In Focus: How niche schemes are becoming more important to brokers’ growth strategies

Back at Insurance Times’ BrokerFest event in February 2023, broker delegates heard that they must be clearer on strategy due to the impact of economic conditions over the next three to five years.

Essentially, brokers were told they had two options – focus on size and scalability or go down the route of specialty, which can be achieved through schemes.

Broker schemes typically provide cover that is tailored to address the specific needs of a certain demographic.

However, following the effects of the Covid-19 pandemic, one could argue that scale could be the way to go forward instead. After all, headwinds such as inflation has made business tough over the last few years.

For example, Insurance Times’ Schemes Index showed that between April and October 2022, brokers experienced “a stark drop” in both their commission earnings as a percentage of premium and renewal volumes for broker schemes business across a broad range of classes.

Therefore, brokers may turn their attention to more popular general insurance products that could drive profitability quicker.

But with schemes having been the bread and butter for brokers over the last few years, is going for scale worth giving up the chance to identify an under-served segment of the market?

According to Joe Sultana, commercial director of digital schemes platform IS2, while focusing on scale has its benefits, it comes with risks as well.

And he felt that, if brokers did their homework on a niche market correctly, schemes had the ability to drive scale due to the potential of there being less competition.

“Specialty is even more important [than scale] because of the competition [aspect] and being seen as a leader in that specialism will give longevity that you might not see in a scale situation,” he added.

“Scale situations can lead to some different types of risks with underwriting profitability if other competitors move in on that sector that may have a bigger financial clout.

“So, specialism really protects longevity, so that is what I would recommend.”

Benefits of niche

Recent figures also demonstrate that brokers may do better to focus their efforts on niche schemes, with data suggesting that they have bounced back since the height of the pandemic.

According to the most recent Insurance Times Schemes Index, which covered the period between April and October 2023, all scheme types bar three saw consistent rises in the total amount of commission earned by brokers.

The data showed that the highest percentage increases in commission came from schemes focused on household (59%), pubs and clubs (53%), caravan and trailer (44%) and cyber (37%).

Nick Houghton, chief executive of broker JMG Group, said that schemes provided “a great opportunity for insurance brokers to really add value”.

“Know what you are good at and just be really good at it,” he said.

“We should all be embracing it because it is a really good way for us to demonstrate what we do for the local economies and for local businesses.”

Therefore, it would seem natural that more brokers would want to grow their schemes book – Biba chief executive Graeme Trudgill said a well-run scheme can often maintain high levels of retention and referral.

“Schemes can differentiate brokers’ value propositions,” he added.

“You often find they reflect personal experience or interest and they are always expert.

“Some brokers are well known for being specialist in a particular sector or class and can work with relevant trade sector bodies and target their marketing and advertising.

“For example, there are brokers that are expert in equestrian business, classic cars or other niche risks that might only be transacted by a small number of brokers, so they build a reputation in that sector.”

Eddie Hooker, chief executive of Hamilton Fraser, agreed that niche schemes can help boost retention levels due to them helping with reputation.

“If you have a successful scheme, you should be enjoying much higher retention rates,” he said.

“This means that revenue-wise, it is going to be a lot more profitable for you than having to go out and hunt for brand new business all the time, which a general broker is always having to do.”

Creation process

So, how can brokers work out niche client needs and then turn these into efficient, useful schemes?

According to Houghton, it is key for brokers to understand the market through a client’s lens, which means looking beyond the insurable risk.

“You have really got to understand how that person makes money,” he said.

“You’ve got to go down several layers and really understand how they think about things, what language do they use and what is their distribution chain [for example].

“[It is about] how, as insurance brokers, can we help save them money, transfer risk away from their business and make them strong and profitable.”

Trudgill echoed this point, saying that schemes needed “at their heart the specificities of the client’s sector”.

“Understanding their needs means there is often expert advice also available to help clients recover after a loss, which might not be the case in the mainstream insurance market,” he added.

And after the fundamentals are established, managing general agents (MGAs) can come in to help brokers handle and improve a scheme idea as it gets off the ground.

Andy Hurrell, founder of Corin Underwriting, said MGAs can help brokers uncover what specialist wording they need, what value-add they need, what limits they need and what extensions they might require.

“As an agent of the insurer, we are able to marry that side of it up, manage expectation, manage the running of the business, manage capacity and manage the risk management,” he added.

“Hopefully this gives them something back that looks like a scheme for them that can enhance their distribution offering to clients.”

Marketing

However, while niche products can benefit customers, the key is understanding how niche scheme ideas can be sold.

And Sultana said that one of the pitfalls brokers could fall into was not understanding how to draw customers in.

“While coming up with the right niche is great and having that differentiation is key, it doesn’t end there,” he said.

“The component that is sometimes missing is – and we have seen it way too often – that there is not enough focus on the marketing.

“It is just as important to make sure you have a clear understanding of how you are going to attract the customers you need.”

There are plenty of ways this can be achieved, such as investing more in the use of social media or establishing informative newsletters that can be sent out as part of a campaign.

Houghton said that being in the schemes space allowed brokers to “experiment and play about” with different ways of winning clients.

“Specialising on something allows you to do so much more for the people you work with,” he added.

“If you do it well, there is so much more [on offer] for your business and these are very rewarding.”