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Why SME insurance is such an underserved market

May 1, 2020
Why SME insurance is such an underserved market

With SMEs accounting for more than 99% of companies in the UK, it’s fair to say they’re the backbone of the economy. Yet when it comes to providing them with insurance, they are a hugely underserved market.

Each year SMEs account for around £7 billion of insurance premiums. This is compared with around £62 billion for the commercial London Market as a whole.

The problem is that many insurers and brokers find it difficult to serve smaller companies. Indeed, what makes the SME market vibrant is also what makes it complicated: they come in all sizes, operate in thousands of different industries, and often have highly complex needs. The way SME insurance is currently delivered then becomes a race to the bottom in terms of price, partly because SMEs struggle to understand the intricacies of different policies and the benefits of more expensive, but also more comprehensive cover.

This often leads to SMEs being underinsured against the risks they face. Many small businesses lack the time and expertise to assess their insurance needs and underestimate the cover they require. Simply put, not every business owner has the time and knowledge to research all of the insurance policies that they will need.

Why is it so hard to serve SMEs?

The problem lies in the fact that the SME market is not homogenous. There are around 4.3 million SMEs in the UK, every one of them different to the other. As a result, underwriting these companies at scale is a difficult task because insurers aren’t always able to develop a clear picture of how each SME operates.

For example, most of the information that insurers need, such as valuations, revenue levels and profit margins, are filed only once or twice a year. This leaves insurance companies little information to go on when determining what level of coverage is required.

Helen Bryant, Director of SME and corporate partners at Allianz UK, explained in a podcast in 2019 that the lack of data can be the biggest hurdle for effective insurance coverage of SMEs.

“It’s about greater and more effective utilisation of data to inform pricing and improve customer experience – making it more effective and human at the same time,” she said. “We are looking at ways to use data enrichment so we don’t have to ask so many questions of customers which can mean fewer tripwires. It’s a fine balance though as SMEs still want that interaction and human touch.”

SMEs prefer to buy insurance online

At present, the process of buying insurance for SMEs is largely offline; according to PwC, just 43% of UK SMEs bought their insurance online. However, it’s becoming clear that this needs to change. Not only did the PwC report find that nearly half of newly formed SMEs want to access insurance services online, but research by Yorkshire Bank found that nearly half of SMEs believe technology is more important to their business than people.

Technology can be a real leveller for businesses, allowing SMEs to overcome any size disadvantages they have and give them access to a greater array of products and services. It’s no surprise then that transactions have already started to ramp up, with 58% of those surveyed by PwC saying online was their preferred purchase method. These firms now expect to be able to research insurance options online, as well as purchase, amend and renew policies via their online portals.

As a result, this is an area where the insurance industry is improving its online offerings.

Indeed, in its Underwriter of the Future Report, the Chartered Insurance Institute found that as of  2018 there had been a significant progression towards online insurance sales in the SME market, particularly among businesses with 10 or fewer employees. However, for larger SMEs and more complex cases, there is still a preference for face-to-face underwriting.

Transformative technology improves scalability

So how can the insurance sector improve the way it interacts with SMEs? It’s clear that the SME market offers significant growth potential for the insurance sector, but progress is being stifled by an inability to meet such a huge range of bespoke requirements at scale. Despite technological advances, inefficient and outdated processes are still being used.

While the move online is a major opportunity, the answer lies in adopting transformative technologies that not only help insurers and brokers reach small business clients, but also use company insights to develop a better understanding of the nature of each business and how it operates.

The more an insurer understands a business, the better it can underwrite an insurance policy for them. In the past it may have been difficult for insurers to truly see all of the activities a business undertakes or the particular risks it faces. But by using data sources such as Companies House, insurers can quickly gain insight into how it operates, how it is structured and what its credit and financial profiles look like.

With better insights into a company’s financial position, as well as its growth trajectory and business activities, insurers are better able to tailor policies around their specific needs. Moreover, the use of artificial intelligence and machine learning allows this to happen in real time and makes it scalable across vast numbers of SMEs with variable needs.

The challenge in serving SMEs up until now was that they needed a personal service but often could not afford it. Through the use of company insights and AI, they can create efficiencies that streamline underwriting and provide small companies with the service they need at the right price.