Providing brokers and insurers choose areas best suited to their interests and expertise, the benefits offered by niches can be out of this world, finds Simon Threadgold
Specialising in niche commercial lines can prove extremely successful for insurers and brokers. Niche includes exceptional risks and hard-to-place trades, and also anything that falls outside the packaged policy or commercial combined model.
Groupama's commercial insurances manager, Malcolm Smith, splits niche into three defined areas. The first is niche distribution, with Groupama delegating authority on small commercial packages to brokers specialising in marketing by telesales and/or the internet. The second is niche products and cover.
Mr Smith explains: "On the casualty side, for example, it could be the inclusion of treatment risks for beauty salons or efficacy risks for alarm installers - the risk of an alarm not working and causing a loss. There are also niche products that reinstate what is normally excluded, and extensions to liability covers to include professional indemnity or financial loss."
The third segment consists of distressed or unusual risks that are out of favour due to poor experience or high exposures. These include unoccupied factories and warehouses and, on the liability side, higher risk trades.
"Lloyd's used to do a lot of this business, but has become more risk averse," Mr Smith says. "And tree surgeons, for instance, are out of favour due to poor employers' liability results."
Although Groupama is involved with niche business, the insurer is primarily focused on mainstream insurance for small to medium-sized enterprises.
But some insurers have a more fundamental commitment to niche commercial lines, such as Hiscox, AIG and Chubb.
Hiscox chairman Robert Hiscox is bullish about niche markets, given that premium rates are still rising. In his latest interim statement to shareholders, he states: "We believe excellent market conditions will remain longer than some pessimists are forecasting. We will continue to enjoy strong trading conditions for a good few years to come."
Hiscox has a long-standing involvement with space and satellite cover, a high-risk sector if ever there was. According to the Futron Corporation, a US consultancy, major in-orbit anomalies rose 146% between 1998 and 2002, while space insurance premium rates rose 129%. Notable failures include the Ariane 5 rocket, which exploded on take-off last December, destroying two satellites.
This does not worry Robert Childs, director of underwriting at Hiscox.
He cheerfully admits that nearly one in five launches has a problem, but points out that the premium rate is 18% of the sum insured. "If you are happy with the underlying background to the risk, you can write it successfully," he maintains. "We take specialist areas and try to find out more about it than anyone else. We make it our own. It's all about knowledge."
Cybercover is another Hiscox speciality. Mr Childs predicts that demand for cover will grow in line with growth in the IT industry and expansion of the internet. He argues that the kind of perils covered, such as hacking, are simply the old perils of theft and malicious damage but in a different medium. "You apply the same discipline for an internet service provider as for a manufacturer and make a judgement on how good the management is."
As yet, Hiscox will not offer cover against computer viruses, which have been spreading like wildfire this year. Mr Childs explains: "We're not able to cover them at the moment. We don't yet know enough to manage that risk."
At AIG Europe, niche specialisms include construction risk, management liability, mergers and acquisitions, and environmental impairment liability.
The UK market for pollution cover has grown steadily on the back of the markets in commercial property and brownfield developments. EIL has become recognised as a useful tool in risk managing environmental liability.
Buyers include site vendors and purchasers, owner occupiers, property developers and property deal funders. They all want to protect their investment against the discovery of unexpected pollution on site.
The EIL market has also evolved to include industries that have ongoing or operational environmental liabilities, such as waste management and water and power utilities. Will it remain a niche market? "We don't think so," says AIG Europe's product development manager, marketing, Simon Housego.
"From a UK perspective, environmental legislation is going to become more stringent. As awareness of environmental insurance increases, we would expect the take-up of EIL to increase significantly during the next five years. You only have to look at the US to see the potential for the UK market to outgrow its niche status."
Accordingly, AIG Europe intends to continue building a UK team to service this market and diversify its product range. "The future looks good to us," says Mr Housego.
Royal & Sun Alliance is recognised more as a generalist than a specialist insurer but the company has developed many schemes for niche markets.
These include schemes for schools, universities, farms and trade associations.
RSA's schemes and affinity manager, Daryl Hine, says: "What makes a difference on niche markets is that you get closer to the customer. By focusing on a limited distribution channel - one or two brokers - you increase your level of expertise, get critical mass and end up with a profitable account.
