Pile on the pounds

Ever since the mid-1980s revolution that was the advent of Direct Line, the sale of basic-volume personal lines products has become an almost entirely commoditised process, with standard policies willingly scooped up by the eager customer who simply wants to get the cheapest price. Commercial lines, as any self-respecting broker will inform you, have always been the 'Holy Grail' in this respect. Is it really possible to offer standardised off-the-shelf products to the hundreds of thousands of diverse businesses in the UK, each with a different operating model, needs and liabilities? Yet, even here, in recent years the answer has been a simple yes.

With every underwriter - from Axa to Zurich - eager to pile onto the SME bandwagon, a range of commoditised offerings has been developed in an attempt to grab market share in what must be the most fiercely contested sector at the moment. And this process has only been accelerated with the continuing widespread uptake of the internet, which has simplified the purchase of off-the-shelf commercial packages even more. Is this lengthy slide towards commoditisation ever going to end?

The commoditised approach

Although the drive to write more SME business has been frenetic in recent times, the concept of a more commoditised approach - even in commercial lines - is not exactly new. Essentially, the packaging of commercial lines insurance products is a long-established practice, originally arising to circumvent the tariff regulation of the market in the 1960s and 1970s. Thus, package or combined policies provide cover against many so-called 'standard' business risks, such as buildings, contents, goods in transit and liability, though the package itself varies according to the insurer and the business in question.

From the insurers' point of view, one of the major benefits of package insurance is that combining various covers in a single package enables a better spread of their own risk. For business, the benefits include reducing the amount of paperwork; the fact that payment systems can be restricted to a single direct-debit or annual payment; and claims handling is restricted to a single company.

Peter Staddon, head of technical services at the British Insurance Brokers' Association, is sanguine about the trend that is happening in this arena and accepts that these benefits are considerable. Besides, he adds, the fact of the matter is that many business are not that fussy about the insurance product they receive. "I think commoditisation is something we have to accept because there is a huge business pool out there that wants exactly the same kind of policy," he says.

One might have thought that, with such a strong trend, the role of the commercial lines broker would, by implication, be squeezed out. After all, surely the concept of commoditisation - inextricably linked as it is to a 'one size fits all' approach and the direct utilisation of the internet - is intrinsically at odds with the role of the independent adviser offering a more bespoke service.

Not so, according to Ian Richens, chief executive at broker FM Green: "My own view is that the commercial packaging of small risks will continue and that the internet is an ideal medium for that sort of business to be bought and sold on. And we are already selling some of our business, such as our carrier scheme, on the internet. So it is by no means a no-go area for brokers."

According to Richens, the key issue for those intermediaries that want to compete in the volume commercial market is not to shy away from commoditisaton but to embrace it and better the offerings available elsewhere. So a sort of mixture of commodity and bespoke offering is the end-result: "Brokers worth their salt need to negotiate their individual packages with insurers, and this is not a new practice - in the past, legal fees were the norm here.

"Basically, brokers have to be slicker and quicker, and this is merely another distribution arm for us to go down. We have to be aware of it and, if we want to be in a certain market that already has its own standard scheme, then we have to be there with our own offering. As the old saying goes, if you can't stand the heat, get out of the kitchen."

Use of the internet is key, he adds: "The secret is getting your website in front of people so they know where to look, but that costs money. If you want to be there in that part of the market, you are in there with the big boys, and you are not talking about niche products."

He says that such thinking lies behind part of the company's decision to 'jump into bed' with Vega. "It is one of the reasons we want to be part of a bigger chain," he comments. "If we want to be part of the volume commercial market we have to keep growing."

Competing

Staddon agrees with this line of thinking, stressing that brokers can compete in the commoditised world in which they now operate. "The smaller end of the SME market will become more commoditised and, let us be honest, if you are in a chain you should add value and tell people what you do. But, generally, commoditisation will be of benefit - it is a good base from which to start. I do see this coming through the direct route, but brokers can use commoditisation as another tool.

