Market: SME

Despite the downturn, the number of UK enterprises grew by 4.7% to reach 4.8 million last year, according to the Datamonitor report, ‘UK Commercial Insurance Distribution 2009’. The majority of these UK enterprises are classified as SMEs, a market valued at approximately £5.4bn in 2008.

Datamonitor financial services analyst Andrew Haslip says: “Due to the size of the SME market and the wide spectrum of risks that it presents for insurers, the market remains attractive and one which has seen fierce competition from a variety of players for market share at both a distribution and underwriting level.”

New entrants

Over the past two years, a number of new players have ventured into the market, intensifying competition. In 2007, personal lines juggernaut Direct Line began targeting the SME?space and LV= launched a broker arm, ABC Insurance. The following year saw Endsleigh offer a new range of packages for this sector, while Coverzones introduced its SME online-only product.

Meanwhile, established players have been under increasing pressure to enhance their product offerings and services to offer something special to this market. RSA is relaunching existing products and building new ones, including Mini Fleet, a product designed for small fleets via an electronic trading platform.

But it’s not all good news. The recession has taken its toll on small businesses. According to the British Retail Consortium, 40% of small and medium-sized retailers said the reduction or withdrawal of trade credit insurance had damaged their ability to trade. Meanwhile, accountancy firm BDO Stoy Hayward predicts that 30,000 SMEs will close their doors by the end of 2009. As a result, smaller firms are increasingly conscious about price and value for money when it comes to commercial insurance.

RSA director of SME business Ken Norgrove says: “All SMEs have their costs under constant scrutiny to help manage cashflow, and insurance spend is not immune to this review.

“On the other hand, businesses are more worried than ever, which means they won’t cut out essential cover they really need. They are doing more research themselves to ensure they are not paying too much and are not being sold cover they don’t need.”

Price was a key motivating factor in SMEs’ decision to changing providers over the past year, regardless of size, with 70.6% citing this as the factor behind their switch, according to Datamonitor.

“The importance of price in all of these instances highlights the need of many SMEs to limit their insurance costs,” Haslip says. “Small businesses have always been sensitive to the expense of their insurance products, and this appears to be the dominant factor affecting their insurance buying habits in the recession.”

Market forces

The needs of SMEs continue to vary according to nature and size. Packages, however, remain popular with all smaller firms that buy commercial insurance, with employers’ and public liability the most commonly held products. Datamonitor figures show that 46% of SMEs bought insurance as part of a package in 2008.

“The popularity reflects the success of simple packages like shops and offices and tradesmen products that can accommodate a broad range of risks, but also the more niche and specialised products designed with specific trades in mind, such as the motor trade,” Haslip says.

Elsewhere, Angel Underwriting business development director Gary Green believes the economic climate has increased the appetite for relatively less common products, such as directors’ liability. “It covers the directors’ and officers’ own personal assets in the event that something happens to the company and they’re held personally responsible,” he says.

Brokers remain dominant in this sector, with Datamonitor figures showing that 80.2% of SMEs go through this channel. Marsh remains the biggest player in this market, while Towergate increased its income in this sector by 13% in 2008.

Brokers remain a vital route to this market. Towergate Risk Solutions chief operating officer Jonathan Walker says: “More than 80% of SMEs continue to buy insurance through brokers, and the trend is not obviously changing.

“Although there are signs that some smaller businesses are buying on price through direct channels, most will continue to use a broker who can offer a sensible protection programme. Ultimately, this can be the very thing that saves them from going to the wall. We are also finding that people realise the need for someone to fight their corner.”

Insurers continue to show little sign of moving away from this channel in favour of direct routes. “We distribute our commercial products via professional insurance brokers and intermediaries and, while we have seen increasing numbers of customers choosing to purchase their van and business car cover direct, we are confident that the professional advice provided by our brokers and intermediaries will remain the dominant distribution channel in the SME sector,” RSA’s Norgrove says.

This is echoed in the market generally, with alliances between brokers and insurers continuing to develop over the course of last year. Hiscox formed a new partnership with Allison & Partners in March; Jardine Lloyd Thompson and Brit launched a new trading facility; Groupama and NIG joined the commercial lines panel at Keychoice; and Aviva halted its direct operations to concentrate exclusively on the broker channel.

Elsewhere, Allianz forged SME partnerships with WPS Insurance and a number of other brokers. “A large proportion of SMEs do require professional advice and services, and there is no reason for this to change,” Allianz’s head of SME affinity and broker markets, David Martin, said.

But QBE commercial manager Mike Bowen believes the trend for partnerships is starting to slow. “I think there has been a lull at the moment because the financial situation means they have not been able to get together as much in terms of acquisitions.”

Green adds: “There is a lot of pressure on consolidators at the moment. A lot of the larger carriers are insisting on reduced commissions or are not trading with those consolidators at all.”

Not everyone agrees that brokers will continue to dominate, First Assist managing director of specialty insurance Alistair Hardie believes the appetite for direct channels is set to grow. Indeed, according to Datamonitor, the broker channel is set to decline to 78% by 2013. “I think people are looking for simpler ways to buy because there is the perception that buying through an intermediary has implicit costs in it,” he says.

Small fortunes

Hardie points out that the UK’s commercial insurance market is worth approximately £22bn in gross written premium annually and, of that, £9bn comes from SME firms of up to 50 employees. “Because the majority of this £9bn comes from very small businesses at the micro end of the scale, these risks are considerably easier to cater for online,” he says. “This has made this area of the market a real priority for direct and affinity players seeking to offer cheap and robust products over the internet.”

Hardie adds that brokers need to be wary about ignoring online distribution – and not leave it to the direct players. “Brokers look at the market and still think it is not going to go in the same direction as the personal lines market, but they are going to find themselves caught out in terms of their core business. I think the brokers need to be very careful that they are not left behind by other people seeing an opportunity in this space.”

Others are less convinced that the direct option poses a threat to more traditional channels. “The B2B business will be affected by the direct channel, but this will not have the same effect as in the personal lines space, as the needs of the customer are very difficult in terms of advice and complexity,” Martin says.

As SMEs emerge from the recession, one thing is clear. Players will have to be closely attuned to their needs to attract a substantial portion of this market. Bowen warns: “The challenge is adapting to the change in the marketplace. It will always be highly competitive and we mustn’t let that get in the way of providing the right product and the right service in the right timeframe.” IT