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Back in the Ring
By Richard Adams
Professional Broking August 2005
Being short-listed for Commercial Broker of the Year at the recent British Insurance Awards says something about where Kevin Young, chairman and founder of Argyll is taking his firm. And, after a temporary absence from the acquisition arena, he is now back with the intention of doubling Argyll’s size. Richard Adams reports.
While many brokers lament the lack of local underwriter contact, Argyll Insurance Brokers has two underwriters from Norwich Union based at its Worthing head office; a legacy from General Accident. While this is not unique to Argyll or NU, it is one of the commercial advantages peculiar to Argyll, which caters for the top end of the standard commercial SME market, with an average premium spend of between £25,000 and £30,000.
The Company’s chairman and founder, Kevin Young, probably came to the attention of most in the period following the collapse of Independent Insurance as the chairman of the creditors of Independent. Despite Young’s best efforts, he was unable to rescue some affected clients but he still strongly believes the industry needs champions.
Like many brokers, Young has strong views on the Financial Services Authority and the way it has gone about devising and implementing the governing guidelines for brokers. One bugbear is risk transfer and the handling of client money.
“The market needs to make more noise about this – and will do as we get into the first six monthly period. Brokers will realise how complicated it is and this is one of the primary reasons why I hope the FSA will review the situation,” he exclaims, adding: “If you have a customer with five policies with a total bill, including brokerage, of £50,000, with four of the policies in the company market – there is therefore no issue under client money under the FSA.
The risk transfer debate
However, if the fifth policy is with a wholesaler – at Lloyd’s
for fleet, for example – a broker needs to treat this differently and
commingle. But, because there is no agency with the final underwriter, as
there was in the past, there is no risk transfer. The wholesaler will have
risk transfer under a separate arrangement for themselves, but surely risk
transfer must give better protection for the customer. I do not understand
why the FSA did not make it statutory. If risk transfer applies, they have
paid the insurer, if not, the client has only paid the agent and, if they
go bust, the client is not protected. I am not saying it was an easy decision
but brokers should have been given this.”
While Young is not volunteering to champion this cause, he says, while the
British Insurance Brokers’ Association ‘sort of is’, there
needs to be someone credible and with the stature to press the issue on behalf
of the broking community.
The other concern he raises about regulations is the fact that brokers with
up to a £1m turnover are not required to formulate a business plan.
He continues: “This is potentially a big problem as there are holes
in the accounts at the lower end of the scale, many of which have taken an
almost tick-box approach but that have been allowed into the regime and granted
authorisation anyway. All brokers should compile a business plan, as this
is partly how a business proves its solvency. If this was the case, from the
outset, more firms that did not make the grade would have been weeded out
at the application stage. As time goes on, the FSA will uncover a lot of things
it does not like.
All the brokers I know are generally very professional and operate their firms
to a high standard but it seems strange to allow firms in that will not, on
closer inspection, make the grade. “Another area of concern is financial stability, which adds further
to the risk-transfer debate. If risk transfer is not made compulsory, can
the FSA honestly vouch for a broker and assure the customer that this is a
safe place to put their business?”
Regarding the European Union’s plans for a Spitzer style investigation
and what it may mean for the UK. Young says: “Spitzer was about bid-rigging,
which in the US, was big news. In the UK there are relationships in which
there are profit shares and retention rewards and they are legitimate commercial
incentives. A broker’s first responsibility is to its client and, if
they are placing their clients’ business in a reputable market that
best suits their needs, I cannot see how they can be vilified for that. It
does of course depend on what the EU did. If they came in ‘all guns
blazing’, we would have to jump, but it would not be an issue if brokers
were found to be operating in ways that did not present a conflict of interest.”
Like many, Young is waiting with bated breath to see how the regulatory regime
under the FSA will shape up and, simultaneously, the unpredictable influence
of the EU on the insurance sector. One other increasingly aired sentiment
he is concerned about is the impact on the market during the first wave of
reporting.
“This is more difficult than people realise and there could be a wave
of consolidation as brokers realise just what is involved.” As a firm
that has not embarked on a great deal of acquisition activity itself, Young
says Argyll – which has not acquired another firm since 2004 –
is on the trail with a couple of prospects in play. And he is bullish about
the outcome: “We will acquire in the next six months. We had one target
that did not come to fruition recently, but we are looking to bolt firms onto
our existing operation.”
Consolidation strategy
And the strategy? “It is very difficult to open up in new geographical
areas and a lot of careful planning and putting the correct management structure
in place has to be done before this can be attempted. Argyll was built in
this way, by making sure we had a good financial director, human resources,
IT and other infrastructure in place and now has operations in Kent and Sussex.
