Brokers are under competition as never before and need to find ways to offer clients a more professional and comprehensive service
It's time for a shake-up in the commercial legal expenses market.
A few years ago, there was a fanfare announcing the massive potential in the SME sector with specific products launched. But, this has failed to materialise and something has clearly not worked out.
Research across the market shows that penetration is low - a mere 30% of SMEs have taken up commercial legal expenses cover. So, why has this insurance not taken off?
Litigation is soaring and SMEs are often more at risk than their larger counterparts since they are likely to have less formalised business procedures in place.
Hazards which could give rise to a lawsuit include health and safety, data protection, and employment practices.
Employment tribunals constantly hit the headlines and employers must be aware of - and guard against - a huge range of issues including disability, equal pay, human rights, part time working, race and sex discrimination.
Fundamental problems
What is more, brokers are constantly saying they want to add value and this cover certainly fits the bill. Given that there is clearly a need for commercial legal expenses, it is surprising that take-up is not closer to 70%.
But, look beneath the surface and it becomes clear that there are some fundamental problems which need resolving - and this includes educating some brokers on the differences in providers, wordings and service.
As Allianz Cornhill Legal Protection sees it, the answer to the market's current woes is to change the current perception that cheaper policies are acceptable. What is needed is quality cover at a fair, rather than the lowest price.
There needs to be a commitment to service, both to brokers and to clients, where claims are paid with a minimum of fuss. And, in particular, we would like to see far greater emphasis on risk management, where clients are offered an integrated approach with insurance being only part of the solution.
The above needs to be combined with better broker training and education, so that those selling to clients have a good understanding of the risks faced and the wordings.
To date, a number of providers - and these are invariably wholesalers rather than insurers - have decided to 'pile it high and sell it cheap'.
Considering the product has been around for around 25 years, this is obviously not proving a successful strategy.
It is incredible to think that many providers are selling a legal expenses policy for under £50. But how many clients and, indeed, brokers realise that the likelihood of having an employment or a tax claim is considerably higher than having one for a fire?
For a cheap policy however, cover is likely to be narrow and be unable to cope with the larger risks. No wonder brokers are put off. They look bad in front of their clients who are left to fork out for costly legal bills.
There is a further, more worrying trend. A number of brokers have reported that their clients have experienced problems when claiming. A cheaper policy may offer less wide cover and more exclusions.
Some brokers may also find commercial legal expenses complicated. With so many changes linked to European law and coupled with the rise in employment tribunals for example, they feel they are better off not recommending it in the first place.
A poor track record for paying claims is one aspect; some brokers have also been stung by providers entering the market when they have spare capacity, only to pull out when the going gets tough. Indeed, one of the first questions a broker should be asking is whether an insurer is committed to the market.
And, forward-looking brokers will also be increasingly talking to their clients about the benefits of risk management - and how this can be surprisingly cost effective. As with the insurance itself, the number of SMEs investing in consultancy services for this is largely untapped.
Established insurers are now focusing on risk management and working with brokers to offer this in an accessible and practical way to SME clients.
The message is that insurance is not enough - companies need to avoid claims wherever possible in the first place, but also know they have the back up of a quality policy should the worst happen. It is not uncommon for a claim to run into thousands of pounds and to take many months to process. The insurer needs to have access to experienced panels of solicitors and be able to meet the costs of barristers and expert witnesses.
It is worth remembering that in the case of an employment dispute, for example, the loss of management time and auxiliary costs can quickly add up the equivalent of many month's profits. Even with insurance, this money cannot be retrieved, although of course the legal costs will be paid.
Tailored packages
There are now viable risk management options for SMEs. Large corporations, which typically employ in-house risk managers and put in place three to five year programmes, have long been aware of the benefits.
Now, there are packages tailored to smaller business. At Allianz Cornhill Legal Protection we have developed a range of risk management tools which identify problem areas and which tackle them before a dispute or legal action occurs. Using these comes at a price. But for almost all firms this will be highly affordable - typically costing just a few hundred pounds.
A growing number of switched-on brokers are now offering risk management services and so can utilise these tools. It's an excellent way of differentiating themselves and also gaining a real understanding of how their clients operate - and of recommending lasting change. Clients gain a much clearer picture of where their risks lie and can so better manage their exposure.
Recently, an insurer announced it was offering SME cover direct. Brokers are under competition as never before and need to find ways to offer clients a more professional and comprehensive service.
Quality commercial legal expenses insurance combined with risk management consultancy services is the ideal solution.
