A small step to big changes

For some time, it has been clear that the micro SME market has been ready for fundamental change. Now, after a few false starts, this change is getting into full swing.

Brokers and insurers increasingly recognise that this is a segment where you have to get your processes and cost base right, and the best way to do that is by adopting electronic trading. More importantly, the number of customers choosing to buy online is increasing by the day.

Many are surprised it has taken this long, but there are good reasons why this has been the case. First, insurers may have been lulled into a false sense of security by the fact that this business has historically delivered strong and relatively consistent loss ratios. Secondly, there has been a tendency to wait for market solutions to emerge. Thirdly, adopting e-trading solutions alongside existing business models is extremely hard. And, finally, there has been uncertainty about the speed at which brokers – and more importantly small business customers – would change their placing and buying habits.

So what triggered the change and why has there been such rapid progress over the past 12 months?

It can be put down to two simple factors: buyer demand and simple financial dynamics.

As recently as two years ago, small business customers would shy away from buying online, but more and more are willing to do so now.

They increasingly value the fact that they can buy their insurance at any time of the day.

As owner-managers get busier during these difficult economic times, the attraction of purchasing commercial insurance in the same simple way as purchasing personal insurance – saving valuable time and effort – has become ever greater. Online intermediaries are offering more choice, competitive prices and, in most cases, the option for the customer to speak to a broker if need be.

For their part, insurers and brokers have done their sums and realised that healthy loss ratios (or high commission levels) can simply mask the effect of outdated and costly business models.

The reality is that the combined cost of serving small business customers in a traditional way has been too high and this has resulted in insurers and brokers losing money – or customers paying too much. Neither scenario is acceptable.

There is also an increasing realisation that it is not the role of the market to deliver a gift-wrapped solution. Market standards have a role to play but if you ask 20 insurers to agree on a question set for a shop insurance quotation, at best you will end up with something clunky and unusable and at worst you will end up with nothing at all.

This may suit insurers who have legacy business to protect, but to think this would hold back innovation in the market is naive.

The reality is that the progress we have seen has arisen from like-minded insurers, technology partners and brokers working together on propositions that get implemented quickly on an adopt-and-learn basis.

Typically these aren’t the traditional players with a strong foothold in the sector, but they are companies that recognise a £3bn-plus market that is underserved and where there are huge opportunities.

For insurers, it really is difficult to look beyond e-trading as the way forward. And while there are a number of different e-trading models that could be adopted, the aim has to be to achieve a balance between low operational costs, underwriting performance and service delivery.

Organisations that get this right have the potential to achieve significant and profitable growth over time. And a key component of this is to work with the right trading partners.

There is no question that the new wave of e-trading intermediaries is making a real impact. Some of these provide business-to-business solutions to brokers, while others provide online business-to-consumer solutions for micro SMEs themselves. Some are owned by traditional brokers, others by new entrants to the market.

Typically, they are not respecters of reputation and have no tolerance for wasting time (and money) on products they can’t get to market quickly. They also have their fingers on the pulse, using electronic management information, as well as frontline anecdotal evidence, to identify the changing buying habits of small business customers and what they are looking for from online offerings.

These intermediaries want to work with like-minded insurers who can get product to market quickly. Better to start with a panel of two and add to it, rather than wait for six to be ready. The benefit for the quick movers is that they have the opportunity to shape the future.

There is little doubt that e-trading has taken off and is here to stay. We’ve passed the tipping point. A typical small business client is increasingly voting with its feet (or is that with its mouse?), and more and more will choose to buy online.

Insurers who are already active in this space are in effect setting the standards and helping to shape this rapidly maturing market. The most effective way of driving change in a market isn’t through developing and adopting industry-wide solutions, but through innovating and coming up with new ways of working that create competitive advantage for their participants.

There is no surer way than this of getting more in the industry to the table. IT

Simon Cooter is distribution director of Brit UK