In-depth: Think big in SME

From little acorns…

Some of the biggest companies started as micro-SMEs, and as Sam Barrett writes, brokers could profit from getting in on the ground floor with small businesses

Concerns are mounting in the broker micro-SME sector. With margins tight and plenty of common ground across some areas of cover, many fear this area of business is set to become increasingly commoditised. 

While there’s nothing to stop the aggregators trying to become the only way for ‘white van man’ to arrange his insurance, there are worries that this could leave these businesses without the cover they need.

“Often micro-SME owners are new to running a business and haven’t fully understood the change in their insurance needs from being a private individual,” says Dave Bowcock, managing director of specialist brokers Principal Insurance. “As an example, extras such as automatic replacement vehicle hire, GAP insurance and tool cover can be ‘good to haves’ for private motorists, but they can be vital to white van man.”   

Gaps in cover

Having these gaps in cover can seriously affect the ability of these businesses to survive if they do suffer a loss. A good example of this is the importance of tools in transit cover for a mobile tradesperson. If their tools are stolen or lost, without insurance they might struggle to replace them, affecting their livelihood and potentially even putting their business on the line.  

Ben Butler, director of Macbeth Insurance Brokers, explains when he takes on SME clients he often finds their insurance isn’t appropriate for their business. “A business will be growing successfully but its insurance will be completely out-of-date. They might have taken on employees, and need employers’ liability, or moved into new areas of business. Without advice, they only find out what they should have had when they need to make a claim,” he says. 

Perhaps as a result of these risks, there are signs that the rush to commoditisation in the micro-SME space won’t necessarily materialise. 

For starters, legislation could help. Phil Barton, chief executive (insurance) at Jelf Group, believes the Insurance Act 2015 will help to put the brakes on this shift. “The Act requires the insured to make a fair presentation of the risk but this is difficult if they’re doing it remotely through an aggregator’s site,” he explains. “It’s a very positive step for the insurance industry but also for these clients as they do need advice.” 

In addition, it’s becoming increasingly common for organisations, especially in the public sector, to include insurance requirements within tender documents. This not only helps to make businesses more aware of some of the risks they face but, where the requirement is for a form of cover they haven’t had before, it can help to drive them towards advice.  

There can also be practical issues for new micro-SMEs. Dave Greaves, head of SME at QBE, says it can sometimes be a struggle for start-ups to get the insurance they need. “If it doesn’t have a trading history, a new business can find it difficult to get the cover they need online,” he explains. 

But while brokers recognise the importance of advice for these micro-SME clients, economic factors also come into play. Butler reveals his firm doesn’t always push for business in the micro-SME sector. “We’re service driven so aim to speak to all our clients wherever possible,” he explains. “Because of this we tend to focus on emerging SMEs. The margins are too slim for a one man window cleaning business and we can’t really add much value.” 

Taking a selective approach can ensure profitability in the micro-SME sector, but with the economy improving, others argue that it could be worth taking a broader view. “No business remains the same, especially in times of economic growth,” says Barton. “There’s a lot of truth in the saying that little acorns grow into mighty oaks.” 

Managing micro

Finding ways to service these micro-SMEs cost-effectively is essential, with technology enabling brokers to handle business in this space. For example David Martin, director SME markets at Allianz Commercial says his firm has invested in technology to ensure that advising these businesses can still be viable for brokers. “We use rating technology to gain a better understanding of each risk. This helps to remove frictional costs and enable the business to be carried out quickly and efficiently,” he explains. 

As an example, by using an address, he says it’s possible to have an insight into details such as the height of the building, what it’s next to, and whether there are any specific risks such as flood. This saves collecting lots of client details and improves the accuracy of the price. 

Further, while advice remains important for many SMEs, brokers also recognise that some clients will be perfectly happy to buy their cover online. Although building online systems to enable this used to be an option for larger brokers only, QBE’s Greaves says that technology now makes this a possibility for smaller firms too. “The cost of technology has fallen so much that smaller firms can develop their own online systems if they want,” he says.

But while lower costs can enhance the profitability of micro-SME business, Barton believes that some brokers are dismissing the market without understanding its true value. “It’s easy to get hung up on the one year earnings figures when calculating the profitability of business, but you really need to consider the lifetime value of these clients. If you can provide them with the right level of service, you’ll retain them for years to come,” he comments. 

Conversely, remove the advice element from the equation and the insurance purchase becomes completely price focused. This reduces the likelihood of retaining the business as the client will be more inclined to shop around if the price isn’t low enough. 

Looking after the little guy

When it comes to looking after and retaining the micro-SME client, getting the service proposition right is essential. While it will be important to keep this business profitable by ensuring transaction costs are kept low, Bowcock says brokers still need to provide a good level of support to these clients: “Many micro-SMEs will regard insurance as an irritating but necessary evil but, as long as they feel their broker is looking after them, they’ll stick with them.” 

He added: “If they feel unwanted, marginalised or inadequately informed, they’ll look around. Brokers need to be in regular touch with these clients, by email or phone, to reassure them that their interests are being looked after.” 

Providing clients with relevant information that can help their business is a good way to maintain this regular contact. As an example, Greaves says that telling them about issues such as underinsurance can really highlight the risks a client can face. “A small builder might think £1m of liability cover is more than enough but if a claim’s brought against them it can be relatively easy to use this up. If you tell them they can double their cover for as little as £25, they avoid the risk but also appreciate the value of advice,” he explains.   

Having this regular contact also enables a broker to understand how the business is developing and, importantly, whether its insurance requirements have changed. Taking on the role of trusted adviser to even the smallest of micro-SMEs can foster a healthy and profitable relationship that lasts for many years.  

