Clear and present danger

Bundling various commercial covers into a single package has, for many years, been a solid income stream for brokers, with the benefit of capturing a raft of business for the insurer and obvious administrative and cost-saving benefits for the customer.

Yet, the traditional cosy relationship between small businesses and their brokers when it comes to the take-up of such multifaceted coverage has started to come under threat. In recent years the competition posed by both direct business and banks has jeopardised the once unquestioned dominance of brokers, while the increased accessibility and quality of technology available - coupled with a more youthful entrepreneurial demographic - means that access to commercial packages is now wider than ever.

Despite such apparent dangers, the current commercial market is actually quite a healthy one for brokers, and the opportunities going forward are reasonably good as far as this sector is concerned. While there is no doubt that brokers will face stiff competition from other channels in the coming years when it comes to low-value, commoditised insurance policies, the packaged commercial sector actually represents more of an opportunity.

For a start, such packages are simply not as commoditised as other areas of insurance. And, perhaps more importantly, with a softening market insurers are pushing improved packages - offering a wider range of cover, with brokers once again seen as the ideal means of distribution. But, will brokers be able to capitalise on this new-found interest in packages and place some open water between themselves and their competitors?

One insurer that brokers indicate has been keen to push its commercial packages in recent months has been Norwich Union, which has long been an important player in this sector. According to Andy Green, commercial product executive at NU, there are currently five different products on sale: office and surgery; residential property owners; pubs, restaurants and hotels; shop and salon; and the fifth product encompassing the remainder, but aimed specifically at the self-employed sector comprising between one and five employees.

Green says the cover is aimed at the smaller commercial market in general, and is still a big market but with a slightly different emphasis at the moment: "A greater number of start-ups are smaller businesses. So the self-employed products that used to be targeted at the construction industry are now also aimed at the services sector."

Encouragingly, he says that this is a type of insurance that is well suited to the intermediary channel: "Brokers still play an important role, as these business are normally a one-man band, so they do not have the time to go around looking for insurance."

Another insurer that is also investing in the packaged commercial market is Chubb, which upgraded its packaged commercial product, including eight additional covers offered free to most customers, as of 1 October 2004.

The revamped product, Master Package Plus, is designed for commercial customers paying a minimum £10,000 a year in premiums, or between £50m and £1bn in turnover. Using property and liability as core covers, eight extras are all offered at limits no higher than £100,000, including: environmental; abduction/extortion; event cancellation; marine cargo; confiscation; fidelity guarantee; product recall and helplines.

"The packaged commercial market in the UK has been fairly traditional, fairly stagnant," says Andrew Russell, manager of commercial insurance services, UK and Ireland, at Chubb. "We wanted to differentiate the Chubb offering and effectively act as a quasi-shop window for our other offerings."

Andrew McKee, vice president, UK and Ireland commercial lines manager at Chubb, adds that, although this is a very competitive market, Chubb operates within tightly defined niches, so there is room for growth for such a product.

The popularity of packaged commercial policies not only rests with insurers, according to the British Insurance Brokers' Association. "They are very popular with brokers at the moment, though the market is very competitive," says Graeme Trudgill, technical services manager at BIBA, pointing to a packaged scheme available for its members launched at last year's conference as evidence of the continuing strength of the proposition.

The scheme, BIBA Business Plan Plus, is underwritten by Axa and has been developed in conjunction with Folgate. Laura Jones, who looks after the scheme at Folgate, says that it is a fully comprehensive policy directed at various business sectors with the opportunity for add-ons such as reinstatement of data costs. "The take-up has been really good," she says. "We have been fairly quiet about it, but approximately 350 BIBA members are looking at it, and we are expecting around £2m in gross written premium this year; we tend to go for smaller BIBA members."

"Everyone is after package business at the moment," Jones adds. "There seems to be a huge focus on this." But what about the threat posed by alternative distribution channels such as banks? "Some banks are offering it, but it tends to be banks that put money into business and that is part of the terms of the agreement. But I do not think we are really losing out to banks. It's a quiet threat, but nothing significant at the moment."

Other brokers are not so sure that the banking sector should be dismissed quite so easily. Stuart Reid, chief executive of insurance broker Stuart Alexander, stresses that the banks do pose a threat - with packaged commercial just the tip of the iceberg: "Never underestimate the competition- a lot of banks are looking at outsourcing this - just look at the recent deal between HBOS and Smart & Cook, while the Royal Bank of Scotland has a similar deal. But it is more common that banks generally are going into insurance - and loaning to brokers.

Reid is keen to differentiate between different types of packaged commercial business, however: "There will be a genuine drift (to other channels) on £5000 premium and below to more internet-sourced business over the next few years, though commercial insurance is relatively complicated and the advent of the Financial Services Authority brings extra discipline.

So, in that regime, there is between £5000 and £10,000 in premium that is not an area of business that can be commoditised as much as other areas of business." Besides, he adds, for many packaged commercial policies brokers provide a service that insurers sometimes do not, such as claims handling or policy-documentation handling."

Another area that needs to be borne in mind when considering the possible threat posed to insurance brokers by banks and the direct route is that packaged commercial products, although increasingly viewed as an area of insurance that has become very much commoditised, are in practice more different than people often give them credit for.

Packaged products

"For me, the common misconception is that all packaged products are the same," explains Simon Cooter, director of small business and e-business at Royal & Sun Alliance. "Generally, packages are aimed at smaller businesses and the smaller the business, the more valuable a packaged policy is because it provides comfort that they are not missing anything obvious."

Cooter adds that RSA is keenly aware of the difference that various packages can provide and, as such, regularly monitors the market. "We benchmark our products using information provider DeFaqto and invest in the parts of a package that we think will be of interest to the customer - we try and make sure the package does not hold any surprises. Defaqto is good at identifying different areas of cover among insurers and comparing what is and what is not included, and it comes up with quite different scores."

For RSA, he says, the role of the broker is thus important in being able to appreciate the difference offered by the various packages on offer: "Eighty per cent of what we provide is very similar to what other insurers provide but we then look at the other areas and invest in them."

He is not convinced, however, that the direct route is necessarily the right way to go for the types of SMEs that are the core constituents for this area, either. "Unless the client is able to compare products from one insurer to another, they perhaps have to take a bit of a flyer. So, although it is perfectly sensible to go direct if they know their exact requirements, it becomes that bit more difficult if they do not quite know them."

Although brokers would appear to be in a reasonable position for the next few years when it comes to selling commercial packages, a perhaps more pressing issue for them is whether the demand for such cover can match the supply. Certainly the likes of NU, RSA and Chubb may be confident that this is an area with a healthy future, and Trudgill is also assured that this is an area that will continue to thrive.

He says: "Shops and offices packages are bread and butter for brokers, covering buildings, property, liability and goods in transit. Really it should cover everything the small business wants in one easy package, and the broker comes into it and adds risk management advice and makes sure the cover is appropriate."

Once again he cites the example of BIBA's own experience having launched the scheme with Folgate and Axa as proof of the continuing viability and demand for the commercial package: "It is going well, we are not losing out to banks and the prices are good. Packaged commercial is as popular as ever."

OVERVIEW

- 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.

- Essentially, 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 packaged 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; payment systems can be restricted to a single direct-debit or annual payment; and claims handling is restricted to one company.

ABI ANALYSIS

- Ascertaining the size of the UK packaged commercial lines market is difficult, although some pointers have been given. According to a report released by the Association of British Insurers in 2004, 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 the SME market in the UK estimated to be worth some £4bn in gross premium income, the importance of commercial packages becomes self-evident.