So now the main focus of acquisition activity will add to these existing bases.”
Although, with Argyll’s nearest prospect, things are still at the pre-due-diligence
stage. Young is still confident that he will complete it by the autumn. “I
anticipate that, by the end of September, this will be complete and the deal
should take our gross written premium close to £30m.”
In terms of Young’s overall plans for Argyll and beyond, he says: “In
terms of where we go next, I would like to double the size of Argyll in the
next five years. Beyond that, it is difficult to say. I may want to double
it again or I may be satisfied with my accomplishments and look at passing
the business on.
“We have had some good suitors that have offered generous packages in
the not-too-distant past, but it is not the right stage yet. The problem is
that you can become too big to buy; the same applies in the housing market,
but there is a lot of potential in Argyll and that is something for the future.
My preferred route would be a management buyout and to pass the company onto
those that currently manage it.”
Young agrees that often venture-capital pressure is not always the healthiest
option for a broker. He continues: “A broker needs to be sure they have
a venture capitalist that will listen and understand the business. BP Marsh
was an option for us in the past and it may be an option in the future.
At the moment we fund all of our acquisitions with debt as banks offer more
flexible arrangements. Five years ago, banks did not treat goodwill as valid
but now there has been a change in attitude – certainly with Lloyds
TSB.”
Starting Out
Young comments that the process of starting up Argyll in 1991 would be far
more difficult to achieve now. “I think start-ups in future will use
existing companies as a platform for entrepreneurial endeavour in future.
Starting with a Greenfield site now is difficult, as the FSA would look at
it more closely because it would have no history,” he says.
“The greatest problem when buying a business is helping the people you
are buying with it over the culture shock. If a broker has built up a business
of 25 to 30 years, they will undoubtedly have issues when it comes to accepting
a new role. It is like telling someone you are going to ‘buy their life’.
That is why cultural compatibility is crucial as these issues will present
themselves even with well-made matches.”
In response to the question whether he thinks the banks and building societies
will finish off the work Direct Line started, as some are predicting, Young
says: “Non-concerned personal lines business will always be under threat.
We write a lot of personal lines off the back of commercial and even have
our own Argyll-branded household product. Because of the demographic of this
area {Worthing}, a lot of people who come here to retire want to use a broker.
A lot of them are not enamoured with the Internet revolution and this is something
peculiar to this area, which we are in a position to capitalise on.
“Banks and building societies will come in at the price-sensitive end
of the market and, therefore, the small end of SME is susceptible. However,
if I was an SME going down the direct route, I would be concerned that I had
all the facts right because I would not be educated enough about insurance
to know everything I might need to. For example, I might not understand the
reasons for non-disclosure. We have a large number of SME clients and understand
the product and act on their behalf and, in the event of a claim, we can argue
their case from an informed position.”
Championing the clients’ cause has occupied Young’s time of late,
having recently settled Argyll’s largest-ever claim with an insurer.
A sum of £2.8m has been agreed for a client that suffered a major fire.
“Without our involvement the insurer may not have agreed this. It is
a totally unfair situation for the client without a broker and without any
professional experience.”
Some of the argument, unsurprisingly, came down to the business interruption
claim. Young continues: “The insurer was Fusion – and they did
a brilliant job. The fire occurred in February and a settlement was agreed
in mid July, which is great; it’s very refreshing to me. There was no
need for any legal wranglings, so credit where it is due.” Clearly, advising clients and advocating on their behalf is close to the heart
of what makes Young tick as a broker and business manager. So, has there been
an outstanding or defining moment in his career? “I think the best thing
I ever did was to be honest about what I wanted to do.”
Honesty and clarity
Young cites how writing a business plan for the regulator’s benefit
has become an invaluable document as it is ‘spin-free’, substantiated
by quantifiable and provable facts, and honest. However, being honest and
clear about where senior managers want to take the business is a tenet Young
came to revere prior to setting up Argyll.
He explains: “When I came out of Citicorp – which was divesting
itself of its insurance involvement in 1991 – I went to chief executive
David Woodward and said I wanted to take a chunk of its clients and set up
on my own. To that, he shook my hand and said: “Because you have told
met, I will let you do it.” And, not only did he let me do it but he
supported us. Poaching teams and clients happens – and there were those
that tried to – but we really didn’t need Citicorp’s lawyers
hounding us. Instead we had a free run as a result.”
In an era of greater transparency Young’s philosophy is one the regulator
would probably wholeheartedly endorse, and is clearly one that has stood him
in good stead and is set to continue to do so for the future.
