Synergy at work

Judging by the advertisements on television and in the newspapers, there is a huge industry out there that is determined to fill the UK's courts with actions for damages. There is a huge raft of people who feel that they have been maligned, ill-used or even injured by an industrial accident that was the fault of the employer, or are simply wanting to jump on the bandwagon of a seemingly bottomless pit of money from court awards.

Of course, the various firms spending their advertising budgets on 'no win, no fee' promotions may be philanthropists, however, there is no smoke without fire.

Calling it a 'nanny state' or compensation culture really is a matter of semantics. Ultimately, there is a huge issue threatening the very livelihood or existence of firms, large and small. They are the people who foot the bill, the award and the costs if they are not insured. And, 85% or more of those firms are the clients of insurance brokers.

Opportunity?

Many insurers and insurance brokers are setting out their stalls to capture the seriously growing SME business market. Not surprisingly, the insurance vehicle for many SMEs is the package policy under a variety of brands. Many of these include, somewhere, a commercial legal expenses section, leading clients to believe that all is in order and that they have adequate protection.

Some investigations, however, have thrown this into doubt. The findings relating to the development of a new product, Work4ce-online, combining legal expenses insurance with human resources from Composite Legal Expenses and Qdos Consulting show this. There are some singularly important issues that arose and have become the platform for this combined approach. The fact that this has been tried and tested in an affinity group market for some months has further underlined a need.

One of the problems with the selling of insurance is that it is sold, with all the necessary baggage of Financial Services Authority regulation, and then there is often a stony silence from insurers and brokers alike until renewal (and the inevitable demand for premium) or when the client initiates action to propose a claim.

In property and casualty insurance, for larger clients at least, there are mid-term reviews and there are risk-management surveys and all sorts of helpful reading material delivered, largely, at point of sale to help the client along. But three, six or nine months on, most clients, particularly the smaller end of the market - the SME - is on their own.

In legal expenses insurance this phenomenon is almost axiomatic. Yet this is one area in which change is prevalent and risk almost unrecognised until it is almost too late.

After the initial sale, little more is said about legal expenses unless the client feels there is a claim brewing and that is where some new issues come to light.

From the investigations relating to the new product line mentioned, there was a concern - or perception - that, if a client seeks HR, health and safety and legal advice from the logical sources (such as friends or business contacts) there is a serious chance that any action taken as a result would, or could, void the legal expenses cover under the umbrella policy condition of 'reducing the prospects of success'.

Inevitably, if this clause - which appears in many guises in all contracts - is invoked, a serious relationship issue will arise between client and broker as the "you sold me the product, now they won't pay" scenario is a virtual inevitability.

During research, this was given by many insurance brokers as quite a significant reason not to specifically sell legal expenses insurance. After all, who wants to prejudice a business relationship with a client for the sake of a few pounds?

Putting the problem to bed

With some 65% to 70% of existing policyholders who utilise the various legal expenses helplines using them for employment issues, do so because employment issues are undoubtedly the most serious they face.

The pundits in the legal expenses insurance industry will start complaining that there is more to legal expenses insurance than employment issues and, in this instance, they are right. But, day to day, the overriding fact is that the SME needs advice and guidance on HR issues and that, more or less by definition, is where there is no in-house dedicated HR resource.

How does one stay abreast of the developments in HR regulation, health and safety and legislative change? To some extent by reading the insurance trade press, reading daily (broadsheet) newspapers perhaps and talking maybe. Any or all of these takes time and that time would be better employed making money for your business. And there is no guarantee that you have picked up all the nuances of change, so you may be guilty by default.

Analysis of large companies with dedicated HR departments demonstrates there is around one HR person for every 90 members of staff. That means that each member of staff receives (and indeed needs) around 2.5 days of dedicated attention every year. So, if you or a client SME has, for example, 10 staff - that is someone spending over one month every year on staff-related issues in addition to the 'day job' and they are not, by definition, HR experts with technical back-up, appropriate journals or attending educational courses.

Activity-based costing

Both in personal and commercial legal expenses helplines, the cost to the provider is minimal per unit and will increase if the activity levels are higher than expected. By increasing awareness of legal expenses, the providers (or arrangers) of the cover are likely to increase their cost base and, therefore, their selling price. Keep quiet and it is a useful additional selling point with low risk and predictable levels of activity.

Changing the mind-set

However, if the need for that mind-numbing search for information on HR issues is addressed head-on and sensible proactive advice is given in the field of HR and regularly reinforced with information about relevant change, legislation and the action to be taken, then the chance of things going wrong is reduced.

The more the message is reinforced, the more probable that the advice needed and sought will be from a competent source, such as Work4ce-online. There is an inextricable link between the advice given and the legal action that may result. Link the two functions and the perception of insurer get-out clauses is really diluted, if not diminished altogether, and the chance of recourse to the law is equally reduced.

But, it is not a complete solution just to keep the boss of an SME in the picture; the need to fulfil is to keep everyone who may be involved in the firm's HR issues 'in the know'. That way, the possibility of indiscriminate advice being used is also reduced. That is a simple and inexpensive matter of distribution.

The argument here is that the SME, on balance, lacks the knowledge and wherewithal to be expert in HR and health and safety issues. If you side with that debate, then the question is whether the average insurance broker is well enough versed to give advice to a client or indeed sufficiently empowered under competency rules to so do. And, it is all the front-facing troops that need to be competent.

As technical know-how of both the HR and legal expenses issues are a given, while contentious, would it not be better for experts in these fields to offer the product direct to the SME?

The answer is yes but, as the insurance broker quite rightly controls the vast majority of commercial business, then a better solution could be to sell it direct on their behalf. However, this is subject to a rigid guarantee that the client belongs to the insurance broker concerned and no poaching or extraneous approach will be made without express permission.

Brokers may ask what is in a guarantee? And, if they renege on a guarantee, what chance does a broker have to fight them successfully? A publicly made guarantee from a specialist supplier of one product line has to earn its own 'brownie points'.

There are insurance brokers out there who do have in-house expertise and will see this type of product as an opportunity, thereby rendering the product available by the traditional methods of sale. There are also those brokers who will not be persuaded and there are many who will see an opportunity and take it, hopefully, using this type of mixed discipline cover as a sales tool to 'steal' clients from others!

Some will be part of a chorus of "we have already got that product" or "so what's new about that?" The component parts of Work4ce-online do exist in isolation. But the real clue to the solution is the client buys one product that provides HR advice and compliance and legal expenses insurance proactively. With the combination of these two expert facilities, the client will not jeopardise the relationship with the client if things go wrong. Cost is a few pounds a month and provides, essentially, a personnel manager in the lap of the owner of the SME.

Right now, a client could buy much of the HR documentation and advice on a CD-Rom and buy legal expenses insurance separately or as part and parcel of their commercial package policy, but that is all reactive just like all insurance. Work4ce-online is a proactive product - operating from day one, the client receives advice, can use the HR compliance documents, seek specific help and rely on the insurance when the going gets tough.

So why doesn't the broker use legal expenses as a key selling feature rather than as a bolt-on? Never before has there been such a need to draw the client's attention to its existence - insurance they probably could and would use more frequently than traditional commercial insurance covers if only they knew about it.

The three main issues from our investigations are: a perception that legal expenses providers rely on the 'reducing prospects of success' clause; combine this with the fact that some brokers do not like to sell the product line because of knowledge base required; and the client needs information provided rather than searched for and paid for through the nose.

Linking HR and legal expenses and claims will reduce, not increase, and the legal expenses provider will be 'on side'.

- Nigel Dyer, FCII, Intelligent Marketing.