Case study: Windsor Partners Ltd
Windsor Partners Ltd is a Lloyd’s broker operating from an office in the City. Approximately half of its brokerage comes from the professional indemnity sector, with about 50 employees working in this area. Following the acquisition of another broking firm three years ago, they conducted a strategic review of the business.
Director Andy Erritt says: “Once we’d absorbed the business into our own, it became apparent that it wasn’t cost-effective to run some of the smaller accounts. Operating as a broker has become increasingly expensive, so we looked at ways to streamline this part of the business.”
Andy approached Hiscox, who expressed an interest in taking on these accounts. “Once the deal was agreed, Hiscox set up monthly meetings with us to keep us informed about the transfer. The transfer was straightforward and it’s allowed us to concentrate on our core business.”
Moving your business to the fast lane
Sam Barrett discovers that specialising in fewer areas could provide the key to growth for brokersBusinesses can have a habit of getting out of hand. Wacky marketing ideas, mergers and acquisitions and shifts in the market mean it’s easy to end up with an unruly book of business.
Also, although revenue may have increased, the mix of different business types can also reduce overall profitability.
For example, according to Datamonitor, premiums on professional indemnity have fallen by 15 per cent since 2005. This has squeezed margins and made this area of business difficult to maintain on a profitable basis. The same is true for small package commercial business, which has become much more commoditised in recent years. Today, although it still requires the same amount of work from a broker, the return is much lower.
It’s also fair to say that consumers don’t expect the same level of service across all their insurance purchases. The advent of online insurance sales, as well as comparison services, means they’re much more likely to shop online or by telephone for commoditised products such as home and motor insurance.
Open all hours?
Some business is more suited to the direct market. “If it’s not complex, then consumers are happy to arrange their cover direct,” says Hiscox’s Business Aquisitions Manager Tim Heath. He adds that, in these instances, consumers are more likely to shop at a time that’s convenient for them, for example after work or at the weekend. Operating on a face to face basis across these hours isn’t commercially viable – or attractive – for many brokers.
Regulation has also changed broking. Compliance requirements mean that there are additional costs in servicing business. Again, this can make them much less profitable.
Because of these pressures, rather than develop a business model that covers all areas of insurance, a growing number of brokers are choosing to specialise. By removing the low-value but high-maintenance business, you can concentrate on the areas where, as a broker, you can really add value. In turn, this will strengthen the business and increase its competitive edge and profitability.
Lightening the load
There are a number of options available if you are keen to cut out the dead wood. You could sell part of your business to another broker, although you’d always be wondering whether they’d try to extend the relationship with your clients into the areas you’d retained.
As an alternative, Hiscox will work with you to find a solution that will allow you to maintain the profitable areas of your business while removing the elements that are a drain on your margins. By buying these low-profit books from you, and managing them through its direct arm, there is no disruption to your customers and you can focus on the areas of your business that really add value.
Another solution that reduces costs is for the broker to outsource the running of the book. In this case, Hiscox’s Schemes and Affiliate Solutions team undertakes all the admin and back office functions for the broker. The broker retains ownership of the customer and takes a small reduction in commission in recognition of the work by Hiscox.
It could also be a good time to review your business strategy, thanks to suggested changes to the capital gains tax (CGT) regime. The changes, which are due to come into effect at the beginning of the 2008/09 tax year, will replace the current sliding scale of CGT rates with a flat rate of 18 per cent.
This means if you’re selling a business you’ve held for more than two years, you’ll pay 80 per cent more tax as the rate shifts from 10 per cent to 18 per cent. This increase in taxation could see a flurry of pre-April disposals as well as more innovative ways of divesting a business.
Regulatory changes may also make a business review timely. In January, new capital adequacy requirements come into force. These will require brokers to hold 5 per cent of commission and fees, which could be a significant increase for some.
Further, in January, the Financial Services Authority is set to change the rules on how goodwill is expressed, no longer allowing it to be included as an intangible asset on the balance sheet. This will affect any broker that has acquired a business in the past, when goodwill could be included alongside other business assets for 20 years or so.
“We’re happy to work with brokers who are interested in reviewing their business strategy,” adds Tim. “We can provide a variety of services to help them develop their business in a way that suits them.”
