The tough economy is attracting customers as they look to cut costs and reduce risk in uncertain times
More than four-fifths of brokers manage a scheme and, among those who do not, a huge 53% plan to start one, exclusive Insurance Times research shows. Click on the pdf link, right, to see the results summarised.
With the schemes market having grown rapidly over the past decade - and currently estimated to have topped £1bn in gross written premium - the rise of schemes looks unstoppable.
However, whether schemes are really the ‘no brainer’ that some claim is open to question. We look at what is driving the growth of schemes and assess both their risks and whether they are here to stay.
Jelf insurance chief executive Phil Barton says: “Schemes are undoubtedly on the rise and, correspondingly, the open market is shrinking.”
Schemes are becoming increasingly important within brokers’ businesses too, he says. “At Jelf, for instance, we have established a separate schemes and affinities business - and many of our competitors are doing the same.” Jelf appointed Jonathan Bogan as managing director for the new business in August and is recruiting another director for the division, as well as negotiating more schemes.
So what’s driving the growth of schemes? While they were rising before the economic downturn, the recession appears to have enhanced the appeal of schemes, with insurers and brokers often seeing them as something of a safe haven.
Ageas head of commercial pricing and underwriting Roy Watkinson says: “In difficult economic times, it always helps to have specialisms, which is what schemes are about, and schemes can make it easier for both brokers and insurers to build business.”
The economic downturn is likely to nudge customers towards schemes as they seek to reduce costs and become increasingly risk-averse. RSA managing director, UK commercial, Jon Hancock says: “Schemes business has grown as a whole since before the recession, so it is unlikely to be a case of direct cause and effect.
“However, the increased focus on value for money that tough economic times inevitably bring for insurance buyers is likely to drive demand for propositions that better reflect their business needs.”
MMA Insurance schemes manager Chris Withers says: “When businesses are struggling, they tend to want cover specific to them - which schemes can offer - rather than commercial combined.”
Meanwhile, the tendency for businesses to turn to their associations for help in tough times is likely to further drive the rise of schemes. The Insurance Partnership’s head of schemes and affinity, Paul Buckle, says: “Businesses need more support from their trade bodies at the moment, so they are becoming more aware of the links the bodies have with schemes - and the benefits of those schemes.”
Technology’s double edge
The growth of schemes has also been spurred by developments in technology. Once one scheme is set up, it is now much easier for brokers to replicate it for other trades or niche sectors. Groupama head of commercial underwriting Dawn Dillaway says: “We have templates now, which makes the cost of setting up schemes much lower.”
Technology also makes smaller schemes economically viable. “Previously you had to have at least £1m GWP in a scheme, but now you can run one at £50,000,” Dillaway says.
But while technology is fuelling the growth of schemes, it is also a barrier for smaller brokers entering the market. Jelf’s Barton says: “To run a scheme you need an online presence, marketing ability and an inbound and outbound telephone service. Companies that invest in technology and develop a broad range of distribution channels will do well, but it will undoubtedly be harder for smaller brokers.”
Brokers of all sizes will face threats from aggregators and big insurers, which have the financial muscle to invest in the best technology, in the schemes sphere as much as anywhere else.
Biba head of technical services Steve Foulsham says: “We have to accept that the marketplace is such that the aggregators and Towergates of this world will have a strong presence in schemes.”
However, he adds that while the preferred method of delivering schemes is online, “for more complex classes of business it is still not practical to do it online”.
In addition, as our survey reveals, schemes business is more profitable for brokers than the open market. But it is also more lucrative for insurers. Groupama, for example, does 80% of its non-motor business through non-delegated schemes and plans to increase this even further.
Dillaway says: “We have realised that schemes are the better-performing area of the book. They are more profitable because we have an economy of scale and we develop expertise in niches, which improves our underwriting accuracy.”
A well-run scheme can offer lower prices for the insured too. The other key driver from the customer’s side is an increased demand for bespoke solutions.
Assessing the risks
However there are challenges in running schemes. One major risk is concentrating business in a single area, says Dillaway: “Having all your eggs in one basket means running the risk that if something happens to the sector you are heavily involved in, you will be hit.”
For brokers, the link with the insurer carries an additional risk, she warns: “If the relationship between the broker and insurer sours, the insurer can move the business and the broker can lose a huge amount in one go.”
Another potential risk is that firms often have to win a tender to manage, and then retain the management of, many schemes. Barton says: “These opportunities depend heavily on your tendering capability” - which is another particular problem for smaller operators.
When starting a scheme, there is also the risk that it will not work. Withers says: “We spend a lot of time talking to brokers about setting up schemes and, while some sound great, in reality there is no market for them.”
MMA is trialling a scheme for amateur astronomers, for example, which Withers admits, “sounds like a good concept, but does not yet seem to have really captured the imagination of buyers”.
