Battling it out with the banks

SME insurance is the bread and butter of many brokers throughout the UK. Traditionally, no small business would have thought of looking anywhere else but their broker when the time came to renew their cover.

But brokers’ dominance of the sector is under assault from a number of sides. In addition to the emergence of the direct insurers on the SME scene, recent years have seen the major high street banks looking to tap into SME business.

And with millions of small business account holders to target, huge marketing budgets and strong brands, the banks have the potential to be a powerful force in the SME sector.

Lloyds TSB reported last month that its SME insurance business had doubled in size in 2007 compared to the previous year, rising to £30m in gross written premiums.

While the size of the business is at present relatively small, it appears to be gathering momentum since the bank launched its commercial insurance offering in 2005.

Now, it has plans to expand its range of commercial products. The managing director of the bank’s insurance division, Phil Loney, said last year that it would be looking to capitalise on brokers’ complacency. “If anyone takes their eye off the ball we will take advantage of that. Some brokers are quite sleepy; they may have close relationships with new customers but they forget the old ones.”

Banking giants HSBC and Royal Bank of Scotland are also pushing hard in this area. So should brokers really be worried about banks and the SME market?

Broker Network managing director Mark Wood thinks not. “Banks for a long, long time have tried to get into the SME market and cross-sell commercial lines products to their customers, but have singularly failed to do so in a successful way.

“The key reasons for this are the number of products they are asking their branch people to sell, and that they haven’t got the expertise to be able to broke and advise properly.”

Wood thinks the potential impact of the banks on the SME sector is really quite small. “You don’t have to move very far into the SME risk category and complexity of risk without thinking that people will want to go to an expert to buy their insurance. You don’t have to employ many people before you want to get some advice on adequate cover.”

So long as brokers avoid complacency and continue to add value for customers, Wood believes the position of the broker in the SME market is safe.

“If anyone takes their eye off the ball we will take advantage.

Phil Loney, Lloyds TSB

David Martin, UK small business manager at Allianz, says that while there are a number of new business models emerging in the SME sector, he doesn’t think the role of the broker in the business-to-business relationship is under threat in the next few years.

“Whatever your size, for good risk management advice, the market seems to indicate that people will go to a broker.”

But Martin says there is a shift in buying patterns that new distribution channels, including banks, could take advantage of. “You’re looking at attitude and buying behaviour. Some new businesses are looking at other distribution models for their insurance. Younger people are more willing to buy through web channels, for example.”

This is the change that is providing the opportunity for banks, and other new channels, to grab a slice of the SME market.

And it is building on existing relationships and their brand power where the power of the banks could come into play. They already have a relationship with their customers and, with the change in buying behaviour, they have the opportunity to build on this familiarity and offer more services to their clients. Lloyds TSB’s Loney argues that the bank has a trusted brand that will help it to sell commercial insurance.

The major challenge for the banks, some argue, is the fact that SME insurance products are difficult to commoditise.

Allianz’s Martin, does not think that the SME market will turn itself into a commoditised proposition in the same manner as the personal lines market. “It’s a business-to-business market place. What you will see is that brokers will adapt, and are adapting, quite well to the market, and new methods of distribution.”

And Martin thinks this continual adaptation in the way they sell policies will provide the key to the continued health of the broker SME market. “I don’t think you can say that one business model in the UK can meet all the different SME insurance needs. The opportunity is there for everyone to take advantage of it.”

The message is that so long as brokers take advantage of the same opportunities that changing buying patterns are presenting to banks and other outlets in the SME market, they should continue to have a strong role in the market.

It is not about brokers versus banks. The lines are blurring between those traditional models, making it more about the products, rather than the method of selling them, says Martin.

Allianz currently underwrites the SME products offered by HSBC to its customers providing cover for a range of business types, from restaurants to wholesalers. Martin says its SME book has been growing rapidly over the past three years. He says the challenge is finding sustainable business models that will deliver products to customers in a cost effective way, however they want to buy them.

“Banks have not got the expertise to broke and advise properly.

