Are usage-based policies set to disrupt the post-Covid SME insurance market?

A “heady cocktail” of recent economic events have hit SMEs hard.

Not only have these businesses grappled with the fallout from Brexit and the Covid-19 pandemic, but continuing supply chain challenges, escalating raw material costs and general inflation are also leaving their mark on small British businesses.

Amid these spinning plates, the coronavirus pandemic also saw SMEs lose trust in the insurance sector, with many companies affected by Covid-linked business interruption (BI) insurance claim decisions and the subsequent FCA test case.

This is evidenced by research published by data and analytics firm GlobalData in July 2021, which found that 41% of respondents felt that insurers’ reputation had worsened because of the industry’s response to the coronavirus crisis.

This view is also shared by Stuart Middleton, chief insurance officer at broker Hubb. He believes that despite SME owners needing the insurance industry “to be right at their side” during the challenges of the pandemic, BI complexities have dented clients’ trust in the sector.

In part, Middleton blamed SME insurance packages - he feels that both previous policy wordings and staff training were not extensive enough to cover all reasonable eventualities arising from an unexpected crisis, like the pandemic.

And, just as SME businesses’ risk awareness was heightened by fluctuating national lockdowns, broker service seemingly struggled to keep pace with the myriad challenges SME clients were reporting, Middleton added, with “the personal service element from brokers decreasing” because “distribution [was] changing” and being forced to move online thanks to social distancing.

Because of this service shift, “it’s not viable anymore for brokers - especially the big ones - to give a personalised service to a client from whom they may only be earning a few £100 in commissions”, explained Middleton.

However, this stance from brokers “doesn’t make the concerns of the business owner go away. In many cases, it may amplify them”.

But how do brokers themselves feel they have delivered for SMEs during the pandemic and associated communication challenges? And are there any insurance propositions that brokers can tap into to regain the trust of SME companies?

‘Commodity on a shelf’

For many of the brokers quizzed by Insurance Times, business bottom lines have been a key driving factor when it comes to service for SMEs. For example, micro SMEs are unlikely to spend vast amounts on broker advice in addition to purchasing potentially expensive insurance coverage.

Aston Lark group chief executive Peter Blanc said that “it is a real challenge to be able to devote sufficient time to properly understand every SME risk when premiums and brokerage levels can be very low”.

Therefore, if brokers “seek efficiency in their models”, it can then “be tempting to provide renewal terms via email, with all of the really important terms and conditions included in one of several PDF attachments”, Blanc continued.

 Ashwin Mistry, non-executive director at The Clear Group, added that in the “pursuit of a better bottom line, some brokers and insurers have sought to cut out [the] essentials of why we started in insurance and what we stand for”.

For him, “dumbing down insurance to a commodity of the shelf has cost us dearly” in terms of client trust.

Research polling 1,000 senior decision-makers, published by Hubb in January 2022, reinforces this view. The survey found that 55% of UK-based SMEs are unsure or don’t think their insurance broker provides the most competitive or best quote to suit their commercial needs.

Blanc emphasised that strained relations between brokers and SMEs must be rectified.

He said: “We must always remember that SMEs are busy people and [are] often not insurance savvy. Our job is to be their trusted advisor, making sure that insurance frees their business from as many risks as possible.

“In short, brokers must focus on advice, not price.”

A usage-based solution?

Blanc recommended that one way to better broker service for SMEs lies in improving data collection. He explained: “A real improvement in SME insurance would be to enhance the simplicity of information gathering, helping the process to become more intuitive and rapid for customers, which may free up time for vital broker discussions around risk and exposures.”

So, could SME-centric, usage-based insurance policies perhaps be used to mend the rift between brokers and small businesses?

According to Hubb’s aforementioned research, 68% of respondents thought it would be fairer for insurance providers to only charge via a consumption model, meaning businesses only pay for what they use.

With this in mind, Hubb is currently developing its usage-based broking proposition, which utilises data augmenting technology that Hubb acquired when it bought technology provider Digital Fineprint in December 2021.

The model will be rolled out on a sector by sector basis - it has already been implemented for the transport and logistics industry, with SMEs next on the list.

One benefit of this usage-based technology, according to Middleton, is that it makes broker commissions and fees transparent, as well as enables clients to see which insurers have quoted or declined cover. The visibility of this information aims to bolster clients’ trust.

Despite Hubb’s research indicating SME appetite for usage-based cover, insurance sector commentators remain skeptical. 

For example, Helen Bryant, director of digital trading at Allianz Commercial, said that while usage-based insurance “undoubtedly has significant benefits for businesses [that] do not require continuous liability cover or have irregular patterns of work, such as self-employed freelancers, it risks underinsurance and the creation of complexity by its stop-start nature”. 

Blanc agreed that “usage-based insurance is not the way to go” for SMEs because “any coverage system requiring regular purchasing decisions runs the risk of leading to inadvertent lack of cover – simply forgetting to purchase”.

Carl Shuker, group chief executive at A-Plan Insurance, added that despite the “convenience” of usage-based policies, the “pro rata will probably be much higher than an annual policy”.

“It doesn’t stop claims frequency or the severity of claims dropping - it just shifts the burden of premium around,” he explained.