Will appetite for UK broker schemes dwindle amid ‘stark drop’ in possible commission earnings?

Between April and October 2022, brokers have 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, according to the Insurance Times Schemes Index.

Produced in association with software firm SchemeServe, the twice-yearly Schemes Index provides a snapshot of the most profitable schemes businesses for brokers.

However, within this most recent reporting period, SchemeServe found that across 25 lines of business where it operates broker schemes, only four had achieved an increase in brokers’ commission earnings when compared to the same reporting time frame in 2021.

Between April and October 2022, the largest reported increase in brokers’ commission earnings as a percentage of premium, compared to the same period in 2021, was for personal accident schemes (25%). Minute commission gains were also recorded for combined liability schemes (2%) and marine cargo schemes (0.3%).

Adam Bishop, chief executive of SchemeServe, has ringfenced one scheme type as a potential growth opportunity for brokers, however – contractors all risks.

Despite commission earnings in this line of scheme business falling by 84% during the Covid-19 pandemic, tentative growth in the last six months signposts these schemes as a potential moneymaker for brokers – particularly as this class was “one of the best performers” back in 2019/20, Bishop added.

Since April 2022, contractors all risks schemes have seen overall new business and renewal volume grow 5%, while brokers’ commission earnings as a percentage of premium have increased by 10%. Between September 2021 and September 2022, brokers’ commission for contractors all risks schemes increased by 8%.

Bishop described these figures as “small movements” that were “standout amongst other falling lines”.

He continued: “It is interesting to see some areas of positivity, perhaps indicating opportunity for growth [in lines] such as commercial combined and contractors all risks, which have shown some improvement in the last six months.

“With the cost of contractors and materials increasing in a still buoyant housing market, this has an impact too in increased premiums and could, therefore, be another reason for slightly higher commissions.”

Cyber slowdown

The previous golden goose of broker schemes, cyber liability, has also experienced a sudden shutdown of growth, with the latest data revealing “a marked drop at renewal and a significant drop in commission earnings”, Bishop noted.

Looking back, between 1 October 2021 and 1 April 2022, brokers’ commission earnings as a percentage of premium increased by 82% for cyber liability schemes, while first and renewal premiums grew by 107%.

Bishop added that new business and renewal growth in cyber liability schemes had grown “by nearly 500% since the start of the pandemic”.

However, these schemes have now “seen the biggest fall of all [the] schemes” operated by SchemeServe year-on-year, Bishop continued, with new business and renewal volume declining by 24% in the last six months and total commission income dropping 28%.

Between September 2021 and September 2022, brokers’ commission earnings for these schemes have fallen 65%, while overall volume for new business and renewals fell by 49% in this time frame.

Despite these results, Bishop still defined cyber liability as “the standout scheme” for brokers.

Pandemic ramifications still evident

Schemes impacted by the Covid-19 pandemic are still seeing fluctuations.

This includes caravan and trailer schemes, which benefited hugely from the pandemic driven staycation boom.

For example, between 1 April and 31 September 2021, these schemes recorded a 69% uptick in commission earnings, while the volume of premiums for these schemes increased by 129% in this reporting period - on top of a 100% growth between October 2020 and March 2021.

In the last six months, however, new business and renewal volumes have dropped 49% and brokers’ commission earnings from these schemes have decreased 37% - Bishop called this “the biggest fall across all lines in the last six months”.

Pubs and clubs schemes have experienced a similar trajectory – between April and September 2021, these were the second most profitable schemes for brokers, with commission earnings up 136% compared to the reporting period between October 2020 and March 2021.

But this “notoriously restricted” line of business has suffered at the hands of “current hard market conditions” to see brokers’ commission earnings fall 36% over the last six months – despite a 38% uptick in new business and renewal volumes between September 2021 and September 2022.

Between April and October 2022, brokers’ commission earnings also dropped significantly for specialist combined schemes (-26%) and breakdown schemes (-60%).

Year-on-year, however, brokers’ commission for public liability schemes saw a 13% boost between September 2021 and September 2022.

Bishop concluded: “In our last index in April, we were starting to see a number of high growth schemes stalling and figures starting to fall - this decline has gathered pace in the last six months across many lines, including caravan, cyber and pubs and clubs.

“There could be many reasons for this – [some drivers will be] different for each product, but certain headwinds including the macroeconomic environment and [the] hard, restrictive market with MGAs losing capacity in certain lines, is likely to be a strong contributing factor.

“Could we be seeing early indicators of a recession starting to bite?”