A sea change in the stormy SME market

The SME insurance market is undergoing a revolution. Broker consolidation, soft market conditions and technological innovations are driving an upheaval in the market place.

A recent report on the changing nature of the SME market from Ernst & Young, in partnership with the CII, predicted that broker consolidation and market conditions would be the driving factors for change over the next five years. In the highly competitive conditions of a soft market, insurers are more likely to provide the deals, remuneration and innovation that distributors are looking for, the report says.

Predictions like that suggest the SME market is in the midst of a sea change. “Distribution is undergoing probably the biggest change for some considerable time,” says Groupama distribution and customer services director Cathie Bruce.

“The two biggest changes are access to market and diversification of the portfolio of business that you have. The broker’s biggest challenge is access to the market, where people are being bombarded by advertising telling them that they don’t need an intermediary to buy insurance.”

Bruce says brokers are challenging this by negotiating underwriting authority deals with insurers, trying to take one of the links out of the insurance chain, and streamlining the process for the customer, through the use of technology.

E-commerce platforms have been hailed by some as the key for brokers to maintain their slice of the increasingly commoditised small end of the SME market. But Biba technical services manager Steve Foulsham, thinks these platforms have some way to go.

“There are a lot of e-commerce type solutions out there for commercial business and they are very much in their infancy. They have a place in the market, but it all depends ‘ ‘ on which insurers are supporting those sites. From experience, on the commercial side, I still think we are some way away from the extent of EDI transaction that we get in the personal lines market. It can be a cost effective way of doing business, but inevitably, if it is a broker-to-broker service, there’s another mouth to feed in there,” warns Foulsham.

“There are a lot of e-commerce type solutions out there for commercial business.

Steve Foulsham, Biba

However, some brokers are already grasping the opportunity provided by the development of e-commerce. Jason Gandy, chief executive of SMEi Group, which owns online commercial portal Broker2Broker, says the efficiency the portal provides for the broker is helping them serve their customers better. Broker2Broker provides comparative quotes on a range of SME insurance products.

“They are busy and don’t have a lot of time. A lot of the brokers that we have registered are at the smaller end, below £5m GWP, with the majority below £2m. They don’t have the scope of agencies and are used to using wholesale brokers,” says Gandy.

“From a broker’s point of view it gives them choice. They can sit there with their customers and give them competitive quotes. From an insurer’s point of view, it’s a very low cost route to market.”

Norwich Union’s head of e-trading and IT, Phil Nunn, says the growth of internet technology has changed the way brokers and insurers are approaching e-trading. “A lot of brokers are now coming to us with more individual propositions based around technology and the internet. What’s really good now is that they are coming to us with IT as a fundamental plank of what they are trying to do.

“The internet seems to be increasing the potential for brokers to be entrepreneurial with their insurer partners,” he says.

Most value

For some, moving to a solus deal, where an insurer agrees to underwrite a broker’s entire book of a certain type of business, seems to be the answer to getting the most value out of their SME book.

“The internet seems to be increasing the potential for brokers to be entrepreneurial with their insurer partners.

Phil Nunn, Norwich Union

Allianz small business development manager Graeme Durlacher says Allianz’s interest in solus deals goes back three to four years. “It’s guaranteed business for us,” he says, but points out that there has to be a wider acceptance rate for risks under solus deals than they might have on the open market.

By taking on a solus deal, insurers will improve their strike rate for business they quote for, says Durlacher. “For brokers it drives a lot of the cost out of their business.”

But he says brokers entering into a solus deal need to be aware of the cultural change involved. If a broker has spent time getting a variety of quotes before making a recommendation to a client, presenting them with only one insurer can be a shock to the way that brokers work.

For Allianz the majority of its SME business comes through the open market, but the six or so solus deals the insurer has announced over the past 12 months are the tip of the iceberg, says Durlacher.

Managing general agencies (MGA) also seem to be rising in popularity. Last year Willis announced it would be looking to set up an MGA facility to handle SME risks.

Towergate chief executive, underwriting, Clive Nathan says there are challenges to setting up an MGA. He says that in a soft market there can be a me too element in the rush towards creating one. “As the market hardens, only the ones that have a track record will survive. In an MGA there is a very high commission level and in a hard market that will be one of the areas that insurers would look at.”

The key to being successful in this area is becoming an expert in whatever niche you operate in, be that cherished cars or farming, says Nathan.