Fully prepared and on the starting blocks

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It may seem a foolhardy move to begin a new business in the continuing economic gloom, but Angelique Ruzicka finds out how to be ready when the time is right

In the current economic climate and with the lack of funding available from banks it does not make sense to start a new business. But managing director of Bluefin Insurance Services David Hopwood says the situation could pick up later in the year when conversations will turn to action.

“In terms of people looking to start-up there are certainly a lot of discussions going on, but since the UK economy fell off the edge of a cliff people generally have been reluctant to take that last step. People want to borrow money but because of the financial situation they are staying put for the time being,” says Hopwood.

The fact that clients are struggling too is also a problem for brokers looking to begin a start-up business. “Brokers’ own books of business, even if they bring them with them, are reducing so it’s really a double-edged sword. That’s also making start-ups nervous as they don’t know which clients will be there in a year’s time. So it’s a pretty uncertain situation,” adds Hopwood.

Be ready to act

If you are considering breaking away and starting your own business there are several things you can do to ensure that you are in the best position to act when the time is right (see Dos and Don’ts panel right). Bluefin’s network, for example, has 21 start-ups on its books ranging from one-man bands to small offices of two or three people.

“We take people right the way through that initial start-up to what we term a full-partnership status. Through the start-up process we will handle their back-office and administrative work, while they focus on building their book of business. When they are ready to start employing people and take on that responsibility they become a full-network member.

The process gives them the opportunity to come in at a very low level and help them with their compliance and all the regulatory issues,” says Hopwood.

Start-ups are not being created as a result of redundancies in the insurance market, according Bluefin. Hopwood says: “It’s generally people who have fallen out with consolidators and are either not happy with the new regime, or those having learned from their boss and are seeing whether they can do it themselves. The typical type we encounter is the second most senior person in the business that controls a fair portion of the client base.”

Clive Tobin chief executive of technical lines insurer Torus, which began accepting risks on 1 July 2008, says the key to creating a successful start-up is getting the right people on board. Tobin is looking to create a new directors & officers (D&O) team for the company’s UK, continental Europe, US and Bermudan business. Torus is also in the process of finding a new chief executive to head up its US business. “For a start-up to succeed you need a good strategy but you also need a team that can act and make decisions quickly. When recruiting you have to try to attract people who bring different skills and get them to be active in the boardroom,” says Tobin.

Tobin believes that the credit crisis has created the right environment to hire top talent and this is something start-ups should take advantage of.

“There is disarray in the insurance market. AIG for example, has run into problems and talent has left. Several major companies in insurance have hit big problems through their investment portfolios. Now is a unique opportunity to hire talent. There have never been so many people moving around.”

While talent may be easy to come by, the problem of finding financial backing still exists. Torus was lucky in that it was created just before the credit crisis began with the support of $720m (£444m) private equity funding from First Reserve. Senior management at Torus had also invested personally in the new venture. But start-ups in the insurance industry may not have such a hard time attracting finance compared to other sectors. Tobin is certain that private equity backers are turning their attention to the insurance industry. “Private equity is looking at insurance as they are less attracted to the banking and asset management sectors,” he says.

Cost-modelling

Once financial backing and talent have been found it is important to fully understand costs. Managing director of Alphatec David Grier says that this is where brokers in the general insurance industry lag behind other professionals such as lawyers and accountants. “You need to know your costs and budgets backwards. I’ve asked brokers before who is their most profitable client and they say a name on gut feeling,” Grier says.

He said that robust cost-modelling enables brokers to see and monitor the real costs of their services and provide a clear picture of their most profitable activities to clients. “New entrants to the broker market are in an ideal position to adopt this approach and put it the heart of their business. But getting to grips with their business’s costs is not just a basic work principle, for brokers it means they stand to gain not only in differentiating themselves from other brokers, but also on the benefits of having a professional broker rather than using a simple price-comparison service,” Grier says.

The dos and don’ts of Start-ups

Do

1. Differentiate your business – service, price and quality are not differentiators – these are the same “differentiators” that your competitors will have

2. Quickly and effectively communicate your message

3. Focus on margin rather than revenue – £10m revenue in your first year with £20m costs is not generally regarded as a good result

4. Understand buyer behaviour – for example, no one will change broker if there is a possibility that it could backfire on them

5. Ask for the business – the most important question and one that is rarely asked is “would you like to buy?”