As the insurance industry shifts and re-settles following the tremors caused by merger and acquisiti...
As the insurance industry shifts and re-settles following the tremors caused by merger and acquisition activity, things are in some ways becoming more focused for advisers.
IFAs may be forgiven for wondering whether the insurance company they place business with today, will be there tomorrow. It is probable that a lot of the middle-sized insurers will be swallowed up, and the market will consolidate into a few big brands and a number of smaller niche players.
Traditionally, the larger insurance companies have shied from outsourcing products and services to other insurers, but in this brave new world, that has to change indeed, it has already started to happen.
Specialist products
Niche players will thrive in this changing insurance market because they are able to supply specialist, bespoke products. As they are not in competition with the people to whom they provide them, clients retain ownership and control of their customers, brand, product and service.
Niche underwriters can bring their expertise to bear in the risk management, technical, regulatory and back office areas, providing organisations with the necessary technical ability and infrastructure to provide high quality own-brand financial services. They can also provide the components to bring the clients' products and services to fruition (see case study).
But what does all this mean for IFAs? A trend towards wholesale insurers creating own-branded products should have a positive impact on the adviser in a number of areas.
While some of the institutions using own-branded products and remember, they may just as easily be retail or affinity groups as financial services providers will sell them directly to the customer, others will use intermediaries. By expanding the market we should also be expanding the opportunities for IFAs or IFA groups.
Large insurance companies are unlikely to want, or may not even be able, to compete on the same terms as niche players. The business is either too tricky for them to handle on their systems, or the margins are too tight.
IFAs will also increasingly notice insurers working together. The larger insurers may not want to deal with niche players directly, but they may work with consultants who do not have pre-conceived prejudices about bringing two insurers together. To this end, relationships with consultants and reinsurers can be expanded.
What niche players are able to do is to work for smaller groups of people.
IFAs trying to place business of a more specialist kind, a holiday property bond, for example, cannot always get satisfaction from large insurers, but specialist underwriters may already be doing it for someone else.
A Lloyd's syndicate may also be able to provide advisers with cover for a specialist product, but it is worth looking at the support on offer. Underwriters should be able to offer a safety net for the end customer. For example, in the unlikely event of a client partners failing, a rescue operation should spring into action and that business investment, customer administration and so on would be taken into their own hands.
Niche players have a lot to offer to IFAs, but even at this level there need to be economies of scale. Underwriters are unlikely to create a product for a single IFA, but if there is a whole block of lots of similar risk a product design might work. Whereas the big insurers might only put a product together for a big network, some underwriters will consider a smaller group of IFAs.
A shrinking market
Advisers may well find that the shrinking of the marketplace as a result of merger and aquisition activity among large insurers means the ability to access a particular product is diminished. Niche players can help fill that gap.
There is evidence that niche insurers are more willing to accept that component management is the way forward. There is a growing realisation that not only is it almost impossible to be good at everything, but that it often does not make good business sense to try to be.
Niche players may be able to offer a service made up of component parts. These parts may be the services of other specialist providers. Functional management could be carried out by the customer organisation or third parties, such as PMI claims underwriters.
Niche players have become intrinsically linked with the concept of 'virtual insurance'. This is where the insurance expertise is a 'below the line' operation. Above the line, the end consumer sees only the insurance product being offered under the brand name of the organisation they are familiar with. More often than not their customers are unaware that a niche underwriter is involved.
Niche players tend to be, and often have to be, at the leading edge of technological development. Ongoing development of systems will cut down the lead-time for bringing products to market to a matter of weeks. Eventually this may be a matter of days. More sophisticated technology also aids niche players in taking on 'difficult' pieces of business that other larger insurers would not touch.
They will also have data management and customer administration systems to handle such transactions in a cost-effective manner and to tie this data back to the risk and regulatory requirements.
The message is starting to get through. PMI companies are now using separate underwriters such as the market's newest entrant, Healthcare4life.
Employee benefits may be another area where niche insurers and IFAs come together. Stakeholder is the thin end of a much bigger workplace-marketing wedge.
Although it is a high volume, highly automated business and the profit margins will be low, it becomes more attractive to groups if the 'nice to have' add-ons such as PMI are also offered as part of employee benefit schemes.
It may be that IFA groups get involved in worksite marketing of stakeholder and other employee benefit packages. A product or series of products could then be created and appropriately branded at this level.
Nigel Cooke is group chief executive of Criterion
