Tailoring to the market

Seen as the staple of any insurer's books, retail insurance is an area that most brokers will have experienced at some point. Whether providing cover for a chain of stores or insuring the local high street coffee shop, retail insurance has always been a mainstay of the market, so the challenge in a soft cycle is to find an area that remains profitable.

Standard package policies are easy to create and will, for the most part, meet the needs of a shop's proprietor through basic covers such as fire and perils, accidental damage, business interruption, theft, employer's liability, public liability and goods-in-transit. The only downside is that the premiums for these packages tend to be small, and while the volume is always high their generic formats means that only modest amounts of money are made.

Brokers venturing into retail should be prepared, therefore, to take on a large amount of policies to make going into the retail insurance sector financially worthwhile. As with other areas of insurance, it is the more niche areas of the market that produce the bigger rewards. Stock with high value, such as musical instruments or sports equipment, could provide a lucrative means for those seeking a new market.

Sports shops

Many high streets in Britain have sports retailers of some sort, whether independent traders or part of a large chain, and due to the nature of their stock the premiums generated by them can be attractive to brokers. Replica kits, sports equipment and related paraphernalia tend to be expensive, meaning the retailer will need a higher level of cover than a budget-price clothes store. The negative side of this is that the stock is more attractive to thieves, so the insurers will demand a higher level of security and will almost certainly demand high-end alarm protection system.

Kevin Mahoney, a managing director at Aon Global UK, said that it was a common mistake for brokers to assume all sports stores were homogenous when it came to insuring them.

"The risk exposures change depending on the size of the store, its stock and a number of other things," he said. For example, while warehouses and goods in transit may be of large concern to the bigger chain stores, the smaller retailers that are struggling to keep up may use South-east Asian manufacturers in an effort to keep costs low, which could prove to be an enormous problem for brokers if the goods are found to be faulty and claims need to be paid. If the smaller manufacturer can't afford the funds for compensation and refunds then the money will have to come ultimately from the insurer.

"Brokers should also be wary of retailers agreeing too quickly to suggestions for change put forward by the broker to help reduce premiums, as the proprietor often doesn't look at the practical aspects of instilling these changes at the shop-floor level. Floor staff members are extremely busy and may not have time for complicated tasks designed to make the insurance a bit cheaper."

Sufficient business interruption policies are also a must and should reflect the type of retailer you are insuring. For example, while a warehouse fire that supplies goods for one store will cause a small loss, a warehouse supplying one particular type of goods to a number of small, related chain stores - such as team-specific sports retailers like Spurs Stores - could cause major losses for tens of shops.

According to Graeme Durlacher, small business development manager at Allianz Commercial, the major risk affecting sports stores is still theft, though improved security and measures against ram-raids such as bollards and barriers have reduced the loss figures significantly.

One broker reaping the benefits of this niche area is Bath-based Cordon Insurance Brokers, which has covered sports stores' packages for a number of years. "We aren't really sure why there aren't more brokers offering policies on this," said John Cordon, managing director at the broker, "It's a fairly standard shop policy and we're quite comfortable with the amount of premium it brings in."

Cordon said that the most common risks the broker deals with are burglary and water damage, though even after the recent summer floods the losses were manageable as only two or three claims had come in. He added that the policies offered were comprehensive and that the only risk they did not cover on the standard sports shop package was terrorism, though this can be purchased as an additional policy if required.

Sports stores are certainly seen to be worth considering as a niche in retail, provided that effective risk management solutions are carried out to reduce the likelihood of theft and (uninsurable) shoplifting. The premiums are attractive and the chances of an enormous payout are low.

Musical instrument shops

With approximately 1,500 musical instrument retailers in the UK, the market is limited in terms of how many policies are available. The good news for those who do win business with them, however, is that the premiums are considerably more favourable than standard retail quotes.

Music retailers tend to care passionately about their stock, which can be far more expensive than other retail goods. While basic electric and acoustic guitar models can be found for around £50, industry-standard guitars from manufacturers such as Fender and Gibson are more likely to be valued at between £500 to £1,500, and can rise up to £32,000 for a high-end PRS Dragon 2005. Violins also start at around a meagre £100, but can rise to £1,000 for a good quality violin and to over £3m for a classic Guarneri Del Gesu.