The science of risk

SMEs come in all flavours and present very different risks, but science and technical businesses in particular can pose a challenge for brokers, as Sam Barrett reports

As the economy recovers, more and more entrepreneurs are taking the opportunity to set up their own businesses. Figures from the Office for National Statistics show 89,000 new VAT or PAYE companies were established between March 2014 and March 2015. 

With more than a quarter of these classed as professional, scientific and technical, it’s essential they get the right insurance cover. 

Whether providing professional advice and services or developing new technologies, drugs or medical devices, these SMEs have a much higher risk of legal action that could potentially put them out of business. 

Kathryn Moon, life science risk and insurance specialist at Arthur J Gallagher, points to SMEs in the life sciences sector as a good example of this. “These businesses face a whole host of potentially catastrophic losses,” she says. “You need to understand exactly what they’re doing to ensure they have the right cover.” 

Insurance savvy

As well as having potentially complex requirements, these business owners are not necessarily insurance savvy. Like many SMEs their expertise is focused on their business, with insurance experience generally limited to their own requirements such as their home, car and travel. 

While this can appear to be a hurdle to taking out the right cover, Chris Wilde, head of commercial lines at Higos Insurance Services, says it also means that these business owners can often be much more receptive to seeking advice from a broker. “The primary focus of any SME is its own business rather than insurance but, many of these firms are consultancies, so they do understand and appreciate the value of advice,” he explains.   

While the nature of these SMEs means they may have greater insurance requirements than a more traditional company, exactly what they need will depend on the individual business. Paul Monaco, commercial insurance manager at Focus, says that as well as areas of cover that will be standard for many businesses, such as property, directors’ and officers’ and public liability, there will also be cover options specifically for the type of work they’re undertaking. 

These can include cover for increased costs of working, loss of research and development income, clinical trials and product liability for the provision of samples and prototypes. Professional indemnity (PI) can also be important where research and development and consulting services are provided to customers or collaborators. 

In some sectors, for example financial services and legal, PI will be mandatory. 

Covering key people

Another common requirement in these sectors is key person insurance. “This is often required by investors or shareholders to cover the founder or inventor, especially in the early stages of the business,” Monaco adds. 

He continues: “We do find that although these SMEs have an idea of what protection they need, often they’re unaware of what they actually need and what is available to them.” 

Coverage requirements can change too. As the business develops, new risks will emerge while others fall away; reflecting these changes in the insurance programme is essential to protect the business. 

Take a life sciences company as an example. Moon says that many of these businesses will go through a cycle, with an initial discovery phase before moving into a developmental phase where they would need cover for areas such as research and development expenditure and, if undertaking trials, clinical trials protection. 

The next phase, where the product is coming to market, can also have its own insurance requirements, as she explains: “When nearing commercialisation, intellectual property legal expenses insurance becomes more of a consideration. Concern about litigation is increasing in this area and this policy can cover both defence and pursuit costs.” 

Emerging risks

New risks are also emerging that will affect SMEs in these sectors. A good example of this is cyber risk, with many of these businesses potential targets for cyber criminals due to the nature and value of the data they hold and their reliance on the internet. 

The variety of risks these SMEs face, coupled with the pace at which exposure may change, makes it a market that is pretty resistant to commoditisation. This can be illustrated by some of the pitfalls that these SMEs could face. 

For example, the technical nature of the work carried out by many businesses in these sectors means that what can initially appear to be very simple cover can require all sorts of special features. 

To illustrate this, Simon Webster, technical line manager, life sciences at Markel UK, points to property insurance. “A life science company might operate a clean room. As well as ensuring that any equipment used to maintain the low level of pollutants is covered by the policy, the insurer would also need to take a specialist approach to restoring this environment if there was a loss.” 

Taking out the wrong type of liability cover can also leave some of these SMEs seriously exposed. For example, although directors’ and officers’ insurance can appear to be fairly standard, Moon says the underwriting criteria on many off-the-shelf policies routinely exclude some of the fundamental risk factors prevalent in life science businesses. 

These potential pitfalls mean that although it’s possible to arrange some areas of cover, for example professional indemnity for some of the professional services, through e-trade sites and software houses, the more technical the cover, the less likely it is to appear. Monaco says that currently there are no insurance packages available on these services for any of the complex scientific sectors such as biotechnology, life sciences and medical devices.  

This can present a challenge to brokers. Although these businesses can have complex insurance requirements, premiums are low and margins slim. Wilde believes that improvements in technology will help to take some of the pressure off the profitability of this sector. “Technology will improve the way this business is transacted, which will give brokers more time to provide advice rather than concentrate on administration,” he says. 

Wilde adds: “I can’t see this area of the market being commoditised; businesses in these sectors need advice.”

Online solutions

Some of the insurers are developing online platforms to support brokers active in these areas. For example, Markel offers a platform for brokers looking to place small research and development business. “It works for low touch accounts as there’s a cost benefit but I’m not sure it would work for a broader part of the market,” says Webster. “[The sector] is too specialist. You need to ensure an underwriter is available to answer any questions if necessary.”  

Also helping brokers in this market is the development of a simple form to make it easier to write some classes of business. Monaco explains: “Insurers including Markel, CFC Underwriting and Nucleus Underwriting have developed a short, simple form which can be completed by the broker and/or their client. This gives pre-priced cover options and a statement of fact basis of underwriting. This keeps the involvement required by underwriters to a minimum and the costs low and manageable.”  

But, while the insurance industry is taking steps to make it easier to write this business, the specialist nature of many of these emerging sectors means it’s unlikely that it will ever be fully commoditised. And, although it might be possible to place some of today’s more unusual risks online in the future, it’s likely that new risks will have emerged to tax the broker and underwriter.