Dream of Schemes

Do discrete business arrangements justify the work involved? Many brokers that have never investigated this area might be quick to tell you that it does not. After all, they will say, it is highly specialised and inherently complicated. It swallows resources, demands significant and sustained management involvement, and is poorly supported by the underwriting community. In short, it is not worth the effort.

Quiz a broker with genuine experience of schemes, however, and you are likely to get a very different response. Done properly and with the right underwriting partner, schemes offer huge potential. This is a highly effective way to attack the market from a different angle, bringing a host of new potential customers within reach.

While it is true that schemes business requires commitment and effort, the rewards should ultimately reward the work invested. As with many insurance projects, the bulk of the effort is at the front end: researching the market; forging relationships; marketing; and getting the business on the books. This means the scheme should become ever more profitable the longer it persists.

What is beyond doubt is that schemes business is right up the professional intermediary's street. It plays into their hands because it hinges on relationships, tailored cover, bright and imaginative marketing, flexibility and adaptability, and top-notch customer service. Consider that all the forces that are attacking traditional broker preserves - supermarkets, direct sellers, retailers, utility providers - are deeply into personalised schemes for their customers. They would not be there if this class did not possess such rich potential.

There is a good chance your clients get home insurance offers with their gas bills - one more opportunity for business to leak from the broker sector. There may be little you can do to spike the guns of the major brands but you can at least defend and promote your own interests by establishing a presence in this distribution arena.

Underwriting support

However, you cannot do it on your own. Brokers need proven and willing support from an insurer partner, and such partners are dwindling in number. Some composites may have cut employee numbers so savagely that they now no longer have the skills and experience to run effective schemes departments. Maybe they have been seduced by the big numbers offered by retail giants - and their brokers - and have diverted resources away from provincial, regional or local firms.

Whatever the case, the fact remains that smaller intermediaries wishing to boost involvement in schemes still have real options when it comes to finding underwriting support. It is a case of looking beyond the usual suspects and putting quality before size or the obvious option of a household name.

Brokers already immersed in schemes may have become disenchanted by the reduction in standards and levels of care being offered by some holding underwriters. The reflex should not be to jettison schemes as good apples gone bad, however. Any deterioration in service should trigger a re-broking exercise, as there is no need to put up with inferior standards, and no reason to allow poor quality to determine your overall attitude to schemes. Quality underwriting support is there to be found.

The same holds true where a broker remains committed to schemes but is frustrated, not by a fall in standards but by the lack of positive input. Things may be ticking over, and while the intermediary is less than thrilled by the performance of the account, an alternative to the current arrangement is not obvious. It is a thin market, so better the devil you know than the angel you do not.

That is not the logic of success. If an underwriter lacks the will, drive and marketing skills to boost a scheme's initial success, it is time to move on. The market is too fragile and fast-moving to allow for complacency or loss of momentum. Sit in the middle of the road and you are likely to be squashed. Scheme business, as with any other class, demands constant fresh thinking, and brokers should not have to settle for less from their underwriting partners.

There are several questions that need to be addressed: what are the key disciplines for a successful scheme? What can brokers do if an existing facility is beginning to flag? How can they maximise potential? Where does technology come in and what difference can it make? How do brokers expand their schemes business? How can brokers form allegiances with partners and other specialist brokers to add value and increase volumes? For example, are general brokers missing a trick with classes such as healthcare and personal accident?

Plan of attack

When formulating a plan of attack for schemes, either as a new entrant or as someone keen to reinvigorate an existing involvement, it is vital to challenge the notion that this class of business is too complicated to merit the attention it requires. Schemes often work because the cost of taking each individual case to the market is too great. Therefore, any business that can be placed via a delegated scheme actually reduces costs and allows the broker to focus on cases that really do need full-on bespoke broking.

Business that is suitable for schemes ranges from 'plain vanilla' package-type business, where the underwriting is much the same case by case, to business that needs specialist attention and where no easy access to market exists. Even in the latter case, however, the bulk of the work is done up-front. Once the guidelines, principles and procedures are in place, then even a scheme where each risk needs individual attention can prove straightforward.

