Small but mighty: Biba's new D&O scheme

Recessions bring danger and opportunity in equal measure. In the insurance sector, many independent brokers have gone to the wall over the course of the current financial crisis, or have been bought out by larger rivals. Those that have survived have seen their margins whittled away to dangerously wafer-thin proportions over the last two years.

But amid the danger, astute brokers are increasingly looking at the opportunities that developing niche business ideas, such as schemes, can offer to help them break into new markets and ride out the worst effects of the downturn.

“Insurance brokers are under pressure, so coming up with ideas for schemes business that insurers will bite at is taking up more of their thought processes,” Panmure Gordon Insurance analyst Barrie Cornes says. “Times are tough and schemes business can offer the potential for both brokers and insurers to offset costs.”

Earlier this month, Biba unveiled a new directors’ and officers’ (D&O) insurance scheme, brokered by Bluefin and underwritten by insurer Ace. The scheme, which is for small brokers and aimed at small businesses, provides cover for losses resulting from wrongful acts, including damages and judgments.

It also covers a range of legal expenses as well as tax contributions where the company has become insolvent. The scheme uses Ace’s online service, enabling brokers to get quotes easily and quickly, and bind policies.

The Biba Bluefin D&O fills a relatively small gap in the market, but in essence that’s what schemes business is all about: creating a niche product for a niche clientele. The D&O scheme recognises that changes in legislation, such as amendments to the Corporate Manslaughter Act, have created a need for brokers to offer small business clients the kind of protection that was traditionally only required by large companies.

Jumping through hoops

So how do brokers come up with winning formulas for schemes? How can they be sure there is sufficient demand to generate income?

“We had some discussions with Biba about this particular scheme, asking them what their members want and where there were gaps that we could plug,” Bluefin director of wholesale distribution Laura High explains. “But we come up with schemes all the time, the vast majority of which are sold direct to brokers.”

Schemes like Bluefin’s D&O cover are usually tried and tested in the retail market before entering the wholesale sector, so have a proven track record in terms of market demand. High adds that brokers often approach Bluefin with ideas to develop as schemes but Bluefin has to be completely convinced there is a demand for a product in the market.

“For example, the D&O market is dominated by large brokers,” High says. “Consequently, we saw a clear need to provide smaller brokers with a scheme that would give them the ability to compete in that market. We did some market research and designed a product that is competitive for the customer and is available online so brokers don’t have to rely on service from insurers. They can simply get quotes for clients and bind the cover online.”

In addition to being a Biba member, Bluefin already had a working relationship with Biba, having run the association’s motor risk scheme for the past four years. Even so, there were still a number of hoops to jump through before Bluefin and its D&O scheme got Biba approval.

“We get lots of schemes suggested to us,” Biba technical services manager Steve Foulsham says. “We reject quite a few, listen to others, and then if we think they will benefit members, we’ll start the process.”

The process involved Bluefin having to tender, along with two other brokers, to provide the scheme for a fixed period of three years. It also had to make a presentation to Biba’s general insurance brokers’ committee, an elected body of members that includes smaller and regional brokers.

“The committee has the final say,” Foulsham explains. “First, they look at the security of the underwriter. We insist on a minimum of a BBB rating for underwriters. Secondly, they look at the value of the scheme to members in terms of price and access to markets. Basically, the successful tender is the one that offers the best scheme based on its operation, access to markets and value in terms of price.”

High says the committee is “rigorous” when assessing schemes, adding: “Biba tend to push you for better deals for their members.” But it doesn’t end there. Once a Biba scheme is up and running, it is subject to quarterly review meetings with the committee, which look at how much income is going through the scheme and who is using it. “We keep schemes under review so we can see if they need to be improved or changed,” Foulsham says.

The role of the insurance underwriter is crucial to getting schemes to market. You could be forgiven for thinking that securing backing from an insurer involves a hard sell on the part of the broker to the much larger underwriter, but in fact the reverse is true.

“Actually, it doesn’t come down to a hard sell at all,” High says. “We only pursue schemes we are convinced there is a demand for. Quite often what we’re selling is an enhanced version of what the big insurers are offering, but we tweak it to suit the brokers that the insurers are not getting to. It’s more a case of demonstrating to insurers how we can sell their products for them rather than: ‘We’ve got this scheme idea, will you please back it?’”

In fact, Ace had to compete with two other insurers to win the right to underwrite the scheme after first being approached by Bluefin two years ago.

And the winner is …

“It’s a lengthy process,” Ace senior underwriter for financial lines Dean Horton says. “It took a couple of months, but we won and are Bluefin’s preferred carrier for the scheme. Our online system was an important factor. It’s quick and produces quotation and documentation instantly, which was something Bluefin was keen on for its client base.”

The competition to underwrite a good scheme is understandable because there are a number of benefits for the insurer. In addition to the fresh income that schemes can generate, the effective delegation of distribution to wholesale brokers means insurers are also saving money and time.

“Ace does have D&O schemes, but only distributes to a handful of brokers,” High says. “We distribute to 2,500 brokers, so Ace is quite keen to tap into our distribution model. That’s one of the biggest selling points we have when we go to insurers with a scheme. We can manage Ace’s distribution, which saves them the work and resourcing, and they know they are reaching more brokers.”

It’s worth pointing out that because the broker handles the administration, the commission that insurers have to pay is usually higher. Consequently, the quality of the book needs to justify the higher cost for the insurer through profitable returns.

But for Horton, the benefits of the Biba Blufin D&O scheme outweigh other considerations. “In order to make your book grow bigger, you have to look down the list of brokers. This particular scheme gets the Ace name out to brokers we wouldn’t normally deal with on a day-to-day basis. We are always looking for different routes to markets and this gets us into places we wouldn’t normally be seen.”

There is, however, a further danger lurking within the opportunity this type of arrangement offers a broker. Brokers are, of course, duty bound to get the best possible deal for clients in the market, and there is a danger that they can become too dependent on one insurer.

“Brokers need to be aware that they mustn’t put all their eggs into one basket,” Cornes says.

To avoid that danger, most brokers spread their schemes across the sector. “We’ve got other schemes with insurers like RSA, Aviva, AXA and Lloyds TSB Corporate Markets,” High says. “We go to the insurer that can do the best job for a particular scheme.” IT