Key Challenges & Opportunities for Brokers in 2023

If you had the opportunity to attend BIBA Conference 2023, you know that it provided an ideal opportunity to network, meet new companies and gather insights and was by far the most successful BIBA conference in many years. After speaking to many other professionals and learning about their experiences, I’d like to share several observations regarding key challenges and opportunities for brokers in 2023.

Everyone Feels Economic Pain

It’s no secret that post-Covid most economies in the world are suffering and the war in Ukraine is exacerbating the problems considerably. The biggest challenge in the UK is inflation. According to the Office for National Statistics, year-over-year consumer price inflation in the UK reached 9.6% in October 2022. As of April 2023, inflation has moderated somewhat, but it remains high at 8.7% which is considerably above the BofE’s target of 2% and these figures are proving very stubborn to decrease.

Because everything is costing more, property insurance is especially impacted because it costs more to rebuild due to increases in the price of raw materials and labor and so premiums rise. But index linking is running far higher than inflation and many insurers have been applying rates of nearly 20%. Often landlords pass this cost increase directly onto their tenants with increased rents too.

Brokers are tasked with explaining to their clients why insurance premiums are increasing, but getting clients to accept the economic reality isn’t always easy, and when faced with a stiff increase over last year’s premium, it can lead to dissatisfaction.

The Population Increases and Capacity has Decreased

According to World Population Review, the UK population is 67,723,781, as of 2023. It’s expected to reach 75 million by 2060. A growing population requires the building of new homes and results in more densely-inhabited districts. This calls for more insurance coverage – but finding capacity in a hard market is challenging. Our towns and cities are seeing more densely packed blocks of flats built to accommodate more people but these properties are not always popular with insurers. Escape of Water is a growing and expensive problem for claims departments and following the Grenfell disaster, insurers are cautious about all matters relating to fire safety in blocks of flats.

New Service Providers but Fewer Brokerages

In the past, Carriers and MGAs of different sizes operated in the market creating some balance and providing more choice. That was equally so with broking houses on both the retail and wholesale side. In more recent years, the number of independent small to midsize brokers has dropped with many brokers having merged or been acquired. Some new brokers have emerged, but the number being acquired exceeds the number of new entrants. This is also occurring at both the retail and wholesale level. Among the 100 independent UK brokers, almost two thirds have since been consolidated or acquired by a rival broker/insurer since 2010, according to Insurance Age.

To survive in this market, smaller brokers have to compete with the bigger companies, which they can only do by focusing on service and relationships while exploiting gaps in product range and volume requirements.

Regulations Are Increasingly Complex

Regulation of the insurance sector was once done with a light touch but that’s no longer the case and brokers and underwriters alike can expect to be monitored closely by the FCA. The compliance burden has also driven up the cost of doing business. Larger companies may be able to absorb these costs more easily, but for smaller entities, it’s proportionally a bigger challenge, which could make the economies of scale from a merger or acquisition more attractive.

In 2021, the Financial Times reported that UK fintech companies feared that new FCA rules would stifle startups. Indeed, starting a brokerage can now take a year before a licence will be issued.
In the personal lines business, many underwriters feel the compliance burden is now too great and it’s no longer worth handling the business due to increased costs. As a result, there’s a smaller pool of underwriters to draw on – and that hurts policyholders in the end. The FCA’s goal of protecting consumers was admirable but in reality its meant less choice and competition in the market.

The Rules Change

The FSA introduced Treating Customers Fairly guidance back in 2006. Those same principles remain in place under the FCA but things have evolved since. It’s up to firms to demonstrate how they are working to achieve the required outcomes and follow the principles. This isn’t always clear cut as our industry is so varied and the guiding principles are very broad. It’s normal practice to refer questions to compliance experts and the FCA themselves to clarify how best to approach different and new situations to ensure we meet the standards required. Keeping up to date on best industry practices is important, not only to ensure customers receive the best service but also to protect our business from complaints and to be prepared for audits from insurers, the FCA and PI insurers.

Navigating a Challenging Market

This is a time of change in the insurance industry. For brokers, change breeds challenges as well as opportunities. Here at Costero Brokers, we’re remaining steady in our focus on great service, specialisation, and continual improvement. If you’re interested in continued collaboration, reach out.