Fighting off the big boys invading the SME patch

Imagine the irony. Broker Cliff Humphreys opened up some post at his company Bridge Insurance in Wisbech to find he’d been targeted by a major direct provider, saying it could find him “cheaper” cover for his premises.

Humphreys was quickly on the phone to his regional branch manager, who muttered about a mix-up involving “different databases”.

Meanwhile Simon Cooter, distribution director at Brit Insurance, a newcomer to the SME market working only with brokers, commented: “I’m aware that directors here have received letters from direct commercial insurers. It’s clear that there is a big marketing push going on.” ‘

Neither Humphreys nor Cooter are losing any sleep over this. But such marketing still rankles and there is always the fear that a large composite could start poaching broker business. Or, indeed, that newcomers could make inroads on traditional broker ground.

These are the major threats brokers in the SME market face as they enter 2008.

But, as Peter Staddon, Biba’s head of technical services, says: “I think with SME direct, it will be a case of caveat emptor – let the buyer beware – and indeed, some who buy through this channel will realise the advantages of using a broker.

“What vexes me is that many insurers will admit that SME business sold by smaller brokers is the most highly profitable area for them, yet now they want to try to rebuild that model by cutting out the broker. If brokers feel minded to do so, they should consider switching from these insurers to one that is dedicated to the intermediary channel.”

Better placed

At least many more brokers are alert to the threat from the directs in SME, and therefore are better placed to defend themselves, than when the same happened in personal lines.

And the good news for brokers is that newcomers in the sector give them a choice of insurer beyond the big composites, many of which are focusing on direct.

ABC Insurance is one such company and its head, Phil Bunker, says: “We’ve already launched our combined product and will be launching three package policies early next year. We’ve big ambitions and I think brokers will also find, because our overheads our lower, our prices are too.”

As for the arrival of Direct Line in the SME market, Bunker is not overly concerned. “I thought it would make a much bigger impact. I’ve seen some of its advertising and it is very subdued. There has been no indication that it is taking an aggressive stance and attacking brokers.”

In fact, the role of the big boys in SME is looking decidedly less rosy. Whereas the newcomers are intent on SME business and winning over brokers, the large composites seem less focused.

Lyn Carslake, deputy chief executive of another relative newcomer, Arista, says: “I don’t like conflict of distribution. It is much better for staff if they understand who their customer is. In our case, it’s the broker. The problem with some of these major insurers is that they seem to have forgotten who the customer is.”

Serious players

Much has been said of the national brokers wanting to become serious players in the SME market.

But, again, Carslake questions how much focus they have on the end customer. “A local broker is going to be in touch with what its customers need. If it can trade efficiently online and deal with more complex queries, this will engender loyalty.

“You can’t do that in a call centre, and this is the model that the nationals have gone for.”

AXA, Allianz, Norwich Union, Royal & SunAlliance and Marsh were not available to discuss the SME marketplace.

A quick look at the SME market shows that comparative quote facility Iprism has launched a quote service with aggregator Gocompare.com, which will raise awareness.

Launched this September, Direct Line for Business has an attractive-looking range on offer, that includes products for shops and commercial property.

Although the direct insurers are targeting the smaller end of the market, Brit’s Cooter points out that this will not necessarily be a recipe for success. “Some say that the micro end will all go direct. I disagree. There are some who will only be interested in the cheapest option.

“You can’t change their outlook unless they have problems with a claim. But other small firms will want the advice and support from a broker – but these intermediaries will need to be able to trade electronically.”

Meanwhile, the newcomers are all very much focused on technology. Imarket is one option for brokers wanting to place business electronically, but this so far has failed to gain widespread usage – and indeed some of the software houses have yet to be fully integrated.

Quite apart from direct operations, brokers wanting to increase their share of the SME sector face challenging times.

It may be an unpalatable fact, but some brokers have been their own worst enemies. There are still too many brokers selling their services purely on price.

Others are arranging huge commission deals with insurers. Some think this may have precipitated insurers putting more resources into their direct arms – dealing with such brokers is simply too expensive.

Upton comments: “We only work with brokers and we support them because we want them to do well. But, we are not going to pay unrealistic commissions. You have some deals at 40% or 50% and this is making insurers unprofitable.”

It’s clearly a difficult balancing act. Insurers want to deal with the big brokers and volume business. So, they have agreed to pay hefty commissions and are now turning in either losses or smaller profits.

But, as Carslake says, some of the big insurers are paying out far too much in commission. There is going to be a correction but the question is, are they tied into existing deals and will they instead choose to claw back from smaller brokers?”

Market share

Although brokers are consolidating apace, no one thinks that any SME insurers are going to drop out of the fray.

Derek Findlayson, UK business development manager for Groupama comments: “In 2008, SME will be the sector that most insurers want to compete in. Brokers still dominate this market and I don’t think their market share will be eroded too much. But, they cannot sit back.

“Research has showed they on average spend only around 5% on marketing and I think they must do all they can to emphasise the benefits of using the channel.”

Zurich offers commercial direct, but its head of SME, Jason Eatock, focuses solely on the broker channel. He comments: “Broker are still the kings in commercial, but they need to keep control of existing business and promote their own brands.

“The real threat will be if a direct commercial launches which is vastly cheaper than the broker channel. Insurers – and brokers – must manage costs efficiently. We need to balance commission with what we pay in claims.

“Brokers need a sensible and streamlined approach, as indeed we do, and in terms of the brokers we deal with, there are clearly some good businesses already out there doing this.”

Humphreys says the year ahead will be tough, but he is making preparations. “I know we need to sell ourselves on good products and service. This is why I am looking at network membership, because the cover tends to be wider than the policies available to smaller brokers.”

He adds that networks are not the perfect solution, but the SME sector is so competitive that he is having to consider joining one.

“One customer had been with me for years, then said he’d gone to Barclays (which is underwritten by Norwich Union) for his SME policy because it was cheaper and offering two months free.

“I’ve had customers come back after going direct. But ridiculously cheap introductory deals are just destabilising,” he says.

As we head towards 2008, the SME market is probably its most competitive ever – indeed, some would say cutthroat. Although there is much talk of a harder market, with this number of players, it seems many SME business owners will continue to find good deals.

Direct SME is here to stay and brokers must be ready to deal with this threat. The evidence is, many already are – and as the letters from directs wrongly hit brokers’ desks, it’s gloves off.