So long as a broker is demonstrating value, it should be able to command a price that reflects the work put in, both initially and as the scheme beds down and, hopefully, flourishes.

So what are the key issues for insurers? Underwriters are simple folk at heart - they want to see discipline and post-inception control. This is hardly surprising given their regulatory responsibilities and the fact they may be delegating authority to those at the front line.

They want the broker to understand the market and run the scheme so that it delivers the right product to the policyholders while generating a fair and adequate return. It may sound obvious but it is not always easy.

The cornerstone of discipline and control is communication. The broker must provide exhaustive data on the scheme, both at inception and as it runs. Management information enables the underwriter to monitor the account at a detailed level and price it on its own merits.

Communication must be open and constant. If the performance of a scheme begins to creak, everyone should be made aware of the noise so that the appropriate lubricant can be applied swiftly and accurately. Too often schemes break down, not because of major flaws but because minor problems are allowed to grow into serious issues.

From the broker's perspective, communication is enhanced if the insurer has a dedicated, skilled and experienced team of underwriters that works solely with the insurer's scheme providers. Some companies simply put schemes into the local branch, which might not offer as focused a service or understanding. The broker can generate no end of management information but if no one has the time, capability or authority to use it, what is the point?

We should, though, register the quid pro quo: if the intermediary expects the insurer to have a dedicated schemes operation, the broker should also allot dedicated resources to schemes.

Both broker and insurer should also develop a technology platform that helps the scheme run easily to the benefit of all. When scouring the market for an appropriate partner, the intermediary should have technological capability towards the top of their priority list.

Most insurers want underwriting profitability from a scheme. Again, it sounds glaringly obvious but anyone working in insurance in the 1990s will have painful memories of years when underwriting profit was non-existent. However, while income should usually exceed claims plus expenses, there might be instances when an insurer, coming fresh to an existing scheme where this is not the case, is willing to take it on with the understanding that increased rates, tighter terms or restricted acceptance criteria will be obtained.

Intermediaries that get involved in schemes usually expand their interest. This can be because specialisation in a particular trade or class boosts their expertise, consequently attracting increasing levels of business in that market. It is true that, as the ability to run scheme business improves generally, so the appetite for handling a wider variety of arrangements also burgeons.

Many brokers relish the freedom and responsibility that delegated authority brings. It enables them to provide prompt quotations and documentation to their own, local service standards. Such opportunities bring their own reward, helping maintain retention ratios and earnings in soft and hard markets conditions. It also supports client relationships and demonstrates required levels of care.

At a more fundamental level, delegated authority can also often enable the broker to secure enhanced commission in recognition of work done and superior results.

Let us not forget the many benefits that flow to policyholders from well-run schemes business, especially in the sort of niche markets in which brokers tend to specialise. First, they enjoy broker advice and expertise in a specific trade, leisure pursuit or product. Next, the niche scheme will often provide wider cover or special extensions specific to the trade or need.

Retention levels

Also, there are benefits in terms of improved service as the broker takes responsibility for underwriting, service and administration, meaning there are fewer people in the supply chain. Then there is the pricing, which tends to be very competitive against the main market.

It is easy to see the many benefits of schemes business for those that are willing and able to pursue the opportunities. Schemes can provide a source of high volume, profitable business if professional and competent partners work together using disciplined procedures and high underwriting standards. The volumes are good, and sound management should allow the scheme to grow organically, with an ever-improving understanding of the underwriting factors leading to more accurate pricing and refined products that answer the policyholder's needs and aspirations ever more fully.

Importantly, retention levels tend to be higher than for open market business and brokers and insurers can usually avoid the cut-throat pricing challenges associated with the market cycle.

Such is the momentum behind schemes from the big distributors that the market is becoming increasingly sub-divided into affinity groups. In raw terms, this means there are fewer individual cases to be had. If brokers and broker-supporting companies want to remain viable, schemes represent an attractive and valuable option and an opportunity that should be seized.