Recipe for disaster

Brokers are good at selling insurance policies - that is what they do. Selling additional products or services to broaden appeal and increase margins makes clear sense, but involves the broker stepping outside of their 'comfort zone', particularly at the sales front-end. This is especially true of risk management services, wherein a number of brokers have set up specialist divisions to try to overcome the difficulties of selling both policies and add-on risk management services at the same time, by the same people. A significant part of the reason for these difficulties is to be found in personal lines, wherein the market for insurance plus service is burgeoning.

The message being received from the personal lines market is that its customers want more. They want a plumber when the pipes burst; a courtesy car when damage is caused to the family runabout; and, if the boiler explodes, customers do not just want a cheque - they want their insurer to come around and resolve it, seamlessly and immediately.

What many have failed to recognise is that small to medium-sized enterprises are far more influenced by personal lines advertising than larger corporates.

In this sense, the commercial SME market is strongly influenced by the personal lines market and the current suggestion, supported by a recent Datamonitor report, that a growing number of SMEs want to be able to buy their commercial insurance direct reinforces this statement.

Quite rightly, SMEs are questioning why brokers/insurers are not providing them with an easy, affordable, packaged solution to their needs. Surely, if an insurer can deploy plumbers, builders, car mechanics and so forth, why can they not offer a simple, reliable, affordable disaster recovery service? And why is everything so complicated and expensive?

A Google internet search for the term 'SME disaster recovery' will yield, in a matter of seconds, more than 4000 sites offering off-the-shelf DR plans, IT and data back-up services and lots of consultancy and bespoke planning from large DR specialist companies.

Options available to SMEs

Thus, the choice faced by an SME is to typically call in a number of specialist DR providers, hold a competition of some sort to decide with which of them to work; pay the winner on a daily basis to write a bespoke plan; and deploy staff to implement and test it. This approach will take several months at a cost of thousands of pounds.

Alternatively, the client can contact their broker and speak to an account handler, who may or may not have been adequately trained to respond appropriately.

The account handler will then try to deal with the query. The more advanced broker will have their account handler pass the query to their risk management division, which is set up to sell as much consultancy as possible. Many brokers find selling risk management solutions difficult because of these factors.

This complexity and cost discourages SME directors and DR becomes another problem to be addressed some time in the future. Worse, it fosters disenchantment, which leads to denial and an attitude of 'it won't happen to me' - surely an argument against all insurance.

Meanwhile, SMEs are under intense pressure to fix their DR problem. Regulation (from the Financial Services Authority, for example) is becoming a central concern, as regulators encourage or require businesses to adopt DR contingency.

The customers of SMEs are beginning to demand DR as part of their initial criteria in competitive tenders. SMEs that supply to local authorities, for example, are increasingly finding that, unless they address their DR issues, they are not getting past the first hurdle.

Corporate governance suggests that directors should look to areas of their companies in need of attention, particularly in relation to any significant threats to the business as the legal and financial consequences upon directors become more severe.

Finally, the government is urging attention to the matter, making 'when, not if' statements about the potential for terrorist activity in the UK.

This is on top of the more mundane, but more likely, threat of fire or flood.

Research is under way by three major insurers participating in a rolling three-year survey of a sample of 1000 SMEs. The same questions are put to the SMEs every three years to build data over time. Three years ago, DR was not in the ten top concerns of these clients. Given such high-profile events as those of 11 September 2001, the war in Iraq, the Madrid bombings and the widespread flooding in recent years, DR and business continuity are now the number-one concern.

Forward-thinking brokers are now deliberately positioning themselves as their SME clients' professional risk management advisers with specialist divisions. They also need to offer DR products, which do not require large investments in either their clients' time or money.

Brokers say that, despite their clients' knowledge and understanding of the threat, there can be stiff resistance to allocating resources in this area. SME owners are fixated by bottom-line performance so, if an activity does not contribute directly to profits, resistance to that activity is high.

According to our research, companies with fewer than 10 employees say that in the event of a disaster they will simply work from home until a more permanent solution to their office accommodation is found. Those with more than 200 employees, companies at the top end of the SME sector, will generally have at least a rudimentary DR plan in place. Not including location-specific SMEs such as shops and restaurants, if these criteria were applied to the Department of Trade and Industry database of small businesses, in London alone there are 175,000 potential clients. It is estimated that there are over 350,000 such businesses across the country.