Other schemes may fail owing to events that were difficult to foresee, such as changes in government policy. For example, government incentives for adding solar panels to homes sparked a flurry of contractors setting up as solar panel installers in 2011. This looked like a great opportunity for an insurance scheme, but the government’s withdrawal of the subsidy has left a significant question mark over the emerging sector’s future.
Countering the risks
The good news, says The Insurance Partnership’s Buckle, is that much of the risk can be addressed by thorough research. “You have to be as in-depth as possible. For example, one of our key products is cover for will writers, who often face challenges from solicitors. To really understand the role, I actually completed a will writers’ course.”
Deep research should ensure that the scheme is based on a detailed understanding of the customer’s risks. For brokers, it should also mean that the scheme is supported by the insurer that best covers those risks.
Pursuing a true niche is the best approach, Dillaway believes. She says: “You need to find areas where there is less competition, rather than mainstream areas such as, say, property owners’ insurance, where the market is purely price driven.
“We are getting schemes off the ground in more bespoke areas at the moment, such as recruitment, security and cleaning - you can corner the market in these sort of areas.”
Withers agrees that chasing price-based schemes business is difficult: “If you can win something easily with the cheapest price, you can lose it just as easily.”
He adds that trying to find a non-cyclical business line is also sensible: “We are looking at recession-proof stuff, like leisure and holidays.”
Warding off competition
Once you are running a scheme, RSA’s Jon Hancock says: “The scheme needs continuous investment from both the insurer and the broker to ensure that it remains the best possible proposition for its members.”
Ageas’s Watkinson advises building excellent expertise and technological capability around the scheme to make it increasingly bespoke: “specialisation is the best protection”. This could extend to finding new services for customers that are not based directly on insurance, such as risk management.
Specialisation can be a moving feast, however, Foulsham warns: “Unique selling points are crucial for a scheme but they become out of date fast, as your competitors catch up.”
Foulsham advises incorporating “perceptual value” into a scheme with “an element that does not cost much but is not available anywhere else”. Biba’s travel scheme, for example, includes a “pet passport” facility.
“It sounds good, but the chances of Ginger the cat getting left behind in France with no way of getting home are slim - we have never had claims on this - but it’s a great unique selling point,” he says.
Ideally, Foulsham argues, a scheme should offer the best customer service. Watkinson adds: “The goal is to have a block of customers who really know your value.”
But are schemes worth the effort or will they prove to be a flash in the pan? Buckle believes the growth of schemes is a long-term trend.
“Even if the recession has accelerated the development of schemes, if people are happy in schemes now they will stay in them.” Foulsham agrees: “The future looks bright for schemes.”
Back to basics: What is a scheme?
Instead of sourcing quotes for customers on the open market, brokers can set up a scheme with a particular insurer or underwriting agency, targeted at a particular group of customers with common insurance needs. This lets brokers tap into the knowledge of particular niches they have built up and insurers benefit from economies of scale.
However, beyond this, definitions vary. Some brokers apply the term to a product approved by a professional association, insurers have branded homogenous tranches of business as schemes, while other definitions say there must an element of delegation of authority. But a clearer definition is coming, understood to be on the agenda of the newly launched Managing General Agents’ Association.
Market views: Schemes are not a quick win
“A scheme should have a lifespan of at least six years,” says RSA managing director, UK commercial, Jon Hancock, adding that innovation must be ongoing. “There are a number of ways that the insurer and broker can work in partnership to develop the proposition, for example refreshing cover and limits to ensure it remains ahead of open market alternatives, working on pricing models and flexibility to ensure underwriting reflects the risk profile of the portfolio, and developing risk management and advice specific to members.”
MMA Insurance schemes manager Chris Withers agrees that schemes are long-term projects. “Some do see schemes as a quick hit in terms of income, and they are usually the ones to swiftly exit the market,” he says.
Withers believes it takes three years to understand whether a scheme will work. “We expect to be testing and learning in year one, while continually talking to brokers and end users. In year two customers may start coming onboard in greater numbers and you can have claims straight away, even though the scheme has little income in terms of earned premium. Only in the third year do you know whether the scheme is a winner.”
Regulation: Threat from Solvency II?
The greater financial prudency that will be required from insurers under the EU’s Solvency II legislation, now expected to come into force in 2014, could threaten schemes.
The Insurance Partnership head of schemes and affinity Paul Buckle says: “If an insurer is writing an SME warts-and-all scheme and no one really knows what is on it, there could be a problem.” MMA’s Chris Withers agrees: “Insurers will want greater control over their capital, so this could lead to fewer schemes.”
However, Withers believes that, in most cases, rather than opting out insurers will instead ensure schemes are more transparent and that older schemes are “tightened up”.
Overall, he believes Solvency II will be good for schemes. “It will slow down the appetite for getting quickly in and out of schemes and clean up the image of schemes - if that is at all needed.”