A charitable affair

The charities sector can be testing for brokers and insurers. The range and complexity of risks involved varies widely from one organisation to another, and the charities themselves are having to evolve and respond to new challenges. There are also, however, some significant opportunities for insurers and brokers, particularly in untapped parts of the market or where charities remain underinsured. An increased focus on corporate governance also means charities are looking for guidance on issues such as risk management, where brokers looking to offer specialist advice can really add value.

The fact that charities need to be flexible in a changing environment has recently been recognised in new legislation. The Charities Act 2006 came into force at the end of last year and provides more elbowroom for the charity sector as a whole, by removing much of the red tape which traditionally prevented many from developing. For the insurance industry, the ability to adapt quickly to the changing needs of charities will now be paramount. If charities take the opportunity to develop new strategies, their insurance partners must be able to move with them.

The number of registered charities is increasing year on year and, as a growing market, the charities sector is certainly attractive to the insurance industry.

Lindsay Gray, senior liability underwriter at Ecclesiastical, observes: "As this sector continues to professionalise, the market for insurance is only going to become more attractive for brokers and insurers. Several insurers have launched tailored policies reflecting the fact that cover needs to be closely fitted to charities' activities and a good handful of brokers have also focused their business on the charity sector."

There have been a number of new entrants and product launches, but there remain some significant obstacles for those looking to grow their presence here. One of the major issues is that many charities are unaware of the availability of specialist charity insurance.

Gary Johnson, charities development manager for Royal and SunAlliance, points to the inherent difficulties in getting the message across to a very varied audience, much of which is voluntary and part-time.

There is widespread agreement that the internet will help to address this problem in the long term but that, at the moment, awareness of charity insurance provision relies very much on word of mouth. This, of course, can be extremely beneficial to those brokers providing a good service. Carl Shaw, head of care at Bollington, points out: "What helps is that charities talk to each other more freely than firms from the commercial sector. If you do a good job for one, it's very likely that you will pick up recommendations to insure others."

A long-term venture

As far as new entrants to the sector are concerned, the message is that it should be viewed as a long-term venture rather than one in which to make a quick profit. Johnson explains that, particularly at the smaller end, the committee process that is a very strong feature of the market means that it can take some time for new products to achieve their potential. "It is not uncommon for quotes to be given and clients to come back two years later saying they want to go ahead. For insurers that are used to quick commercial decisions, that kind of approach can come as a surprise when dealing with the small to medium-sized charity sector."

Gray points in particular to the need for specialist expertise and experience. "Brokers and insurers shouldn't enter the market lightly," she asserts, adding: "Charity business is not easily commoditised. Without a good knowledge of the market, they are unlikely to be able to properly assess the risks and confidently underwrite the business."

Shaw observes that this is a competitive market but that it remains the preserve of relatively few, explaining: "New entrants may be able to compete in the short term by simply undercutting the others, but this won't be sustainable in the longer term, when the market hardens and expertise in the sector comes to the fore."

For those who are looking to build on a presence in the sector, the good news is that there are untapped parts of the market that could provide potential for growth. Last year, RSA said that more than 20% of small charities have no insurance. Again part of the problem lies in lack of awareness.

Mark Ingram, head of insurance operations at Ansvar, believes a more significant issue is that of under-insurance. "Perhaps the greater opportunities lie with those charities that have the wrong type of cover, rather than no cover at all," explains Ingram, who observes: "They may have standard commercial cover in place that doesn't necessarily meet all their insurance needs."

Under-insurance is a common problem where funds are limited. Shaw observes: "When half the charities have an annual income of less than £10,000 per annum then it is tempting to economise falsely by underinsuring. We try to avoid this by carefully going through all areas they need insurance for, pointing out the pitfalls of underinsurance and asking the right questions."

The message is that the opportunities for growth in this sector exist mainly at the smaller end of the market where there tends be high volume, low premium business. However, those looking to tap into this market must beware that small does not mean uncomplicated.

