, however, without their difficulties: the need to create consistent ways of working across all of the companies being acquired, for instance, and of consolidating the data held by the different organisations, can be a time consuming and costly business.
While an acquisition may make good business sense to each of the companies involved, for the staff of the company being acquired, they can also be extremely stressful. Although some acquisitions – such as that of Carole Nash by Groupama – allow the staff and company to remain unaffected, others may lead to redundancies, particularly amongst managerial staff. It’s a difficult and unsettling time, and this can lead to poor performance from the company being acquired – something that must be addressed urgently.
The strengths of the commercial broking market
Choice, independence and trust
Despite the rise of the direct channels offered by the main players in the SME market, the majority of UK businesses requiring specialist insurance cover for commercial property or industry specific liability protection seek the guidance of an insurance broker. There are clear advantages to using a broker who will give you independence from insurers and direct writers, allowing the client business to benefit from clear and unbiased advice which may otherwise be hard to come by. A broker will also give access to the whole market, rather than just one part of it (for example one insurer or product range), plus the peace of mind that comes with knowing their recommendations and advice are based on solid research, carried out by experts.
For these reasons, many firms which engage the services of a broker will remain with that broker for many years, building a relationship of trust, with the brokerage firm becoming an integral part of the firm's growth.
Why brokers sell up
Retirement and regulation
So, are acquisitions the future of the UK insurance industry? The answer would seem to be "yes". In 2005, Datamonitor sought the opinions of over 150 UK insurance brokers on current issues within the industry. Almost half said they had plans to acquire other brokers within the next 12 – 18 months, which gives some indication of the direction the industry is taking. At the moment, the broker market is heavily fragmented, with consolidation a natural move to allow these firms to enjoy a larger market share. In addition to this, many of the principal players in the industry are now approaching retirement age, making now a good time to restructure – as has the increasing cost of compliance with FSA regulation.
The burden of regulation has been of great concern to the industry, as illustrated in the 2006 Professional Broking Sentiment Survey. Many brokers feel that regulation has become a hindrance rather than a benefit, with compliance using up time and resources which the smaller brokers do not have to spare. The time is ripe for the market to consolidate still further, with more acquisitions sure to be announced in the coming year.
One of those future acquisitions could be that of the UK's largest independent insurance organisations, the Towergate Partnership, by one large insurer. The move would allow the buyer to gain an extremely large share of the SME market, but whether or not this comes to pass, it seems certain that acquisitions will continue to play a very important role in the UK insurance broking market.
15 Feb 2007