Rob Withers challenges the insurance industry to forget its prejudices against small suppliers and embrace their strengths

It is not often that the insurance industry is at odds with the government, but in the area of supply chain management this is certainly the case.

The government advocates that when procuring business, smaller businesses should be employed.

Take the comments of Peter Gershon, former chief executive of the Office of Government Commerce (OGC): "The government is committed to helping small firms because they represent such a powerful engine for growth ... every part of government should consider its role in supporting and promoting small firms and an entrepreneurial society. In the context of procurement, this must be within the overarching policy of value for money."

In October 2004, Lloyds TSB and Royal & SunAlliance (R&SA) announced that they were joining forces in a supply chain collaboration.

Both organisations commented on how they would benefit from their joint strengths to make savings.

A month later, R&SA announced the launch of its commercial supply chain network identifying sole suppliers in nine core areas.

It is clear that insurers are ignoring government advice and increasingly placing contracts with a limited number of large firms which offer guarantees that they can tackle the demands of a high-volume client base.

But does procurement via large firms and high street names really bring value for money and, if so, at what cost to the customer?

Most insurers will advocate that the larger the service provider, the greater the capacity, benefit of scale, control and subsequent cost savings.

In the case of building claims, and subsidence in particular, large service providers are unable to deliver a national service on the ground, so they sub-contract out their work.

This creates another link in the supply chain, adds costs instead of savings and removes the insurer even further from direct customer contact.

Given the issues surrounding fraud and customer service, this cannot be good business practice.

Strict pre-tender requirements often result in SMEs stumbling at the first hurdle, mainly because they cannot meet the national coverage criteria, even though they may offer a first-class service regionally.

This, coupled with FSA regulations which state: "Insurance companies have to contract with 'robust organisations' or they will be in breach of the law", ensures SMEs get squeezed out of the equation.

Newer SMEs may not have the track record or the several years of audited accounts required by insurers, or the apparent safety of massive turnover enjoyed by major players.

But government advice - Central Unit on Procurement Guide 60 - is to request only two years of accounts or "other relevant information". Why cannot insurers adopt the same criteria?

Equally, there is no evidence that larger firms have better controls or health and safety records than SMEs.

The OGC indicates that SMEs, defined as companies with less than 250 employees, offer better value for money than larger firms by:

- bringing greater competition to the marketplace;

- having lower costs;

- innovation to differentiate themselves from established firms;

- greater responsiveness due to shorter management chains;

- a willingness to tailor services to meet those of customer needs;

- a more personal service;

- provision of specialist services due to limited demand.


If insurers were to discard their one-size-fits-all philosophy, they would see the tremendous benefits SMEs can bring.

With the correct processes in place and through good quality network management, SMEs can help reduce, and not add to claims costs.

Withersnet is the collaboration of three firms that have effectively joined together to provide a national service for subsidence repairs.

As a self-managed network using a web-based central hub system, Withersnet offers insurers, loss adjusters and engineers 24/seven access to a network of supplier partners subscribing to common professional standards.

An integrated subsidence solution via an IT platform provides a single point of contact for all users.

The job management system gives clients and contractors access to data via a web browser.

Every claim is managed through a single electronic filing system, bringing clarity, control and consistency to the system.

Benefit to insurers

By harnessing technology and supplier management methods, the average length of a subsidence claim has dropped from six months to four months, reducing the amount insurers need to hold in reserve.

This leads to quicker claims handling, lower costs, strict controls, transparency and fewer links in the supply chain. Not something insurers perceive as possible with an SME.

But it is - and these methods could easily be used by other suppliers.

Given that the industry demands such high standards from suppliers and purports to be client focused, why does it use a procurement process that encourages sub-contracting?

Many smaller industry players already use medium-sized service providers, allowing them to keep greater control over claims and subsequent customer experience.

And let us not forget about brokers when we talk about that customer experience. They, along with service providers, are the backbone of the insurance industry.

If the industry continues to follow the one-size-fits-all philosophy, then it could sound the death knell for insurers as well.

- Rob Withers is managing director of Withersnet

THE FIRE AND FLOOD RESTORATION INDUSTRY IS INVESTING HEAVILY IN LYCRA, SAYS ALASDAIR PHILLIPS

The decline in the stock market at the beginning of 2000 dealt a sharp blow to the insurance industry. Many have had to take a sharp look at cost-reduction measures in order to reverse their declining profit margins.

As a consequence, many major insurers no longer have the resources to manage large networks of suppliers. This has driven the need to find suppliers who can provide a national service. However, partly due to consolidation, the number of players in the restoration industry has significantly reduced in recent years.

The companies that are left who fit the profile the industry is looking for can be counted almost on one hand. The interesting part is that these companies are little more than SMEs themselves.

Insurance companies must be finding their choice limited in terms of suppliers that can meet their needs and fulfil the criteria of financial stability, turnover, manpower and robust IT systems.

The one-size-fits-all approach by the insurance industry is a decision they have been forced into in order to operate profitably. For some SMEs to compete in this market, they do need to get out the Lycra and expand their people and processes to fit the customer's needs.

- Alasdair Phillips is managing director of Munters UK.

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