INSURANCE firms are busy brokering deals as consolidation in the marketplace gathers momentum. But does that mean the end is night for the independent regional broker? Sheryl Moore reports.

THE big boys of the insurance broking industry have been busy flexing their muscles and gobbling up smaller rivals with gusto.

Hardly a week goes by without another regional broker being bought by a larger competitor or one of the industry `consolidators' who, driven by the attractive profit margins and loyal customer bases, are doing battle to be the biggest in the business.

The UK broker market is highly fragmented, and even the seven or eight consolidators, which include Smart & Cook, Jelf and Cobra as well as the handful of broker networks acting as consolidators, control less than 10 per cent of the sector - equating to around £3.4bn in gross written premium (GWP).

But according to research from Datamonitor, the consolidation is expected to move up a gear and, if the consolidators hit their growth targets, they could control around 14 per cent of the market by 2010.

And it is not only the consolidators that are swallowing up rivals in their wake, the big insurance firms such as Axa, as well as those from the continent, are also getting in on the act along with the private equity houses.

A recent study found that 59 per cent of small brokers expect takeover bids from consolidating brokers - so where does this leave the future for independent regional broker? And what is so attractive about these firms?

There are thousands of independent brokers across the north west alone, and many have made the headlines after agreeing to be taken over.

Last month, Jelf paid up to £18.75m for Manchester-based Manson Insurance Group, and chief executive Alan Always said the deal gave Jelf the `firepower to continue with its rapid pace of growth'.

Last October, its rival Cobra swallowed up South Manchester insurer UK & Ireland Insurance Services in a £4.3m deal.

This followed the sales of Alex Finch to French business Verlingue, and Altrincham-based Carole Nash group to French insurance Groupama for £80m.

And that wasn't the only deal in the north west for Groupama. Last June, it bought a 60 per cent stake in Macclesfield-based insurer Bollington, which itself is on the acquisition trail and is edging closer to the £100m premium bracket following the takeover of Altrincham rival, Greystone Insurance Services, in October.

The deal demonstrated that it is not only the big groups that are keen to gain a bigger slice of the market.

Earlier this month, Bridge Insurance Brokers, based in the city centre, snapped up Warrington-based Chartwell Insurance Brokers, and said it would not be the last deal it completed in 2008.

Bridge chief executive, Peter Warburton, said: "We expect to play a part in the consolidation of the market.

"There is a size you need to be able to get to in order to get the best deals for your clients, and be able to fund all the compliance."

Indeed, in addition to a highly fragmented market, rising costs of Financial Service Authority regulatory compliance, downward pressure on brokerage commission as well as increased competition, are driving consolidation.

And with the attractive margins, loyal customer bases and the opportunity to drive down costs, companies are prepared to pay well for their rivals.

Mike Reeves, director at Manchester-based corporate finance firm, Clearwater, says that it is not uncommon for the broker firms to go for up to two times revenue, and as consolidation gathers pace, only the fittest will survive.

He says: "Some of the smaller firms may find themselves squeezed out of the market. Many larger brokers can afford to pay high prices for their rivals, giving them excellent cross-selling opportunities to an existing client base.

"The sector is attractive to private equity players and there is still plenty of opportunity for further consolidation.

"However, this will put increased pressure on smaller firms who will find themselves no longer able to compete, and those wanting to remain independent will have to have a very specific niche and clear strategy to survive."

But others disagree and believe that good regional independent brokers will always be in demand, and there is enough business out there for everybody.

David Schofield runs his own highly specialised brokerage, Secure Trade Credit. He is also a consultant at Manchester-based Caunce O'Hara which is in the UK's top 75.

Mr Schofield readily admits that Caunce O'Hara receives around three or four phone calls each week from potential suitors but is intending to remain very much independent for the foreseeable future.

He says: "Customers like the fact that we are independent and Caunce O'Hara has an extremely loyal clientele.

"I believe firms like ours provide a personal service which is what customers demand and need, and we fight hard for our clients to get them the best deals.

"We also have the same buying power and hold as much clout as the big boys.

"There is huge consolidation going on but at the same time there is certainly enough customers to go around and I am 100 per cent convinced that there is still a market out there for regional independent brokers."

David says that while the doom and gloom merchants believe that the very small brokers will be priced out of the market, he says that many of those, like his own, specialise in very niche markets and provide a service that is not available in the mainstream market.

He says: "I specialise in credit insurance and the consolidators can't do what I do, so there will always be a market for this kind of work.

"The consolidators like the profit potential from well run regional brokers, and if Caunce O'Hara was approached with a ridiculously high offer then of course it would be looked at.

"But we are proud of our independence and the end is certainly not nigh for the regional independent broker." Tweet