Smaller charities can be involved in a wide range of activities, from dealing with and advising vulnerable members of society to jumping out of aeroplanes. Furthermore, precisely because of the high volume nature of this end of the business, Ingram points out that it is vital to find efficient ways to do business. "The challenge is to find efficient means of transacting the business for brokers," he explains.

One particular area in which there is anecdotal evidence of increased demand is trustees indemnity insurance. Chris Mays, a director with specialist insurance management firm aQmen, points out that charities can struggle to attract trustees and that the provision of a trustee indemnity policy can play an important role in reassuring potential trustees and therefore attracting them to the charity.

Again, however, insurers and brokers are having to tackle a lack of awareness about the product. Taking the time to talk to customers can pay dividends and Mays says he has seen increased take-up where it has been brought to clients' attention and the benefits have been explained. The Charities Act 2006 has made it easier for charities to buy trustee indemnity insurance. The Charity Commission summarises some of the new provisions under the Act: "The new power allows charity trustees to use the charity's funds to buy personal indemnity insurance - unless the governing document specifically prevents it. This means trustees no longer need an explicit power from the Commission or from their governing document before purchasing such a policy."

There are limitations on what such policies can cover - for example, they must exclude: the payment of fines imposed in criminal proceedings or penalties incurred as a result of non-compliance with regulatory requirements; the cost of an unsuccessful defence against criminal prosecution for fraud, dishonesty, or wilful or reckless misconduct; and liability to the charity as a result of a deliberate failure to act in the interests of the charity.

Keen for advice

For brokers and insurers looking to differentiate their service offering to the charity sector as a whole, the good news is that charities of all sizes are becoming more keen to receive advice on risk management issues. Ingram points out that good governance requirements mean charities are becoming more professional in their approach to managing risks, and that the accountancy framework in place also puts the onus on charities to ensure risk management controls are up to scratch.

"There is quite a hunger from the charity sector for help and guidance in this area," asserts Ingram. There is still work to be done, however, in raising awareness of the role brokers and insurers can play and the help they can provide. Johnson also observes that many organisations still view the management of risks and the purchase of insurance cover as two separate issues.

The need for specialist advice and the demand for risk management guidance means that brokers can build strong relationships with their customers. However, as Ingram observes: "Although this can be a very loyal customer base, that is not to say that price is not important. There are huge financial challenges involved for charities to get the funding they need and the insurance cost is a big issue for many of them."

These are challenging times for charities. The pressure of fundraising continues to be paramount for many, as is the need to develop new and innovative fundraising activities. Core functions such as the provision of advice and assistance to vulnerable members of society come hand-in-hand with increased risks in a litigious environment. It is vital that insurers and brokers are flexible enough to recognise the evolving requirements of the charity sector, in order to respond effectively to their clients' needs.

INCOME OF REGISTERED MAIN CHARITIES IN ENGLAND AND WALES, MARCH 2007

During March 2007, 469 charities were registered. Of these, 463 were main charities and 6 were subsidiaries. This brings the total number of charities registered for 2007 to 1299.

At the end of March 2007, there were 190 477 charities on the register. Of these, 21 683 were subsidiaries or constituents of other charities. This means that there were 168 794 main charities on the register that are required to prepare accounts. This figure includes 2541 group charities. Group charities are separate charities but share the same registered number because they have been grouped together for ease of administration.

The register showed that at the end of the first quarter, the total annual income of main registered charities was £42.14bn.

When this income is broken down by individual charities it is found that many are very small organisations indeed, and that the financial wealth of registered charities, measured by their annual income, is concentrated in just a few very large charities. This is demonstrated in the following figures:

- The majority of registered charities have an income of £10,000 or less. They represent nearly 60% of registered charities but have less than 1% of the income recorded.

- Around 8% of charities receive more than 90% of the total annual income recorded.

- The largest 651 charities (0.39% of those on the register) attract more than 49% of the total income.

Source: Charity Commission.