Schemes business requires significant investment to make it work and underwriters are not prepared to tolerate poor profitability. But, as Jane Bernstein reports, the benefits are many and it remains attractive to brokers.
If a broker were to make a wish list, it is very likely that additional revenue streams, satisfied customers and profit-making business would feature prominently. And schemes are increasingly being viewed as a way to fulfil those wishes. But while schemes business is looking attractive, genuine hard work and investment is required to make brokers' dreams come true.
Given the harsh economic environment of recent years and the fact that schemes can require significant investment of both time and money, it may seem safe to assume schemes business would have been de-prioritised. However, asked whether now is a particularly good time to be involved in schemes work, many insurers and brokers respond with an enthusiastic and emphatic 'yes'.
John Bibby, director of sales for UK General, points out that, as policyholders look for better value and as insurers' products become increasingly standardised, schemes can provide brokers with a way to differentiate their products, as well as being a source of ancillary revenues.
Specific sector benefits
Kevan Aubrey, commercial development manager for LV, says he sees "massive value" as an insurer working with brokers in developing schemes. He goes on to explain that schemes business tends to involve highlighting the very specific benefits and the extra added value for a particular sector, all of which puts a schemes broker in a very strong position in the current economic environment.
That is not to say schemes are an easy money-spinner in a harsh economy; in fact, there is a heightened pressure on brokers to ensure the scheme makes money. Ian Gosden, managing director of Higos, comments: "There is probably a greater focus from insurers on schemes being profitable and underwriters are not prepared to tolerate a loss."
Alan Bassett, commercial schemes manager for Groupama Insurances, suggests brokers have been keen to drive a shift from open market to schemes business because there are so many inherent advantages in the latter: "Schemes income has been growing over the past 10 years and the split between schemes and open market business has probably been moving in favour of schemes throughout that period."
There is certainly a consensus that the pros outweigh the cons. Those working in the schemes arena are keen to identify a long list of benefits — and differentiation tends to be at the top of that list. As Howard Lickens, chief executive officer of Clear Insurance Management, and a Brokerbility member, asserts: "Schemes are vital for brokers — with all the competition about, and changing buying habits, you need to offer more flavours than vanilla."
While Nick Grazier, head of marketing and business development at Lloyd's insurer Jubilee, says: "There is a need for the market to differentiate itself. Standard products have a place but the broker always has to demonstrate that they are adding value — as do insurers. Just selling standard products isn't where the market is going."
He cites further advantages to tailored offerings: "Not only do schemes create revenue but they can also enhance loyalty." The message is that a good scheme can protect a broker from rivals selling more standard products.
Mr Bibby also identifies customer retention as an important factor. He points out that if the offering is genuinely different and works, then it is unlikely customers will look elsewhere. Additional benefits flow from the value and longevity of the broker's business. "A broker that just has standard products anybody can replicate is not necessarily as valuable as one with specialist products," he explains.
Targeted advice, tailored service
Schemes experts also point to the fact these offerings allow brokers to really focus on their service proposition and provide customers with targeted advice. From a commercial lines point of view, Tony Bloomer, head of schemes at Ecclesiastical, explains: "In a market like commercial it is becoming increasingly tough for brokers to find an edge as products and prices commoditise. Schemes that target people united by common needs allow brokers to create a more tailored proposition in terms of product, specialist advice and service, which they can control — and thereby create competitive advantage."
Lord Mohammed Sheikh, chairman of Macmillan Sheikh, emphasises that a good scheme goes hand-in-hand with high standards of customer service. "One advantage of a scheme is that you are very much geared to responding quickly to enquiries — and we are keen to be able to offer excellent response times," he asserts. Lord Sheikh also points to the high levels of innovation inherent in schemes business.
Clearly, in addition to opportunities for brokers through schemes business, the policyholder can also expect to benefit in terms of service standards and value-added propositions. So, are the advantages equally self-evident for insurers — and do they see benefits in handling the specialist business within a scheme rather than within their general business?
Mr Bassett highlights that writing niche business as a scheme means brokers can identify more accurately what the clients' needs are and the underwriter can gain a fuller understanding of the hazards inherent in those risks.
Outperfoming generic business
Furthermore, a good scheme can also be particularly lucrative for insurers. Mr Lickens observes: "For carriers, scheme business can outperform generic business, partly because there is limited competition and partly because scheme brokers understand the risks and can select and improve their book."
For brokers, the potential for increased control represents exciting opportunities. However, some elements are more controversial than others and, in particular, Mr Bloomer believes the insurer market is split over the question of delegated authority.
He comments: "With the market in its current state many scheme insurers have been looking to pull back on broker authorities. However, those with schemes established on a solid footing where both parties are adding value, where the right training and competence regime is in place, where the right underwriting guidance has been given and clear referral programmes exist, have little to fear from delegated authority."
