SME special report: a tale of two sectors

The SME landscape bears the marks of the harsh economic climate, as previously fertile patches become rugged terrain for brokers. The sluggish economy and this winter’s severe weather have taken a heavy toll on businesses, along with the price they are willing to pay for insurance.

Nonetheless, it seems there are opportunities in adversity. The vast and diverse SME marketplace, although decidedly bleak in certain patches, still offers rich pickings to savvy brokers.

According to the latest survey by the Department for Business, Innovation and Skills, there are 4.8 million private sector enterprises in the UK – an increase of 51,000 since the department’s previous survey. These businesses continue to form the backbone of the UK economy, employing an estimated 22.8 million people with a combined annual turnover of £3.2 trillion.

As businesses come to terms with the challenges of the harsh trading environment, they have been forced to re-evaluate their requirements. In response, brokers must plough fresh opportunities in new sectors rather than relying on their traditional heartlands.

Brokers only need look at the contrasting fortunes of business volumes in professional services and those in consumer-facing SME sectors such as retail and leisure to see how times have changed.

Professional services have emerged as a fertile hunting ground for brokers. According to Insurance Times’ SME survey, the appetite for professional services products such as directors’ and officers’ cover (D&O), professional indemnity and public liability products have soared as traditional products in retail and leisure have nose-dived. Here, we review each sector and look at how brokers can tap into new opportunities in both.

Professional services

Brokers specialising in professional services products have had a good year. According to the Insurance Times survey on the state of the SME market, business volumes for professional indemnity insurance and D&O cover have shot up by 67% and 70%, respectively.

The performance of public liability and employers’ liability insurance have also performed healthily, growing by 70% and 50%.

According to industry experts, the rise has been fuelled by SMEs’ increased awareness of the risks posed by a recessionary climate. The Confederation of British Industry (CBI) says the number of employment tribunals rose 56% to 236,100 claims in 2008/09.

In a recent survey by the CBI, 45% of employers reported a marked rise in the number of weak and vexatious tribunal claims experienced in the past year. In addition, nearly half of employers (48%) are worried about an increase in age-related claims when the national default retirement age of 65 is removed in April.

Forum of Private Business senior adviser John Kilby explains that SMEs are beginning to respond to this growing risk. “We’re a much more litigious society and directors are much more worried about being sued,” he says.

He adds that more and more businesses are asking for D&O to be included in their cover. “Increasingly, being a limited company is not the form of protection it used to be – a lot of people now sue senior employees.”

Broker Network managing director Nick Houghton says SMEs are becoming more aware of their exposure to these risks. “Slowly but surely, SMEs are understanding the need for D&O cover. The need for professional indemnity has always been fairly well understood, but D&O less so,” he says. “I think this understanding has increased and we have seen more people buying it. There are still plenty of customers who aren’t buying it that should be, and there is an opportunity for brokers as a result.”

Business start-ups

In addition, industry experts have noted that people made redundant may be encouraged to set up their own business, fuelling demand for professional indemnity and D&O cover. Biba chief executive Eric Galbraith says: “People are getting redundancy payments and looking at what they can do, especially if they have an entrepreneurial spirit. In addition, the government is very keen that more SMEs get into start-up positions.”

Kilby adds that the insurance sector is likely to see an increase in self-employment as the government’s public sector cuts prompt people to start their own businesses. This, he explains, will fuel more demand for cover such as professional indemnity insurance.

So how can brokers capitalise on the opportunities in this sector? Houghton recommends developing an understanding and expertise of the sector. “Brokers wanting to break into the market need to understand the product and make sure the product they are selling is targeting their customer’s needs.

“There are significant differences in the offerings from insurer to insurer and product to product. It is important they are selling the right one and they understand the market they are targeting.”

Sector experts advise brokers looking to break into professional services to attend training sessions held by insurers. Houghton explains: “There are many insurers providing specific training. It is mainly about research – talking to customers, talking to insurers and making sure they do the groundwork before going into the marketplace.”

Of course, developing expertise takes time but there are short cuts. Galbraith explains that brokers looking for a head start can invest in the services of specialist wholesale brokers with expertise in this sector.

Brokers that develop expertise in risk management will have an edge over the competitors. According to Datamonitor’s research on the market, demand for risk management advice has overtaken legal services as the add-on insurance service most in demand by SMEs.

Allianz SME underwriting manager Dave Martin points out that those companies are becoming increasingly concerned about risk management strategies and there is scope for brokers to capitalise on this. “Insurers are getting better at giving risk management support and advice and I think the opportunity for the broking sector is to provide that advice and expertise.”

Consumer-facing SMEs

There is no doubt that consumer-facing SMEs in the retail and leisure sectors make up the market segment worst hit by the recessionary fall-out. Inflation, rising fuel costs, VAT increases and the severe winter weather have kept people indoors, which has had a disastrous knock-on impact on an already fragile British high street.

According to Insurance Times’s SME survey, business volumes for traditional areas such as café and pubs and inns fell by 67% and 75% respectively. Entertainment and leisure and hotel fell by 67% and 80%.

In addition, the latest research from the British Retail Consortium (BRC) shows the sector experienced its worst sales performance in a year as retail sales fell to a 10-month low of 0.4% in February.

So it’s no surprise that demand for traditional cover in this market segment has shrunk. As businesses in the sector become increasingly price conscious, brokers face an ongoing struggle to ensure their clients are adequately covered.

Allianz SME underwriting manager Dave Martin says: “One of the areas under the most pressure from economic conditions is the retail and leisure side of the business. There are real challenges for those businesses to make sure they have the right coverage in risk protection, but also in terms of their trading environments.”

Shrinking market

What’s more, the market itself has contracted as more companies face closure. Pubs, for example, are closing at a rate of 25 a week, according to the British Beer and Pub Association.

Broker Network’s Houghton says: “Retail and leisure are the first areas that people cut back on, so it is the area that has been more affected than most.”

Although it is a big challenge to find fresh opportunities in shrinking markets, it can be done, says Houghton. He explains that any broker looking to break into the retail and leisure sectors should look at affinity groups, which design specific products tailored to a trade or even an area. Products can be tailored to meet the requirements of a particular area, such as flood-hit Cumbria.

“That is where brokers will win, rather than having a broad-brush approach,” he says.

Aviva product development manager Carol Ann Burrows underlines the importance of understanding the concerns of businesses within the sector. While retail crime rates have decreased, for example, employee theft is on the rise, according to BRC’s retail crime survey.

Burrows believes brokers can win client loyalty in the hard-pressed retail and leisure sector by tapping into such concerns and highlighting these risks.

As competition in the contracting consumer-facing SME sector becomes more and more ferocious, investment in technology should become a priority for brokers. Biba’s Galbraith says brokers wishing to retain a foothold in these areas should develop their electronic offerings.

“The challenge within SME is that there is going to be a lot of online activity, with people trying to offer cover from aggregator sites designed for SMEs or direct offerings for SMEs,” he says.

“Brokers with an electronic offering combined with their face-to-face skills have a winning formula.” IT