It's then harder for other insurers to break into. It is very important to choose the right partner. Best results are often achieved where the broker has a personal interest in the market, for example, by participating in the same sport."
The Folgate Partnership, which is comprised of 27 brokers bought during the past 18 months, may not spring to mind as a provider of specialist covers. However, the Folgate Partnership thinks certain insurances are very much undersold in the SME sector and is rolling out introductory levels of directors' and officers' cover to familiarise clients with it.
Peter Hollingdale, head of underwriting, says commercial legal expenses is another area that is undersold, especially in view of recent developments in employment law. He also says it is important not to lose sight of covers that have already been sold to clients. "One thing that's forgotten is the indemnity limits on public and product liability. There is the opportunity to up-sell, not just cross-sell. Personal accident and travel are also neglected. Selling these covers to commercial clients is good business."
As far as digital risks are concerned, Mr Hollingdale reckons the time is not yet ripe to broach the subject with most SME clients. "Website and virus covers are very new, and cover for all except larger firms is limited. Insurers should turn their attention to SME businesses. The same applies to environmental impairment - demand is very low and take-up even more so."
D&O used to be considered a highly specialist class of business, of interest only to large public companies. Now, with boards of directors facing tougher scrutiny and regulation, it is becoming increasingly mainstream. Premium rates have shot up, especially for the multinationals. Kelvin Curran, managing director of First City, a specialist D&O and professional indemnity broker, says: "It's an area that all companies have realised they are exposed to. Even SMEs are beginning to take note. It's a good area for a specialist broker to be in."
Michael Dickson, director of broker Dickson Manchester, is of the same opinion. "It's still not common in the SME area but there's growth. People are buying for the first time. Little companies' D&O can be hoovered up in small quantities, and we don't have any capacity problems."
Dickson Manchester and First City are just two of the brokers profiting from expansion in the D&O market. Several insurers have climbed on the bandwagon too. They include Norwich Union's professional risks department, which also handles professional indemnity, contingency, fidelity and performance bonds. The department concentrates on SME business.
Darren Jones, senior underwriting manager at Norwich Union, says: "Speaking to regional brokers, the majority dabble in D&O though some have taken a more proactive approach. Many brokers are still uncomfortable selling D&O. Clients want to know what it covers and if they can give examples of claims. But there is very little claims history at the SME level."
Smaller regional brokers will often sub-broke professional risks in the London market. However, they are now recognising the market potential of this sector and beginning to set up professional risks departments of their own.
Global brokers can develop niche areas that are way beyond the scope of their smaller colleagues. For example, Willis is one of only four brokers battling for space and satellite business. With the sum insured for a launch averaging $200m (£120m), the rewards for brokers are high. "We are consistently profitable," says managing director of Willis Inspace Philip Smage. Willis had a relatively small space division until 1996, but has grown and developed the business since then.
Lost in space
The space and satellite niche is highly competitive, and it is only by honing their expertise that brokers can hold onto this business. Claims settlement forms part of the job. "There is still a large number of unpaid claims. They take a long time to sort out and as a broker we are very involved," says Mr Smage.
Developing niches is also a strategy at global broker Marsh. Sean Finnigan, Marsh's national director of speciality business, explains: "Historically we segmented business by geography and size of client. Now we're increasing our focus on industry sector. This accounts for 40% of our current sales."
Marsh has established several specialisms, including public sector, voluntary sector, educational, and retail motor risks. Two further areas, healthcare and haulage, are being developed. "It's all about clients," says Mr Finnigan.
"You have to understand their language and must be seen as the expert in their field. This helps enormously with client acquisition and retention. Some sectors are very competitive but once you've established yourself as market leader, retention is good."
Brokers do much of the work in developing products for niche areas. They have an aptitude for tackling parts of the market that insurers are fearful of and turning them into successful schemes. Both for brokers and insurers, niche business is more exciting than run-of-the-mill shop and office packages.
As Mr Childs puts it: "Specialism is better than selling bags of sugar." It is also more dangerous. Rewards can be higher and so can losses. Lloyd's, the ultimate niche insurer, provides the perfect example. But taking risks is what general insurance is all about.
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