Mark Wood, Broker Network

Rather than seeing brokers as in competition with banks, the relationship between HBOS and Smart & Cook, now part of AXA-owned Venture Preference, points to the potential in co-operation. Customers going to the business insurance section on the HBOS website are directed to contact the broker in order to take their insurance request further.

Stuart Reid, chief executive of Venture Preference, says banks have tried to sell insurance to their customers before, with varying degrees of success. He argues that for banks, working in partnership with brokers is the way they will find the most success in this area. “Where you have a relationship with the bank and the broker supporting each other, it can work. But you need to have an informed bank, and a good broker.”

The relationship between Smart & Cook and HBOS has been ongoing for three years, and Reid describes it as “mutually beneficial”. Banks trying to break into the SME market by themselves could find it a step too far for them, he argues.

Harboured ambitions

A case in point is HBOS itself. The bank’s deal with Smart & Cook came about because it did not have the expertise in house to broke the risks in-house. HBOS had previously harboured ambitions to become a top 20 commercial insurance broker.

Reid, however, thinks the presence of banks in the SME market will definitely make waves. He suggests that there will be some commoditisation in the market, particularly for risks in the £5,000 category or below, which will help banks tap into the market.

“But one must not forget that insurance is a complicated product. The reason that people take up cover is that they want to talk about it and they want to have confidence in what they are buying. Insurance by its very nature is very, very complex to sell,” says Reid.

Others however, argue that if banks decide to really push their SME offerings, brokers could be in for a hard time. “It’s a huge threat to brokers,” says Perkins Slade chief executive David Slade, so much so that the broker pulled out of the SME market for risks with premiums under £5,000. Below this level, Slade says, it is extremely difficult to add value unless it is a particularly complicated risk.

Slade adds: “The vast majority of SME purchasers can’t tell the difference between a banana and an orange, and if the banana is three pence cheaper, then they will buy it. It is moving towards a commoditised market, and if that is what insurance is coming down to, frankly Perkins Slade does not want to deal with it.”

He says brokers have little chance of competing with banks in this area through adding value, as “the customer doesn’t recognise what added value is”.

Working with the banks to sell to the SME market is only an option open to big national brokers, says Slade, pointing to Smart & Cook’s relationship with HBOS. “But how many brokers have the facilities to provide a totally national service? Very few can do this.”

“The vast majority of SME purchasers cannot tell the difference between a banana and an orange.

David Slade, Perkins Slade

For the banks, getting involved in a complex area that is outside their core expertise could have serious consequences, says Slade.

“The banks won’t be able to give advice. If it is products where people don’t need advice, or they know what sort of cover they want, such as a straight forward risk, then they will go to their bank.

“I’m afraid this will lead to absolute chaos as even these small products need advice. I think it will be okay while they are piling it high and selling it cheap. But when they have to give advice it will fall over.”

Other see nothing new in banks such as Lloyds TSB announcing ambitious plans for SME operations.

Fortis distribution and development director Chris Dobson says: “Banks have always been well positioned to take advantage of the provision of insurance to their SME client.

“What has taken people by surprise is that they have not yet been able to really crack that one and create a really big presence in the market. The opportunity is still there for them to take, and a number of them are working hard in this area.”

Buying habits

But are they now a bigger threat to brokers, due to customers changing their buying habits? “No more so than before,” says Dobson. “One of the reasons that banks have not been able to succeed as they would have liked is that brokers are very good at doing this themselves.

“More and more brokers have focused on SMEs as the personal lines market has become more competitive, and brokers now have good propositions for their clients and can give them advice across the market.”

Dobson also says banks have the potential to push their offering past the small end of the SME market towards more complex risks. “They will probably look at the SME market in terms of the package of services they can provide, and one of these things will be an insurance offering. It has been and will be relatively straight forward to create the skills and resources needed in this area.”

Dobson does not rule out banks attempting to provide insurance products for larger commercial risks. “If the suggestion is that they will never be able to move up to the medium to large size enterprises, I would say it would be hard, but would not say never. They are big enough and powerful enough to do that, if they want to.”

Allianz’s Martin adds: “What you will see across the market place is a very big difference between brokers and financial institutions that are adapting to the growth in distribution methods for SME cover in the market place, and those that aren’t. Those that don’t adapt will struggle to move forward.” IT