Schemes give brokers an edge in an otherwise standardised market, but failure is likely without the initial legwork and a willingness to ‘think outside the box’
The market for schemes has grown rapidly over the past 10 years and is currently estimated to be worth more than £1bn in gross written premium.
A report published earlier this year by insurer MMA revealed that half of UK brokers now manage schemes, covering everything from toupée insurance to policies that insure against wine tasters losing their sense of smell.
The advantages for brokers are clear. Schemes give them an edge in an increasingly standardised insurance market, another means to exploit their usefulness to clients and provide that holy grail of “added value” against competition from online aggregators and the large direct selling insurers.
And, of course, schemes offer brokers a targeted bloc of clients with a single insurance requirement, which enables brokers to create and control their own unique proposition in terms of product and service.
The biggest single issue in schemes failing is the failure of the broker to really embed it in their business.”
John Bibby, UK General
From an insurers perspective, a scheme offers a profitable business that by its nature comes with limited competition and is inexpensive to run because it is administered by the broker.
“Schemes give brokers their own brand and the freedom to choose what they do about rating,” explains UK General sales director John Bibby. “They offer brokers the opportunity to be master of their own destiny. If all you sell is the standard insurance offering, it’s difficult to differentiate yourself. Schemes allow brokers to become a specialist.”
Peter Elliot, head of marketing at broker Bluefin, where schemes account for around 10% of business, adds that the speed and efficiency of executing schemes business is also a crucial factor in their appeal to brokers. “As long as a broker has done the preparatory work properly, found the right insurer, developed the right product and pitched it at the right price, schemes business is pretty straightforward.”
Room for growth – Jason Cobine, Cobine Carmelson
I think the schemes market will grow in the future, but brokers will need to keep up to date with their target market and gather feedback to keep ahead of both changes in the sector they’re covering and the wider insurance industry, particularly online purchasing.
Busy people want to do their business online, but the challenge is they don’t understand what they are buying, so brokers offering a niche service need to help.
But I also think that in future brokers will need to concentrate on two or more sectors with schemes, as UK plc has its winners and losers.
But a successful scheme requires a good deal of spade work, first in investigating a market and creating a product, and then persuading an insurer to underwrite it. And although large insurers are taking a greater interest in schemes, most have strict entry requirements, both in terms of adopting a scheme and staying with it.
“I’d say that around 70%-80% of schemes we look at fail at an early stage of review,” Bibby says. “In my experience, once a scheme is running, the biggest single issue in it failing is the failure of the broker to really embed it in their business. Sometimes people selling the scheme in a broker’s front office aren’t committed to it, perhaps because they preferred working with a different insurer or with different clients.
“You can have a clever idea and a good strategy but you must have good execution. The culture of the broker has to be right.”
Think outside the box
But Jason Cobine, who runs small London-based broker Cobine Carmelson, believes insurers are often the biggest single obstacle to getting schemes off the ground and keeping them in the air. “Most schemes fail to fly because underwriters aren’t entrepreneurial enough,” he says. “Insurers just aren’t very good at making schemes work. I have lots of discussions about schemes but insurers rarely want to do new things, they see things differently to brokers.”
Graeme Clark, a director with Gloucester-based small broker Norman P Partridge, agrees. “Underwriting agencies have much more of a ‘can do’ attitude when it comes to schemes than the bigger insurers.”
Small brokers beware – Julian Beard, John Beard & Sons
Generally speaking, the schemes market, much like the open market, is quite soft at the moment and it’s difficult for new entrants to come into the market.
In terms of the future, I believe it will become more difficult to run schemes. One of the reasons for that is that as schemes increasingly go online there is a prospect that the big aggregators and insurers could take over the market, using their weight from other areas of their business that are profitable to carry poorer performing schemes.
Small brokers simply cannot do that and will find it harder to compete.
Not everyone puts the blame at the door of insurers. “I think it’s true to say that many insurers have heard it all before when brokers present ideas, but it goes back to preparation,” Bluefin’s Elliot insists. “If a broker has done his work properly, an insurer will put together a scheme and make it succeed.”
Allianz Commercial director of commercial broker markets Simon McGinn adds: “The key to any successful scheme is working closely with the broker to understand what is needed, that’s what makes the partnership profitable for both parties. Well-defined schemes have clear advantages.”
The key to any successful scheme is working closely with the broker to understand what is needed.”
Simon McGinn, Allianz
But a number of brokers believe that despite the recent growth in schemes, the market may have reached a plateau, with fewer new schemes being launched and a number of covers being withdrawn.
Southampton-based broker John Beard & Son relies on schemes for around 60% of its business. “The schemes market is ticking along at the moment,” managing director Julian Beard says.
“But increasingly insurers want more information before getting involved. There are more requests for MI [management information] than there used to be, stemming I think from requests from government and the EU. If insurers are delegating authority, they now need to keep a close eye on who they are delegating it to.”
Decisions on delegation
Delegation is increasingly becoming an issue against a backdrop of the continuing recession and new financial regulations, with some insurers pulling back from delegating authority. More than one broker said the entry requirement for getting a delegated scheme adopted by one of the big insurance players started in the region of £500,000.
“The compliance requirements of managing a full delegated authority mean that the GWP needs to be meaningful for any insurer to be able to allocate enough resource to make the venture sustainable for either side,” MMA Insurance schemes manager Chris Withers explains. “Solvency II has implications here, as we all need to be much more transparent about the use of our capital.”
Local brokers will gain – Graeme Clark, Norman P Partridge
I believe the schemes market is still growing and will continue to grow in the future, particularly for provincial brokers. Schemes are pretty much tailor-made for provincial brokers, who can capitalise on their knowledge of their local market.
As insurance gets more standardised more and more clients will develop a greater appetite for an individual policy that is personal to their area and needs. Schemes allow a broker to look at risks in more detail and that means you make better decisions and provide a better and more profitable service for you and your clients - that’s why they have a future.
Elliot agrees that insurers want a ‘critical mass’ in terms of GWP, but adds there isn’t a single-figure starting point. Moreover, there are plenty of delegated schemes with an initial book value of £100,000.
“If you can get the endorsement of a trade association, or something similar, that can be crucial to a scheme’s success, regardless of its size,” Elliot says.
Clark adds that many schemes now have a book value of £50,000, but says brokers need to shop around. “That size of account is achievable for a lot of provincial brokers. Of course, bigger insurance companies probably won’t go for it, but it’s good business for underwriting agencies and they’re willing to take it on,” he says.
Commission on schemes obviously varies but in general it is much higher than that earned on standard insurance, primarily because of the additional work carried out by the broker.
“The average broking commission on a scheme is 20%,” Clark says. “It can be as high as 30% or as low as 10%, but I have the flexibility to adjust the commission as I see fit and frankly I’d rather write a good risk at 10% than a bad risk at 30% because maybe next year I can earn a bit more on the good risk. Don’t forget, it’s the good risks that produce a profit.”