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01 April 2017 Fulcrum

With Solvency Assessment and Management (SAM) and the proposal in the Retail Distribution Review (RDR) set to become a reality soon, small independent brokers must start thinking about the sustainability of their revenue models and scale of income under the new legislative environment.

We caught up with Fulcrum Chief Executive Officer (CEO) Vaughan Jones for a Q&A to find out how he sees the future for small brokers under the new regime

Q: How will the new regulations affect the way brokers do business?

A: The twin peaks regulations, which form part of the proposals set in RDR, are going to fundamentally change the way brokers earn their income. Many intermediaries will experience a drop in revenue under the new regulatory environment, particularly those who rely heavily on fees, which will be capped by the new regulations.

Q: What is the size of the market that will be affected?

A: The short term insurance market is worth more than R115 billion in gross premium, of which at least three quarters is going through the intermediated channels at the moment. That is about R86 billion in premium, which is managed by intermediaries who have binders and/or outsource arrangements with insurers, that will be most affected. These intermediaries are entering into uncertain territory with the advent of Treating Customers Fairly (TCF), SAM and various other changes.

Q: What should these brokers do to manage the impact of these changes?

A: Brokers must understand how the regulatory changes are going to impact the make-up of their earnings base and how they are going to operate effectively under the new compliance regime.

There are a number of options. A smaller broker could, for example, sell into or merge with a larger player who has the scale to operate seamlessly and grow successfully in the new environment. Another alternative for brokers would be to protect their bottom line by scaling up and acquiring new businesses or books of business.

Q: How would a small broker go about finding and buying another business?

A: Growth by acquisition is a delicate process and should not be taken lightly. It is crucial to ensure a strong cultural and strategic fit with the target firm. It is also important that brokers identify a business that will complement what they already do.

Q: Where would I go to find a business for sale?

A. Making use of an intermediary to buy or sell an insurance business can be an effective channel to market. At Fulcrum we are linked to a strong network of insurance businesses and partners. Many of our clients come and speak to us about buying and selling businesses.

Q: What about data management under the new legislation?

A: There are going to be far more robust requirements on behalf of the brokers to ensure that they can transfer and manage their data appropriately with their carriers. That comes at a high cost, with strong technological requirements if they are going to do it alone.

Q: So it’s a double-edged sword – capped fees mean lower income, while more stringent data requirements will undoubtedly lead to increased costs.

A: For sure. The way the current legislation has been worded means the small- to medium-sized broker segment will face many challenges. When it comes to data management, the best course of action for these companies is to partner up with a service provider that can disseminate granular data to insurers on real time basis, rather than investing in costly system upgrades.

Keeping the small broker economy going is vital. Encouraging and supporting SME development and entrepreneurship is the only way our economy is going to grow. We run the risk of losing a key component of our industry if we systematically drive away smaller brokers. This cannot be in the best interests of the insurance industry, its policyholders or the broader South African economy.

 

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