Does it all add up for SMEs?

Depressing though it may be for insurers and brokers, there is no sign yet that price is loosening its grip as the key trend driving commercial lines insurance for small and medium-sized enterprises.

In a climate where confidence among SMEs remains, at best, muted – a survey by Aviva in April (see box overleaf) suggests that just 14% of small-business owners were optimistic about economic prospects for the year ahead – the priority is very much about negotiating premiums down to the lowest level and trimming costs wherever possible.

“Price is still the key driver; it is the major issue. A lot of businesses are looking simply to get the lowest level of cover they can at the moment that will keep them legal,” Aviva commercial product manager David Bruce says.

Growing body of non-insurers

Aviva’s research also revealed – worryingly for the industry – that a significant and growing proportion of SMEs admitted to not holding any commercial insurance on their business at all. In total, 15% of those surveyed admitted that they did not have any cover in place, compared with 12% six months ago.

Within that overall picture, however, the recession has been throwing up some intriguing smaller shifts in claims and buying behaviour, argues Allianz’s head of SME affinity and broker markets, David Martin.

There has been, for example, an increase in theft and malicious damage claims, while the cold weather over the winter has also led to a sharp rise in claims.

“There has been a big increase, too, in accidental damage claims,” Martin says. “This perhaps indicates that people are more prepared to claim for incidents they might not have done before because things are that much tighter financially.”

Despite this, there has not been a significant rise in fraud claims – something that has often followed previous downturns, says LV= commercial director Mike Crane.

“We have not seen business disappearing as much as you might have expected. Although the restaurant and pubs sector has caused concern, there have not been the same volumes of business failures as in previous recessions,” Crane says.

“A lot of small businesses seem to have been running quite tight ships anyway, so they were not as over-extended, although there has of course been some contraction going on.

“One of the things brokers are telling us is that a lot of businesses are asking them to look around more. Insurance is perceived as another cost and, as such, there is a focus on whether it can be trimmed back,” he adds.

A survey by QBE in February found that a third of SMEs were happy to trim costs even further by simply buying direct from the insurer and cutting out the broker altogether. A 10th of those surveyed were sceptical about how using a broker might help them at all. Just 11% said they turned to their brokers for advice, with 5% saying they would use insurers.

Need to offer added value

What this suggested, argued the research, was that while SMEs did understand their legal commercial insurance requirements, the industry was missing a trick in failing to educate the clients about the extra practical advice it could offer.

The research showed clearly the dominance of price in the thinking of SME managers when it comes to commercial lines – ‘competitive price’ was the top priority for three-quarters of those polled. Nevertheless, 45% still primarily bought on the basis of broker recommendation, it added.

Providers and brokers have been working hard to adjust to this new, tougher climate. In May, for example, broker Heath Lambert announced it was combining its commercial affinity and small business division with its personal lines unit. In the same month, hot on the heels of AXA unveiling an SME-focused financial lines unit, RSA said it was relaunching its SME offering. This follows moves by Fortis last October to significantly revamp its commercial underwriting and business development structures to position itself better within the SME arena.

At Allianz, whose market share has grown by 5%-6% despite the downturn, a key initiative has been the development of more sophisticated rating engines, so improving pricing techniques and postcode accuracy, says Martin.

“We can now identify claims trends right down to the street level. We know more about our customers than ever, which means we are able to be more accurate in terms of delivery and our customers are more able to plan their insurance costs over the longer term,” he argues.

Martin also sees his company playing a bigger role in helping to educate SMEs about the importance of risk management, even when times are tough financially, using Allianz’s ‘risk director’ suite of risk management tools to both brokers and policyholders.

“For the future, I see increasing confidence coming through within the SME sector, particularly around insurance costs. Clients are looking more at risk management and we are trying to educate SMEs about their risk exposure,” Martin says.

Competitive rates

Overall, rates remain competitive, says Crane, confounding expectations last autumn that there would be a hardening. Nevertheless, market share is up and LV= is writing 50% more business than this time last year, he adds.

Brokers are demanding more efficiency and there is a greater appetite for electronic trading products. “Price is still important. But brokers are still looking more at the whole equation; what is the best deal,” Crane says.

“Rating levels are going to remain very competitive and there will be more of a move towards electronic solutions. There is a real demand for greater sophistication around price, while at the same time addressing all the other costs that might be in the equation. It is not just about having a good price, it is about having a way of handling that business that is cost efficient.”

Similarly, at Aviva there has been an emphasis on offering more packaged products, argues Bruce, as well as ‘add-ons’, such as help with red tape, claims help lines and counselling services – anything that will give an added-value point of difference, he says.

“Packaging gives people a level of cover that allows them to trade up or increase their limits, or which offers extra cover – perhaps such as business travel insurance or accident cover – something they might otherwise have felt was outside their reach,”?Martin says.

“We are also working more closely with brokers. They are the people who can really look at a business and what it needs. It is about selling a level of cover that will fit the business – although it has to be at a competitive rate.” IT

Top tips for success in the SME market

• With many SMEs focused solely on price, the key differentiator will need to be value. So assess what else you can add – advice on risk assessment, prevention, better service, a better claims helpline or assistance with red tape.

• Consider how you can augment or package your products to make them more attractive to SMEs, perhaps by incorporating additional products, such as business travel insurance or accident cover, within the core package.

• Look at your technology and IT platforms. Are you delivering in the right space or in a way that is most convenient? Are your ratings engines or claims management processes as accurate and effective as they could be?

• Focus on your point of difference – if everyone is chasing down to the minimum premium, what new angle could you come up with?

• Don’t overlook the basics of understanding your underwriting inside out.

Broker focus: Bluefin

There is little sign of any sustained, post-recession recovery in commercial lines, Bluefin chief trading officer Graham Coates warns. For insurers and brokers, the focus will continue to be on working smarter, as well as harder, to maintain profitability.

“For many SMEs, the economic conditions are still very tough. Over the past year, SMEs has been the business area that has probably suffered the most,” he says.

“We are not seeing any noticeable increase in premiums, nor is there a trend in specific products. But the number of liquidations, the amount of economic attrition and reduction in core activity have all slowed.”

The market remains attractive for many insurers, which makes it more challenging, Coates argues. “There is still far too much capacity, and insurers are falling over themselves to pick up SME business. So there is a lot of competing for new business rather than pushing at rates.

“There has also been more activity from some of the newer players. Normally you could rely on the big five composites to compete with each other. But we’ve been seeing a lot more trying to compete for a contracting market.”

With less appetite for consolidation or acquisition, the focus has to be on organic growth, he argues. “It is imperative to hang on to customers. Firms need to put time and effort into how they interact with customers, how they improve their sales skills and lead generation.”

Within such a competitive environment, how insurers interact with brokers – the flexibility or accessibility they offer, the access to a dedicated team or personal contact – will make a difference.

Increasingly, too, the technological solutions or platforms on offer are becoming more important.

Research: What SME managers think

A growing proportion of senior SME managers have admitted that they don’t hold any commercial insurance on their business, according to a recent survey by Aviva.

The insurer’s quarterly survey of businesses in the small to medium-sized sector, published in April, showed that 15% of respondents said that they did not have any cover in place, compared with 12% six months ago.

The survey also showed that the outlook for 2010 was muted. Some 60% of those surveyed said they expected conditions to “remain difficult” for the rest of 2010 and a further third (32%) believed there was a “real risk” of a double dip in the economy.

Only 14% were optimistic that green shoots would appear during 2010 and just 9% had seen an improvement in their prospects during the first three months of the year.