Tailor-made solutions

Research published last September by the Finaccord agency made interesting reading for any broker interested in tapping the potential of scheme business. Just over one quarter (28%) of UK trade associations now have tailor-made insurance schemes in place for their members, with that figure expected to rise to 40% by the end of this year. Of those associations, three-quarters used insurance brokers to operate the schemes.

It is a trend that has been observed for at least the past five years and the next few years will see it grow in importance. There are a number of reasons for this and none is dominant.

Crucially, the increasing tendency towards consolidation of broker businesses has been a big driving factor. Brokers are interested in differentiating themselves from their competitors - and a successful method is to develop specialist services and niche business propositions. These are powerful factors that, when combined, give an inexorable push in the direction of scheme business.

Development of IT and marketing capability is also encouraging and is enabling brokers to develop scheme business. With the former, increased availability of software and computer technology has enabled more brokers to support and administer schemes business themselves. This means it is now more of an option for responsibility to be delegated to a broker for quotations, putting customers on cover, issuing policies, and making mid-term changes - in many cases the full end-to-end customer process, including claims handling.

The growth in IT investment has made it more of a viable option for brokers to do these things themselves, and they can do it more efficiently and more effectively.

Scheme characteristics

Branding is increasingly important for this new larger breed of broker. They are increasingly looking for new ways to differentiate themselves from their competitors, which are now equally large organisations. Always offering the lowest price is not a key driver for these companies.

The advantage of scheme business has always been its ability to cover many sectors, cutting across both personal and commercial insurance.

There is a key distinction between large groups that are based on membership, such as credit card customers, and those affinity groups where people in the scheme share certain characteristics. This may include behavioural characteristics that make those people a better insurance risk, such as people who are in neighbourhood watch schemes.

Such characteristics are the key in identifying potentially successful affinity scheme business. They often translate into very attractive underwriting features - including people with less propensity to make a claim, or less likely to swap insurers at renewal for the sake of saving a small amount of money - in short, customers who have a stable claims ratio and have strong potential for business retention.

There are six characteristics which define schemes, and only one needs to be present for a broker proposition to be considered a scheme.

These characteristics are: a bespoke product or service; a defined target market; not branded solely to the underwriter but to either the broker, the affinity group, both, or all three; delegated underwriting; policy records held and administered by the broker; or some element of bespoke pricing.

The division between scheme and non-scheme business is akin to buying a suit. Most insurance company products for small businesses are off the peg, they might have options, such as low cost, and have good cover but, ultimately, they are mass produced products aimed at whole trade sectors, such as retail or services. Scheme products are more comparable to having your suit tailor made - in this case made to complement the particular characteristics of the broker's customer group.

A successful scheme business also relies on an agreed division of the customer sales and service process between insurer and broker. For example, a company like Norwich Union does not have the skillset that brokers have to access very specific customer markets. The role the company has is to support those brokers in the venture they are considering, or the niche market they are trying to open up. Brokers are closer to the opportunities on the ground and they can move more quickly in these markets. In NU's experience, brokers that establish a successful scheme are very likely to do it again and some brokers specialise totally in providing scheme solutions. They know their niche markets better than anyone and it is a very successful business model for them.

The NU broker schemes team is there to develop business in partnership with the broker. It provides a specialist trading service from the centre, working in relatively small, mobile flexible teams. Most of the time these teams are out there working with the brokers on how they can develop and take forward their ideas. The team offers support with marketing and developing bespoke product features.

What is being seen is that this type of business is attracting much more broker focus. In the past schemes were 'something else' which insurers and brokers did. Now they are a mainstream part of the business and that is something that has happened over the past three years.

The employees in an insurer's broker schemes team have a broad skillset in order to support broker schemes business. They get involved in all aspects: sales; marketing; the underwriting process; project management; relationship building; and bringing in technical or specialist expertise from other parts of NU as it is needed, depending on the complexity of the business proposition.

This is the future way of doing things, brokers developing very targeted customer solutions, and investing in the IT and skills infrastructure to service those customers, with the insurer focusing on doing what they know best - risk, underwriting and performance management, pricing, and providing marketing and other support.