Certainly, insurers need to have absolute confidence in their broker partners before handing them delegated authority. Mr Aubrey observes that the insurer needs to know the broker has the expertise, as well as robust systems and audits in place, adding: "The more experience and skill a broker has in the schemes arena, the more likely you are to want to divest that authority to them."
Retaining more control over the business, whether through delegated authority or other services, is viewed by many brokers as another big positive of schemes business. Mr Gosden asserts: "I am passionate about claims settlement and I would always rather take on the responsibility for this area because I want to make sure the experience of the client matches what we have promised."
The list of advantages and potential benefits to brokers in running a scheme is impressive — which begs the question, why doesn't every broker have one? There are, of course, cons as well as pros, although industry experts tend to talk in terms of barriers to entry rather than disadvantages.
Steve Foulsham, technical services manager for the British Insurance Brokers' Association, identifies the correct expertise as a priority for brokers: "They need to be a specialist first and foremost," he says, adding that the right relationships with underwriters are also important.
For Mr Bibby, enthusiasm and commitment are vital. He also emphasises the importance of buy-in at all levels of the business. "The managing director may be enthusiastic, but if the people on the front line don't engage with it or don't know what they are doing, then it will fail. You have to have everyone, from the front-line staff to the key decision-makers ready and willing to make a scheme work."
Overcoming the initial hurdles can also be challenging. Mr Bloomer observes that many insurers will set tough demands on brokers in the early years of speculative scheme start-ups, so achieving critical mass can appear quite daunting. But he adds: "In reality, with the right marketing support and close co-creation of a scheme between broker and insurer, the opportunities are extensive."
There will also be the need for a certain amount of investment to ensure the systems and skill sets are in place. As Lord Sheikh asserts: "Any broker wanting to enter this market has got to have the resources, the manpower and also the resolve."
Setting up schemes
As far as the creation of scheme opportunities is concerned, there are many different options open to brokers, from building on existing niche business to buying in expertise on specific areas. Others base their business on spotting gaps in the market and developing innovative products.
For Mr Gosden, it has been a combination of volume of certain types of business as well as acquisition. He cites Higos' facility for travel for over 65-year olds with impaired health. "We bought a small broker with that book of business and approached the underwriter to say we wanted to develop it," he explains.
Clearly, setting up a successful schemes business is not a straightforward process — requiring time and resource as well as the emotional investment of passion and enthusiasm. Given that such a significant commitment is required, brokers also need to be sure their insurer partner is in it for the long term. Mr Foulsham observes this has always been an issue where schemes are concerned, and also points to the need for brokers to take the insurer's security rating into account. "There needs to be some longevity on the part of the underwriter," he comments.
The hard work and the potential risks in schemes business are not to be underestimated but many are predicting significant opportunities. Mr Bloomer emphasises: "Schemes are in the ascendancy; I would expect more brokers to be involved in schemes over the next five years as more people realise the benefits they offer — highly targeted, relevant products with broker control over service."
Case study: Bangladeshi scheme
In April, UK General launched a new commercial insurance scheme for a national broker specialising in insurance for Bangladeshi and Indian restaurants.
Square Mile Insurance Services was established in January 1995 by managing director Jan Knights, who identified a gap in the market for specialist commercial insurance products. The broker now writes in excess of £2m gross written premium per annum and intends to use schemes as a growth vehicle for the business.
According to Ms Knights: "Typically Bangladeshi and Indian restaurants have used 'off-the-shelf' insurance products, which have sufficient cover but can be restrictive. UK General worked in partnership with me to develop risks that are unique to the Bangladeshi and Indian restaurant market."
Ralph Hann, schemes manager at UK General, who led the scheme development comments: "Over several years Jan has built up substantial knowledge about the Bangladeshi restaurant market, building very strong relationships with the local community, even visiting Sylhet in Bangladesh, where 90% of restaurant owners are from, and learning to speak their language. Her intimate knowledge of the market has given us the confidence to insure risks specifically for Square Mile Insurance customers."
The scheme allows Square Mile Insurance Services to sell its products under its own brand on a delegated authority basis.
Schemes and social networking
Howard Lickens, chief executive officer of Clear Insurance Management, and a Brokerbility member, believes the explosion in social networking makes it much easier for brokers to develop communities and establish their credentials. "If the niche creates reasonable volumes it can translate into a scheme," he observes.
So, can investing in developing communities via Twitter and Facebook pay dividends for schemes brokers? Mr Lickens responds: "It is early days but the idea is to become the trusted source of information for that community. As with traditional networking the marketing cannot be blatant, but once you establish your status you have created a referral 'machine'.
"Where there is a real community of individuals with an obvious shared interest — such as fans of certain car marques or hobbies — this is a very powerful tool. It will be tougher to break into corporate schemes in the same way but you can be sure there are brokers out there working on it. Insurance buyers are people and people trust the information they glean from their 'friends'. Scheme brokers will ignore social networking at their peril."
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