What’s next for the 20% of insurance brokers with low financial resilience?
The results of the FCA’s coronavirus financial resilience surveys made for bleak reading and underlined how important pro-active planning and monitoring will be in helping firms navigate and, frankly, survive, the next 12 months.
The headline figures revealed that one fifth of insurance brokers are currently unprofitable, while the industry as a whole reported a 30% reduction in liquidity compared to February.
The immediate issue this raises for boards is to ensure their fiduciary cash is in order. The FCA’s job is not to stop firms failing, but to ensure that if they do, it happens with careful planning and preparation to minimise harm to customers.
And it seems inevitable that we will see broker failures this year. Across the 23,000 financial services firms surveyed (including 3,370 insurance brokers and intermediaries), an estimated 20% have low financial resilience and are at heightened risk of failure. Of those, approximately 30% have the potential to cause harm in case of failure.
The FCA has raised its expectations for how firms are monitoring their risks and wants to see a rapid MI ‘early warning’ system to indicate which thresholds have been breached or are close to breach.
The most prepared firms are likely to stand the best chance. Preparations do not need to form a single, isolated piece of modelling – but we have found that by enhancing Wind Down Planning and the TC2.4 exercise our clients are able to identify lead indicators and priorities action plans which can be agreed in advance and integrated into their already established core business planning and risk monitoring processes. In other words, the thinking and framework can be repurposed and applied as part of resilience planning. In particular, the real benefit of enhancing these exercises is to provide the organisation with the opportunity to identify and evaluate a range of action plans, including the impact on the future business model and the steps needed to implement these plans.
In normal times the FCA’s extensive research would be a reference point for years to come. As it is, it is a snapshot of a moment in time – and has already almost been overtaken by events.
The questionnaires were conducted in June and August 2020 and therefore exclude the impact of second and third lockdowns, but also the boost from an approved and evolving vaccine roll out programme. It is worth noting that the FCA has launched another survey the day after the publication of these results.
The encouraging news in the results just published was the fact that firms expected their cash inflows and outflows would be balanced over the coming three months; 44% have made use of the furlough scheme and the number making a net profit has actually risen by a small amount – those unprofitable firms weren’t made so just by Covid-19.
The reduction in working capital also in part reflects the necessary timing of the survey, which would not have taken into account December and March which are traditionally the strongest trading months for brokers.
However, some 60% of insurance intermediaries reported a reduction in overall revenues, demonstrating that the recession’s impact is felt far and wide, and certainly beyond the obvious casualties in the hospitality, leisure and retail sectors. The financial health of insurance broking remains intrinsically linked to the health of UK Plc as a whole.
One can extrapolate forwards to imagine that Lockdown 3.0 and the other headwind of Brexit could have already altered the bullishness of the 48% of brokers who felt Covid wouldn’t have an impact on their business model.
Looking ahead, the survey lays bare the potential for significant damage that coronavirus has had on the insurance sector. Given the continued uncertainty from further new strain identification, vaccine effectiveness and the availability of government support we consider that it is more important now than ever that firms engage and plan for what is looking likely to be a very challenging 2021.
Sicsic Advisory can assist in helping firms model and demonstrate that they are holding capital above the regulatory minimum, and develop a robust methodology to forecast the impact of macroeconomic shocks. Please contact us to discuss how we can help your business.