Is it time for a new model for SME insurance?

April 3, 2020
Is it time for a new model for SME insurance?

The opportunity and need for change within SME insurance is huge, and that's before the full impact of Covid-19 on the industry and SME customers themselves is fully understood. The impact of the current crisis will be huge and will change the way we live our lives. Insurance will feel this more than most given the existing business model that has been slow to adapt to evolving expectations and a continued lack of understanding from customers on their existing cover, and wider insurance needs.

The SME economy in particular will be severely impacted by the current circumstances, and inevitable resulting economic fallout with analysts predicting a 15% drop in economic output in the UK in Q2, as a direct result of the pandemic.  

SME insurers themselves will likely struggle from a reputational perspective as business customers find out that in many cases, the business interruption cover they put in place will not cover them for losses incurred as a result of a disease that does not make the list of named diseases within their policy wording, serving only to increase a lack of confidence between customers and insurers.

Taking greater responsibility when underwriting risks

More than ever before, insurers will come under scrutiny for delivering cover in a way that fails to educate SME customers around inclusions and exclusions, serving only to further increase mistrust in the client-insurer relationship. This was echoed by John Neal, CEO of Lloyds, who stated the industry needs to ‘put a lot more effort’ into educating customers about the insurance products they purchase. At the same time, insurers should be looking to reduce complexity to make this more clear for their customers and take greater responsibility for the risk they are underwriting.

Insurers' lack of success in educating SMEs had led to one fifth of UK SME’s not being aware of what types of insurance exist to meet their requirements. As a result, estimates suggest 40% of UK businesses are thought to be underinsured. SMEs are still counting the cost of the impact of Covid-19, and this may not be clear for some time. Given that last year 25% of UK SMEs believed an unexpected bill of £50,000 would put them out of business, the current situation would bring about the demise of over 1 million SMEs if that level of impact is reached.

Accelerating digital transformation in insurance

Insurance as an industry has been risk averse in its approach to digital transformation, particularly within SME and commercial, that have traditionally been considered more complex. Insurers need to build a business model that allows them to capitalise on technology that is now available to deliver a new digitally led customer-centric approach for SMEs. It’s inevitable the current crisis will drive increased speed of innovation building on work by insuretechs.

The Covid-19 pandemic could be a watershed moment in pushing the speed of change.  Finding new ways to deliver simpler, smarter and digital insurance that better educates SMEs, covering them for the risks they are exposed to, and ultimately avoid underinsurance.