BrokerFest 2021: SMEs face underinsurance risk around intangible assets

BrokerFest 2021: SMEs “have a real problem” understanding the value of intangible perils, such as a cyber attack - especially because a higher quality cover for this type of risk “is going to have a price tag that goes with it”, said Simon McGinn, chief executive of Allianz Commercial.

Speaking at Insurance Times’ BrokerFest 2021 conference on Monday 11 October, McGinn explained that “there’s a disconnect between a customer’s perception of what the risk really means to their business when it’s an intangible peril versus a physical one”.

This is further perpetuated by the fact that although physical, material damage can be seen and simply calculated – meaning that it is easier for SMEs to align premium prices with their visible risks – intangible perils are harder to quantify.

High premiums can therefore be baffling for SMEs as they may not understand exactly what they are paying for, potentially leading to underinsurance.

McGinn continued: “Typically, we see in SMEs that the sorts of premiums for cyber cover that are good covers are probably twice as much as the actual material damage premiums and I think customers have a real problem in understanding the value that they’re getting out of something like that.

“That’s one of the challenges for us as an industry in terms of the advice to customers and the changing nature of risk. Prices are, relatively speaking, high, but that doesn’t mean to say there’s not value in the product.”

McGinn described cyber insurance as a “tough sell” for brokers because “the difference in product between one offer and another is quite vast and there is a danger that you end up with fig leaf cover”, where all the services businesses need to get back up and running following a cyber incident may not be included in their policy wordings.

“A value product is going to have a price tag that goes with it and I think it’s difficult,” McGinn told delegates. “Are the premiums for good products going to be sufficient to generate a good income for the broker? Definitely. The challenge is being able to sell it.”

An opportunity for brokers

Phil Bayles, chief commercial officer at Ardonagh Advisory, agreed with McGinn that the importance of intangible assets for SMEs is rising.

He said: “The nature of risks [has] changed. There was a long-term trend where you could see that physical assets were becoming less important to businesses and intangible assets were becoming more important and I think we’ve just seen that accelerate five or 10 years.”

Despite the challenge around selling high price points for cyber cover, Bayles believes the surge in awareness around intangible assets, brought about by the Covid-19 pandemic and business interruption debates, provides an opportunity for brokers to showcase their value and build customer confidence in the profession.

He explained: “It’s a terrible shame that it took a pandemic for people to realise the value of good insurance. Likewise, the danger of being underinsured. People have become more informed buyers and that is an opportunity for brokers.

“A lot of SMEs need advice because they won’t understand [the] intangible risks that they face as well as brokers do. But secondly, they need the reassurance of talking to someone who knows what they are talking about. It will really reinforce the broker’s role.”

Bayles added that brokers need to find a way to provide advice to “lower value” customers – such as some SME businesses - even if it proves uneconomical, especially as SMEs are now putting more thought into the insurance products they buy following the pandemic’s business interruption disagreements.

McGinn added that many SME risks are being restructured across the market. He has also seen more self insurance, as businesses evaluate what they can and cannot afford.

Chaired by Insurance Times content director Saxon East, this panel session also featured Owen Thomas, chief sales officer at Premium Credit.