The Covid-19 pandemic dealt a savage blow to small and medium enterprises (SMEs) around the world, as thousands of smaller businesses saw sales plummet.
In mid-2020, a McKinsey survey found that 80% of UK SMEs were reporting declining revenues.
Research by Premium Credit in late 2020 found that 51% of SMEs had cut their insurance spending, often dropping some types of cover altogether.
At the same time, McKinsey described the turmoil as an opportunity for insurers to grow market shares in the SME segment and industry players attest to a rising interest among carriers and brokers.
The appeal of the SME market
The SME segment covers such a wide range of businesses that identifying a single cause of its falling fortunes is impossible. But the sector’s breadth and depth can provide valuable diversity for insurers, headline figures may mask significant opportunities in particular sectors.
Amanda Walton, CEO of Marsh Commercial’s Enterprise Centre of Excellence, says the SME segment’s size also provides “predictability”.
“In the pandemic, some very small micro businesses have really struggled, particularly in hospitality, but other SMEs have actually thrived,” she says. “Pricing is relatively consistent, and SMEs’ claims history is well established. That volume makes it predictable, and predictability is attractive right now to insurers.”
This opportunity is attracting insurers of all sizes, Walton adds, from the long-established larger brands to medium-sized players that are “snapping at their ankles”. “There’s a lot more aggression in terms of acquisition and growth,” she says.
Evidence of the interest in the SME segment is easy to find. Last year, Aon bought US SME insurance platform CoverWallet and has been rolling out its model – a combination of digital and advisory services – in several markets.
CoverWallet is yet to launch in the UK, but it has a UK managing director – Phil Thorn. “We see an opportunity in the UK market,” he says. “First and foremost, it’s a big segment, with just under 6 million businesses registered in the UK, though not all of those are active.
“About 96% have fewer than 10 employees. The market is huge. It’s a high-volume, low-premium segment, where being able to service these customers well and doing it economically is important. If you can do that, it can be a profitable business.”
Frederik Wulff, managing director of national markets for Europe at Markel International, says a history of poor competition for SMEs’ business makes it ripe for change.
“For SMEs, business insurance is not their main purpose,” he explains. “They’d think, ‘We’ve got to solve that insurance matter.’ They’d go to an adviser and the market, and that’s it. It was possible to make serious money, and lack of competition was the main reason.”
Changing models, changing needs
The Covid-19 crisis has been a double-edged sword for insurance. Rows over business interruption cover during the crisis in the UK and elsewhere were a blow to the industry’s reputation.
Yet most industry players believe there has been little lasting damage. Rather, they suggest, these disagreements have led to many SMEs to examine their insurance cover with more care and seek genuine value, rather than just the lowest price.
At the same time, many SMEs have changed their business models – closing retail outlets and turning to online sales, or shrinking office space as their employees work from home, for example.
Property lines may lose out, says Marsh’s Walton, but others will gain. Change creates opportunity.
“In these last 18 months, SMEs have been ingenious. There’s been an efficiency gain because SMEs have been forced to question how they trade and to re-look at operating models,” she says.
Different insurers are targeting different areas of the SME universe. Janthana Kaenprakhamroy, CEO of SME specialist Tapoly, points to the gig economy and the growing numbers of sole traders and freelancers in need of specialist insurance services. Meanwhile, CoverWallet’s Thorn highlights professional services, such as legal and surveying, which, he believes, are areas that are ripe for innovation.
Walton, meanwhile, points to liability and indemnity cover in social care.
“If you look at nursing homes and care homes or services, that has become very volatile in the insurance markets. The care industry is going through its biggest change since its creation, but right now a lot of insurers are nervous about that market,” she says. “I think in the next 12-24 months someone will come in and say, ‘I know how to do this,’ and they will potentially clean up.”
New products and customer demands
Many of the features that make SME insurance lucrative are seen in personal lines. Transparency, simplicity and flexibility are the watchwords.
“People understand more and more that a commercial product doesn’t need to be complex,” says Markel’s Wulff. “It’s a trend that’s gaining traction. But it also has its enemies – the people who have an established product suite that works on a more traditional basis. Perhaps it’s a bit less transparent in the way it’s graded. Or maybe it’s not set up so you can offer it in an online process, or it’s not built in a way that’s modular.”
Modular policies that allow elements to be mixed and matched and flexible policies that bend with changing circumstance are increasingly features of SME insurance offerings.
This leads to a key question for those chasing a bigger slice of the SME market: is this a volume business or not?
The SME segment’s size suggests it is a volume game, ripe for direct digital distribution and processes. However, the consensus is that SMEs want – and need – more guidance and advice to get the right cover, and more flexible, if not bespoke, products.
Wulff says: “SME insurance is highly profitable and it’s big volumes,” says Wulff. “But compare it to corporate commercial or personal lines, and it’s not quite like one nor the other.”
If the SME sector is seen through the lens of ‘high volume’ it appears to be highly suited to a no-advice approach and digital distribution.
But if SME clients want advice and tailored and flexible products, these opportunities will make the sector’s model seem a lot different.
As Wulff says, the answer will come not from the carriers, but from the brokers and the clients.
