Size matters

The insurance needs of large corporate and multinational companies may be specific, but they can be served well by regional brokers and are not the preserve of the global or national players.

Companies House tends to recognise a company as a small to medium-sized enterprise if it has between 50 and 250 employees and an annual turnover of less than £12m. The Department of Trade and Industry, the British Bankers' Association and the European Commission all have similar - though different - definitions.

However, for the UK insurance industry, the SME market tends to refer to a commercial purchaser whose requirements can be satisfied by a process-driven, one-key, everyday commodity or product. Although in many ways the self-employed roofer, small cold store, demolition contractor or fuel wholesaler have the same issues as a large corporate, they may require attention, specialist advice and possibly a risk-managed approach and access to specialist markets.

There are no complete statistics available to quantify the size of the SME and large corporate markets, but an analysis of figures provided by the Association of British Insurers, Lloyd's, the National Statistics Office and a leading insurer's own research suggests the UK general insurance market - net of reinsurance premiums - is broadly made up of personal lines £25bn, SMEs £10bn and large corporates £15bn.

There is, therefore, a significant market - 50% greater than the SME battleground - that is not necessarily the exclusive preserve of the mega-brokers. While there are some large, major-league-quoted companies, whose purchasing philosophy is in the top five of whatever professional sector they are considering, in most other cases the buyer is looking for resources that match their requirements and an ability to deliver results on a consistent, cost-effective and reliable basis.

Increasingly, the buyer is concerned less with ownership of resources than with successful delivery, the keeping of promises, transparency of earnings and a strong hand controlling the quality and management of the programme.

The insurance needs of large corporate and multinational companies are different from the SME market in many ways. The areas in which the demands tend to differ from those of the typical SME client can be considered under the following five headings: broker services and compensation; client sophistication and risk awareness; security; international handling; and capture, storage and movement of data.

Broker services and compensation

The risk manager or buyer at a large corporate will expect their insurance broker to provide as a core service: risk analysis; programme design; placement of cover; checking and delivery of documentation; preparation of risk registers and certificates; claims handling, including claims falling below self-insured thresholds; regular reviews of insured value and limits; plus premium accounting. This will all be supported by a service level agreement.

As non-core resources, the broker will be expected to deliver the following: loss control; valuation; health and safety consulting; and business continuity planning.

Some of these services, particularly routine claims handling, may be outsourced but will fall under the commitments made in the SLA. Large corporates have a greater appreciation of added value and, while they demand superior service, will be prepared to recognise their broker's contribution financially. Large corporates are also content to work with a broker's team and various specialists, whereas the SME client typically wants to deal with an individual trusted adviser.

It will be usual for the broker to be compensated by a time-based management fee for core services and on a one-off basis for additional consultancy work.

The UK broker market has a tradition of transparency of earnings, including a general disclosure of the existence of contingency agreements. Current developments in the US may impact on this situation and many brokers have already announced changes in their business practices. So far, those concerned would appear to be US-owned firms or those relying on US business for a significant proportion of their revenues.

Client sophistication

It is an unnerving and intimidating experience for a fledgling business development executive to find that a prospective client understands the insurance market for the particular industry sector far better than the executive does. No amount of training can adequately prepare for that experience.

Sophisticated management teams have a greater understanding of risk and the exposures faced by their business. They understand the mathematics of risk transfer and the role of insurance as a principal vehicle for protection of their balance sheet against catastrophe. They employ, or expect their advisers to provide, modern risk-profiling techniques and to examine the feasibility of non-conventional solutions to their circumstances.

Our major broking houses have pioneered many of the statistical and forecasting techniques necessary to properly respond to the complex needs of large clients and have invested heavily in their consultancy, risk management and captive management operations. UK brokers may be justifiably proud of the initiative and outstanding contribution of our leading firms, both domestically and internationally in this area.

However, modern technology has enabled the regional independent broker to catch up. Technology cannot deliver experience but there are now many independent firms, established by experienced professionals in virtually all specialist areas, offering solutions on an outsourced basis.

The same is true of captive management. A generation ago most regional brokers would hesitate before expressing an opinion on this subject. Now, working in partnership with independent captive managers, the regional brokers can succeed.

So, the regional broker can act as a project manager co-ordinating the work of its own people for core activities and outsourced client services.

Apart from branding, there is no substantive difference other than several different divisions/profit centres of a major broker offering the same results. The team of specialists can often operate in a more focused way, unaffected by the turf wars that often blight the performance of large corporations.

Security

Insurer security is of importance to all buyers but large corporate risks tend to have capacity issues, which require significant market involvement.

It would not be uncommon for a large corporate concern to demonstrate greater balance-sheet strength than some smaller insurers and this may be a cause for concern.

Brokers will be expected to monitor insurer security and provide regular, informed updates and opinions. Once again, technology has removed some of the obstacles to the regional broker. Traditionally, only the major brokers had the resources to carry out this function in-house. Now, with the availability of AM Best and Standard & Poor's online resources and access to analysts' bulletins, the facts and commentary are available to all. Broker networks and alliances have proved particularly useful in supporting their members in this area.

International handling

Brokers handling international clients need local partners (owned or non-owned) to provide local services to overseas subsidiaries and placement of domestic coverage. Until the mid 1990s, the lack of overseas representation was an almost insurmountable barrier to handling international accounts.

It was possible to have the local office of the insurer provide some assistance but this was never a real solution. The global expansion of Aon and Marsh was driven by a need to serve major clients around the world and a recognition that global businesses expected global service.

The last decade has seen the exponential growth internationally of the middle market - those companies too large to be considered SMEs, but outside the FSE 100 or Forbes 500. These companies often prefer the service characteristics of the independent regional broker but, because of their often limited international resources, they have been obliged to look elsewhere. However, the growth of the independent broker networks, relationships and advanced communications technologies have provided an answer.

When working internationally, it is important to ensure that fees are adequate to cover the work, which is often disproportionate to conventionally calculated earnings. A risk manager in the UK may want the broker's local office/partner in Australia to visit his sales office every six months and report back - it may save him a visit and is a useful conduit for information. The sales office may require a day's travelling each way and, without adequate compensation, the local broker simply cannot provide the service.

Internationally owned or non-owned networks must be capable of providing a consistent co-ordinated service to clients with active participation by the overseas partners, not simply a collection of names in a directory.

Capture, storage and movement

At a recent seminar, insurance brokers were described as 'information brokers' and, with respect to large corporate accounts, this is close to the truth. The risk manager needs to work with a broker whose IT systems can enable him to retrieve policy information, schedules of locations/values, claims data, loss control reports for each country and each subsidiary on a round-the-clock basis. The system should also offer country information and operating protocols.

The ability to move information around in a shrinking world is potentially the single most important resource demanded by the large corporate/multinational buyer of our services.

SMEs - A DEFINITION

Small enterprise

- Fewer than 50 employees

- Annual turnover of £2.8m (max)

- Annual balance-sheet total of £1.4m (max)

Medium-sized enterprise

- Fewer than 250 employees

- Annual turnover of £11.2m (max)

- Annual balance-sheet total of £5.6m (max)

Source: Companies House.