The insurance market has become increasingly polarised between the big corporates and the smaller, specialist niche offerings. While the solid returns of mass-market appeal may seem alluring, especially when looking at the bottom line, a well-focused specialist firm can achieve a loyal, trusting customer base, says Michael Tripp
This year has been challenging for the insurance industry and the past decade has brought many changes for the market. Takeovers, mergers and broker buyouts are, in the main, signs of a healthy, vibrant insurance place. Everyone has been hard hit by the floods and other weather claims while the soft market also continues to pile pressure on some insurers.
The process of consolidation and rationalisation has created an insurance market with a distinct structure and personality. A hard core of big broad-based insurers occupy one end of the market spectrum, and a tight-knit community of focused or specialist insurers occupy the other. The ends of the spectrum are dramatically out of balance in premium income terms, with the largest five insurers controlling around three-quarters of the entire market. This pattern is set to stay and both camps appear to be getting stronger every day.
The no man's land in-between these two camps is occupied by mid-sized generalist insurers and does not look at all hospitable. So if it has not already done so an insurer needs to clarify which camp they are in. If it is a smaller operation it's wise to be a specialist.
Of course, a company cannot just call itself a specialist, slide to the right side of the spectrum and consider it done: it is not as simple as that. So what does it really mean to be a specialist insurer and how do firms become one?
'Specialism' can be defined in many ways: by the sectors the firm is in, the specific type of customer targeted, expertise, channel focus, brand values or the products and services that are offered. Many of the big players have specialist schemes and dedicated business areas, but the business mix at these insurers is weighted toward mass markets and specialist products are just one of the many strings to their bow.
Discipline and focus
A truly niche insurer is dedicated to the market it is in. It is disciplined in its focus and does not dip into other areas out of interest. Being a specialist is as much about commitment to a specific market and a drive to build a reputation as being one of the best in what it does. If a firm is not truly committed, it soon becomes apparent.
Some will argue that becoming a specialist is a risky strategy. With all a firm's eggs in several small and limited baskets surely it is exposing their business to potential problems? The bigger insurers could easily sweep in and mop up its business for a cheaper price, or sectors could hit a bad patch and cease to need a specialist insurer at all. Balancing this against the benefits of knowledge and building goodwill is a strategic judgement to exercise the board's wisdom.
There is no doubt that specialising in a sector gives insurers a real point of difference - something many faceless insurers still struggle to establish. Being committed to a particular sector can also get the company much closer to their customers and can deliver a truly customer-centric approach. As technology advances the industry continues to learn more about the risks insurers face and the customers it is targeting. A company can then start to tailor policies more and its underwriting and management can become even more sophisticated.
Niche insurers can also demonstrate real expertise, something that the UK insurance industry sometimes struggles to do. Niche markets do not revolve solely around price; it's more about value. Instead of churning out commoditised policies customers receive a true insurance service. More than anyone else, these customers will appreciate the true value of insurance because insurers are taking the time to understand them and their business and tailoring a policy to suit them.
If an insurer is dedicated to a sector it can spend its time understanding not only the insurance issues, but the other economic, environmental and legal issues bearing down on them. Insurers can then be true advisers, rather than just technical experts only contacted once a year at renewal time.
Understanding a sector in detail goes some way towards fighting back the cynicism still prevalent in the industry. Specialist insurers are likely to win business on the merit of more than price and keep it for longer. Specialists firms are binding up interests with customers' very tightly, which has to be good news for the industry.
Target the business
A specialist approach also enables insurers to have a more informed strategy. Rather than just targeting any bit of business, or sitting back and cherry-picking. Specialists explicitly target the business they are best placed to provide. Indiscriminately taking on any old profitable business never gives the opportunity to really add value.
The widespread flooding seen this year is a good case in point. Every customer needed a different kind of service, one which reflected their needs exactly. This is true even among flood-stricken homeowners in the same street. Commercial property owners with different businesses need an even greater degree of care to make sure the service exactly suits their needs.
So as the industry strives to understand its customers better and provide an even more tailored service, the specialist approach will gain more importance. But it is not easily achieved. An insurer needs more than a commitment to the sector, it needs the right knowledge, the right people, the right products and the right services too. It also needs to be an expert - no amount of knowledge can compensate for a lack of clear policy benefits. And no amount of unique cover features can fill the gaps in an underwriter's understanding of a market.
With no real specialism insurers in the middle ground have no ability to compete with the big insurers on either price or efficiency; the future looks bleak. But it's clear that, although big insurers are the driving force of the market, insurance will never be a solely mass-market business. Too many customers have specific needs for this to be the case. In today's age of information and growing marketing sophistication, an insurer continues to demand to know more about exactly who it is selling to and what they want.
This is where niche specialist insurers do more than hold their own - in fact they lead the way. With the time and skills to focus on specific markets they know more about particular slices of business than anyone else. It is this intimate understanding, which is the bedrock of their business and gives them the ability to enter into markets even the bigger boys would be reluctant to entertain.
So specialism is a good defence in a competitive market; it is a refusal to compete on price by taking a different path. In a soft market, like the one the market has been seeing for some time, it's easy enough for the big insurers to sweep in and claim specialist business. But in the long term this is not in the customer's best interests. They need an insurer that will stick with them and work to make sure its products and services are always keeping pace with what they need.
Meeting customer needs
The balance the market has struck between big and specialist insurers appears to be very much in the customers' interest. Through this market structure customers have access to a combination of price-led package cover and dedicated specialist policies.
Without a sophisticated understanding of customers, insurers become nothing more than a mass production line. The foundations of the specialist end of the market are rested upon the assumption that the industry continues to work hard to truly understand and meet customers' needs. The industry must not become complacent - the minute it fails to do this, its expertise is put seriously in doubt.
The balance of power in the market will continue to move towards either end of the spectrum; in the future the middle ground will dry up further. This is good news for insurers, brokers, the industry and, of course, ultimately customers: it means better service, more choice and continued healthy competition.
- Michael Tripp is group chief executive at Ecclesiastical Insurance.
Ecclesiastical is a UK-based specialist insurer with international offices. It is the UK's leading church insurer and a specialist insurer of the charity, care, education and heritage sectors. Established in 1887, Ecclesiastical has more than a century's experience providing tailored policies and services for specialist markets.
With a network of regional offices Ecclesiastical can give brokers access to local underwriters and decision-makers. It has an excellent claims service and is A rated. Its specialist expertise was recognised in the 2007 British Insurance Awards with a win in the Marketing Initiative of the Year category for the design and launch of its heritage commercial product and services.
Ecclesiastical prides itself on personal service and does not believe in call centres, just personal contacts. It is an insurer with a conscience: with a strong tradition of focusing on customers' needs first with a caring, honest and fair approach. It is owned by a registered charity and is one of the UK's top 20 corporate donors.
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