In November 2002, First Recovery contacted more than 500 companies in this segment, and asked them if they had ever been offered any form of DR product or service, 76% of which responded that they had never been offered DR products or services. Three-quarters said they understood they needed DR protection and that they would be prepared to pay up to £1000 per year for it. Yet today only 17% of SMEs have any form of DR contingency and the integrity and robustness of a significant percentage of these plans is often questionable. This statement is supported by the evidence that less than 50% of those who purport to have a plan have actually tested it.

Market expansion

There is a large and growing market, and this market is under increasing pressure to buy. As recently as May 2004, Westminster Council took unprecedented steps to alert and encourage its 32,000 registered businesses to take action now and develop plans to allow the businesses to have some chance of recovery in the aftermath of a terrorist attack.

How can the insurance market help them? Are they going to be faced with a barrage of cold calls from the ubiquitous consultants peddling 'unique' and specialist knowledge at upwards of £1000 per day? Or are the brokers of SME clients in this area of London going to be proactive and contact their customers in an effort to understand their particular needs and provide a solution? It is possible that a large number of the SMEs that receive the 30-page guide and absorb some or all of the advice provided will contact their insurance broker for help. What is available and at what price will be the first questions asked. Those brokers that are able to respond professionally to these questions could actually deliver the value the client is expecting.

Each SME has its own issues with which to contend that may require a business continuity plan to be developed in conjunction with the broker.

However, for many, their basic needs in the immediate aftermath of an incident will be the same. They will need alternative premises that allow them to communicate with customers and suppliers and the ability to continue with the business to some degree while insurers, brokers and loss adjusters work together with the SME to address the critical issues involved in the early days after a major loss.

Brokers should be looking for a provider that is able to offer services such as access to a wide range of standby office locations throughout the UK, an on-site event manager to co-ordinate the service, plus installation of an IT network, redirection of telephone lines and reinstatement of essential data - all delivered as soon as possible after the event to get the business back on track as quickly as possible.

Brokers can sell DR services in two ways: as a stand-alone package - sold as a recurring annual contract - or as a free, embedded element in an office insurance policy, such as the policy launched in March by AIG, with which First Recovery developed Office and Disaster Recovery.

The broker is in the same position as an SME. A broker does not want a high sales overhead to offer DR, which is why a pre-packaged insurance approach is so important. Both the client and the broker need not spend hours defining a service, which almost any company dependent upon an administrative function will need in the event of a disaster.

Insurers also gain in a number of ways, by a reduction in severity of the business interruption loss. But, perhaps even more critically, insurers will benefit from the better managed risks being attracted to such products and, as such, an improvement in the overall quality of management and risk awareness within their SME portfolios. In addition, where the product is embedded in a policy, insurers can offer a differentiated service-led policy to the market, rather than cut premiums to gain market share.

Brokers win, too. They can offer a simple product, with little or no time/cost entry barriers - a single-page application form is all that is required. This allows them to develop a dialogue with the client about risk management in general and encourages cross-selling for risk management services.

Brokers gain a commission each time the product is sold and each time it is renewed. Of course, the service delivers enhanced revenues and margins as well as closing out competition that can not offer the product. Others are taking the line that their clients should buy this type of package as a standard part of their renewal, unless the client has good reason not to.

Further options

Some brokers may go further and explore options such as offering the first year of these packages free to new clients, to differentiate themselves from their existing broker and attract new business.

In conclusion, SME clients are being told by the insurance industry, via television advertising, that it can help when disaster strikes. They are exposed to these messages every day and expectations are rising. DR companies are either only interested in big companies or they charge significant sums for consultancy. Many brokers are trying to offer risk management services, but are finding it difficult: SMEs do not like spending money, and when they see little or no bottom-line benefit, it becomes a task too hard even for specialists, let alone more general account handlers, whose first priority is to make a successful renewal.

So, the market for pre-packaged emergency DR services is born - low entry barriers; simple, clear and understandable services; little or no administrative overhead for either broker or client; reliability; national availability; and, above all, affordability. Further-more, where these services are packaged into insurance policies, the apparent cost to the client is zero.

Finally, customers get what they want - affordable help when it is most needed, sold to them by the insurance broker - a trusted source adding value with innovative products that solve seemingly intractable and expensive problems faced by clients.