"A lot of one- or two-man bands almost want a package just because it is straightforward, cheap and cheerful. A lot of brokers will say they can have that, but will point out the exclusions that such a policy will have. Whereas insurers are going to look at what they can get away with at the lowest price."

Staddon says that brokers need to be more upfront about what exactly they can offer to the SME that does not see the need for them when faced with an inexpensive and easy commoditised commercial offering. "Brokers do not say what a cracking deal they do," he explains. "I would like to think that the vast majority of SMEs know how much (using a broker) is going to cost them, but realise the benefits. If brokers put their cards on the table, businesses will respond to that." And it appears that the form these benefits can take can be crucial: "Some of the insurers are telling us that brokers can get bigger settlements than a direct writer can."

That is all well and good for the basic SME sector, but exactly how far will the process really go as far as commercial lines, more generally, are concerned? According to the Association of British Insurers, which has conducted research into the issue (see box, above), commoditisation can only go so far in this respect. "The vast majority of commercial insurance is still, and continues to be, sold through intermediaries and that reflects the diverse range and needs of firms," says a spokesman for the trade body. "We are not just talking about one product here. So I cannot see it changing in the immediate future."

The ABI actually argues that, far from the process of commoditisation of commercial being an inexorable trend that will further squeeze out intermediaries, in the most vital areas of commercial insurance the opposite is the case: "Given the issue of increasing costs for liability insurance and the importance we place on finding a good broker who can shop around for you, one could argue that the broker's role is only going to become more important in the future."

One London Market broker also warns of the dangers of moving to easy off-the-shelf commercial policies, stressing that the UK business sector - especially at the smaller end - is such a large and diverse community that treating it as a single entity simply will not wash. Besides, he adds: "What happens with commoditisation in commercial lines, as in personal lines, is that price and not policy content is what becomes important, which means that margins are invariably extremely tight." The implications of such tight margins, he suggests, are that a proper analysis of the client's needs - which, ordinarily, a broker would provide - might not always be there in such a commoditised environment.

A maturing market

And even some underwriters believe that commoditisation of commercial lines is far from an unstoppable juggernaut. Aside from Staddon's generally accepted statement that "the biggest commercial risks will never be commoditised", there is also a line of argument that, even on smaller commercial risks, the future could well see some interesting developments as the market matures.

According to Phil Wolski, general manager of sales and marketing at Brit Insurance, one needs to envisage the insurance market as a birthday cake: "In the agrarian economy, you made it with eggs, flour and milk. Moving into the industrial economy, you buy a cake mix. It is the same combination of eggs, flour and milk - at 10 times the price - but it is more convenient. You then move into the service economy where people have no time to bake a cake, so you buy one at 100 times the price. Finally, you have the experienced economy where you pay for a birthday party at a restaurant where the cake is thrown in free."

Wolski relates this analogy to the insurance market: "In the insurance world, you get to the service economy where things become very commoditised, but then you have the advent of the internet, which starts to push people back down the chain. So, having got to the service economy in insurance it is now a case of getting to the experienced economy. Here at Brit we have underwriters in regional offices who can make decisions. So you can package things all you want but, at the end of the day, it is not what brokers want."

ABI RESEARCH

Attempting to gauge the size of the UK commoditised commercial lines market is a notoriously difficult exercise, though some useful pointers have been given. According to a report released last year by the Association of British Insurers, smaller intermediaries and brokers have increased their share of the UK commercial lines market, with packaged business continuing to represent a small but significant proportion of overall business. The ABI's analysis indicated that brokers and smaller intermediaries increased their commercial lines market share from 7% to 29% over the period 1998-2002, with 16% of sales from company agents, direct or packaged business. With SME market in the UK estimated to be worth some £4bn in gross premium income, the importance of commercial packages becomes self-evident.

Source: Association of British Insurers.