Because most retailers house hundreds of their chosen instruments, they are more conscious of the need for advanced security measures, so theft, while still a major risk, is rarely seen on a claims form. Professional thieves are a problem, however, stealing stock to order. Not only will the retailer be looking for the insurance to pay for the lost items, but if the products are rare and their manufacture is not immediate then the insurer may have to use business interruption cover to reduce the impact on the firm's profitability. Accidental damage tended to be at the top of most brokers' claims lists, followed by theft and property damage.

Gillian Maconachie, underwriting manager at Edinburgh-based Premier Commercial Brokers said that brokers should also enquire as to where repairs are being carried out, as if they are being done on-site then a standard shop policy would not be enough to cover all eventualities. She commented: "If repairs are a considerable part of the business then it may be that a standard retail policy will not be suitable and cover should be sought on a commercial combined basis. The additional hazards of using wood working tools or flammable varnishes, for example, may merit more underwriting consideration and greater premium levels."

Keith Sully, retail services and leisure underwriting manager at Norwich Union, revealed that premiums start around £700 for local independent musical instrument shops, though those catering for national markets or that have large, flagship-style stores will have higher premiums proportionately. He said also that brokers' rates could be affected by whether or not the instruments are used off-premises for tuition or trial purposes, and also by the inclusion of legal protection for dealing with any disputes over the conditions of hiring them out.

Successful brokers are almost guaranteed customer loyalty, as unlike other areas of retail where policies can be won and lost on price alone, music retailers are invested in their stock emotionally as well as financially and therefore like the personal, comprehensive approach taken by brokers.

Noel Sheehan, owner of Sheehan Music Services in Leicester, said his business has been with SM Commercial Insurance Brokers for 24 years because "it has tailored the policy very well over the years".

Nigel Clark, managing director at Howarth, London, said that he remained with his firm's broker, S. Johnson and Co., for a number of years because it had negotiated successfully with the insurer, Allianz Commercial, to provide a comprehensive cover for stock in transit, covering the retailer for any eventuality. David Riggs, manager at Dawsons - which has nine stores across the UK - said he had remained with Norwich Union because the cover had proved to be adequate and the quotes had become cheaper each year.

Bespoke policies reflecting the needs of clients are a must for brokers in this market, and all of the brokers asked said it was worth the extra man hours. David Christmas, managing director at Christmas Insurance Services, said that for the work that goes in to the policies, the broker receives premiums allowing them to charge better commission rates. John Beeston, managing director at broker Bryan James & Co. and Musicians Insurance Services, stressed that in the experience of his company, which has written over 10,000 policies for music-related clients, an homogenous scheme is not possible for this industry.

Beeston remarked: "Much as we'd love to, and we would because we pride ourselves on providing a lot of schemes, we wouldn't recommend a music shop to have a standard shop scheme because they could end up paying for cover they don't need, or having a package policy that doesn't cover everything. As far as we're concerned, it's worth investing the time in underwriters that look at the shop and develop a more bespoke policy."

Bryan James is a broker averaging a gross written premium of just £2.5m, but it benefits clearly from having key market intelligence. "Knowledge about the industry breeds loyalty," Beeston said, adding: "We also support a lot of organisations, musical associations and festivals. Your involvement looks good to others in the profession."

This is supported by Lark Insurance Group, which writes policies for 300 of the 1,500 musical instrument shops. Lark's musical instruments divisional manager, Claire Sanders, said that it was imperative to get to know the network of proprietors because they all know each other and are keen to recommend your broker for business to others.

She warned: "You need to know what you're doing, though, as if you make a mistake they will tell each other all about it." Clients are the best thing about the industry though, she added, saying that there are some real characters and that the relationships she had developed with them were so good that she considered most of them as her friends.

A perfect fit

The key to success in retail insurance is in being prepared to spend time getting to know your retailer and their market, ensuring that as a broker with access to the best policies on offer you provide your client with a tailored solution to their insurance needs.

Retail insurance may not be the most attractive part of a broker's books, but that is not to say that it cannot be profitable if approached from the right angle. Provided a broker researches the niche area well, then regardless of the goods involved, the rewards can be plentiful through client retention, recommendation and market presence.

KEY FACTS

- In 2006, 11% of all enterprises in the UK were retailers, with 182 475 VAT-registered businesses operating in 278 365 retail outlets.

- UK retail sales were £256bn in 2006, larger than the combined economies of Denmark and Portugal.

- The retail sector generates almost 6% of the UK's gross domestic product.

Source: British Retail Consortium.