Over the past decade the authorised representative (AR) channel has become one of the success stories of commercial insurance distribution.

Some brokers, weighed down by regulatory paperwork and unable to negotiate favourable terms with insurers as a standalone operator, have found the AR channel an ideal compromise between independence and market grunt. Others have made a start in broking as an AR route because it’s the most economical way to build a new business.

Large insurers have been enthusiastic supporters of the AR concept, with market leaders Suncorp and IAG opening up new distribution options by building their own AR operations.

Many brokerages now have ARs on their teams also.

But there was a movement in the AR force last week when Westcourt founder Jeff Hollands suggested to insuranceNEWS.com.au that the sector is going through “a period of rationalisation”.

Mr Hollands, who has sold Westcourt to IAG, says some AR companies are “too skinny and we wonder how some of them survive”.

The recent collapse of Perth-based Winley Insurance – and the loss of millions of dollars pilfered from its broker trust fund – has also been the subject of considerable discussion in the industry in recent months, with some major players suggesting operations like Winley have insufficient controls and (obviously) lax safeguards.

Certainly insurers and underwriting agencies, who were the biggest losers in the Winley fiasco, are likely to be much more cautious about the experience of the ARs working for groups and brokerages they do business with.  

Such caution doesn’t mean the AR sector is full of shonks and thieves; far from it. But the proliferation of ARs operating as brokers under someone else’s licence does bring to mind the business reality that rapid growth in a service sector is, as Mr Hollands suggests, likely to be followed by rationalisation.

In 2002 the Harvard Business Review published a paper by three academics that postulated the theory that most new industries are fragmented but consolidate as they mature.

“Our long-term analysis of mergers around the globe has found that most industries progress predictably through a clear consolidation life cycle.”

Experience in service industries as varied as energy and telecommunications has already shown that technology is changing the way services are sold, and that small operators are at a disadvantage.

Advice is a service, and the way it is dispensed – and who dispenses it – will continue to evolve. Large AR networks like Insurance Advisernet are already gearing up for greater levels of competition and growth. 

And as Westcourt co-director Tremayne West noted to insuranceNEWS.com.au in April, the demise of Winley demonstrates “a differential between the top AR networks and just brokers leveraging their licences out for ARs to rent”.

“The top networks have been around for some time and have the infrastructure to support that network,” he said. “Winley was the cheapest and the most recent in the AR space.

“The networks with the principles and compliance practices will be trusted by underwriters, and the demise of Winley will raise the professionalism of those dedicated AR networks.”

A little over two months later, Westcourt was sold to IAG to form what will eventually be the largest AR group in the country. And many of the benefits for Westcourt ARs have been linked to the need to maintain and enhance their professionalism.

Westcourt was not a cheap operation, with state-based managers and support services. Its fees – reliable sources say smaller operators in the group were paying up to 20% – reflect the cost of providing a variety of services to maintain professionalism.

Mr Hollands says the advantages of being part of a “large, strong and secure” business like IAG will give his ARs the ability to grow within the group and take up such benefits as greater buying power, technology, training and development, insurer relationships, marketing and sales.

Just as the “independent” local broker has survived in a different form by joining larger organisations like AUB, Steadfast and IBNA, or evolved through mergers and acquisitions, so will the AR groups continue to exist by getting bigger. But there will inevitably be fewer of them.

Managers who spoke to insuranceNEWS.com.au say brokerages utilising a few ARs under a single licence will continue, but the larger groups focused solely on ARs will have to tackle the challenge of maintaining high levels of support.

Groups focusing solely on cost will be disadvantaged, and will find acquiring or being acquired as the most logical way to provide economical support services.

And there will also be subtle change in the established players as they adapt to new opportunities, no matter how large they are.

In the case of Westcourt and NAS, the change may not be subtle. NAS is a very different organisation from Westcourt. The two companies’ cultures, systems and management arrangements are very different, and over the next year of separate operation Mr Hollands expects a whole new organisation to evolve.

“The aim will be to take the best of both businesses, and roll them into one new company,” he told insusanceNEWS.com.au. “It will even probably have a new name.”

Such an approach makes sense. All too often a merger sees a larger company completely absorb a smaller competitor until all the market advantages of acquiring a partner with a more nimble attitude or more effective operating ethos are lost. Just look at our major banks for examples.

With competition becoming more evident in the AR sector, anything is possible.