The best scheme businesses, from a profitability point of view, tend to be those where there is an almost emotional bond or affinity between members of the niche market. For example, membership schemes run by members for members and charitable or community based organisations. This emotion-based affinity is more likely to be benefit personal lines products.

However, brokers have also shown themselves to be adept in recent years at opening up niche commercial markets. A look at the classified advertisements in the insurance press shows this - brokers specialising in industry sectors like media, leisure and construction and others specialising in particular classes like liability, and in 'difficult' sectors like entertainment, and unoccupied properties.

The nature of scheme business tends to favour small companies - as once an organisation's annual premium bill passes £5000 per year, they are large enough on their own account to require specific broker advice around coverage and risk management, and to have their own bespoke policies.

The scheme specialisation can also be applied successfully in the volume markets, as shown by the growth of players such as Budget in car insurance, and Carole Nash in motorcycle insurance. The trend seems to be towards specialisation, tapping into niche market sectors and customer groups to develop a close relationship with the customer. This enables a brokerage business to truly differentiate itself from others in the marketplace.

One of the key benefits is the fact that customer service and policy administration is put in the hands of the person who is closest to the customer and knows them best - the broker. Underwriting authority, and sometimes claims handling authority, is usually delegated to the broker by means of an underwriting guide tailored to allow the broker to make the maximum number of decisions without reference to the insurer, consistent with the broker's underwriting skills and the insurer's underwriting strategy.

This brings decision making closer to the customer, and can only be a customer benefit. However, to a large extent, this means delegating risk acceptance and front line underwriting, and therefore expectation of profit, to a third party.

Managing risks

Historically, a lot of insurance companies had bad experiences with schemes business, because of their failure to manage the risks inherent in delegating underwriting authority outside their own organisation properly.

What insurers are coming to recognising is, if you have the right management and governance framework in place, it can work - as long as it is a framework and not a rule book, as flexibility needs to be built in.

For an underwriter the benefits are numerous and, increasingly, the risks associated with the delegated scheme model can be seen to be capable of being managed effectively. If time is spent getting it right, the rewards are there, as working with brokers on scheme business means working with people who have detailed knowledge of their customer base. This can mean more profitable business than in the wider open market.

It is critical to work with the right brokers, and work hard to develop the relationships. That means identifying which ones have the got the business already and have access to the customers. It needs to be ensured they have the right infrastructure in place on the IT front, and the ability to handle underwriting and marketing.

Finally, and most importantly, it needs to be ensured there is a partnership culture in place between insurer and broker and it has to be more than just a supplier/buyer relationship. That is done by developing a close working relationship and understanding what makes them tick - not working remotely from the broker. It is vital the broker has the right attitude to value and price as well, as a scheme proposition based on always giving the customer just the cheapest price, irrespective of quality of cover or service, is unlikely to be successful or sustainable in the longer term. Successful partnerships on schemes business are based on brokers who are committed to developing sustainable relationships with customers.

Most insurers would also be keen to ensure scheme contracts with brokers reflect the commitment to a long term partnership, rather than based on short-term deals. NU has found relationships between brokers and insurers that work are based on a long-lasting partnership. The more you switch business - customers, brokers or schemes - the more exposed you are to higher operating costs, which is not good for long-term profitability.

At it's most fundamental, the scheme approach to business offers brokers an additional opportunity to demonstrate their value in an insurance industry which is now increasingly dominated by big brand players.

There is a continuing trend for big non-insurance companies to stretch their brands into insurance product sales, commercial as well as personal, however, there is a massive gap in the market, which is there for brokers to exploit. In terms of customer groups it is on a smaller scale but where price is not the most important thing. Ultimately it is sustainable, reliable business that will see customers stick with a company for years. The bottom line is it can generate massive revenue, at NU schemes business has grown by 80% in three years and it is anticipated it will grow even more in the next few years.

This is business for the long game - not instant gratification - and it is win-win for all parties. The broker gets good business, and ultimately the customer gets a better product which is tailored to their circumstances and needs. There is no doubt customer groups are seeking these solutions to their insurance needs and there are more opportunities to do good schemes business than ever before. It is up to brokers and insurers to make sure they do all they can to meet that demand.

- David Prior, head of the broker schemes team, Norwich Union.