Going soft in the SME sector

The United Kingdom, beyond local areas, has seen few seriously disruptive weather events in the last two years. This fact, combined with increased competition between insurers and a favourable profit return, has contributed to premium rates declining in the small to medium-sized enterprise commercial property sector. How long can this last, and is there enough business to keep the insurers happy?

Sustainable rates?

There are mixed opinions within the industry about how long the current softening of the market in SME property will be sustainable.

Neil Mercier, property insurance manager for Axa, says: "The current level of rating is getting to the bottom level of comfortable. For premiums of around £100,000 we are seeing people lop up to 25% off, while for smaller premiums, around the £1000 mark, we are seeing reductions of around 5%."

Tony Hutchins, commercial property manager at Allianz Cornhill, agrees and says: "We have reached the bottom and rates must rise to avoid big increases in the future. The major insurers need to take a lead."

Mercier anticipates these price reductions will stop at around the end of the year, or the beginning of 2007.

Meanwhile, Dave Sherman, NIG business manager - complex commercial, believes rates will not turn until the second half of 2007 at the earliest. He is bullish about any possible repeat of the 2001/2002 hardening that followed poor results driven by a soft market.

Sherman says: "There are encouraging signs that the lessons of the past have been learned by those underwriters who have refunded their books after the last downswing. The underwriting discipline for those underwriters in 2006 is far stronger that it was in 2001/2002, which in our view will make any re-adjustment less severe than it has been in the past."

Sherman adds: "While there have been a number of large losses in recent years, the commercial property market has continued to produce some good results across most SME underwriters' accounts."

Graham White, property manager at Zurich UK Commercial, told Professionl Broking: "Throughout commercial property, prices have been weakening. In SME property the softening cycle has been larger, and began towards the end of 2003.

"Around this time, some companies pulled out of the corporate market and started in the SME area - there were some large loss hits in the corporate sector. An SME business is a more homogenous product where there are lower risks and more customers."

Zurich is rolling out a SME proposition after having concentrated on larger corporate risks in the last four to five years.

White continues: "People have been seduced by there being no extreme weather events. We are more inclined to stick to a technical price, which we feel is more important than volume." He reflects: "Is volume vanity or is it sanity?"

He adds: "I was surprised after the events (hurricanes) in the US and the floods in Europe there was no major movement in reinsurance rates at the end of last year. However, these might harden, which could then change SME rates."

White hopes the market continues to employ underwriting selection even in SME business. He is also worried about insurers streamlining the back office, meaning there is less flexibility for insurers with the exception of correcting prices.

Too much choice?

While insurers continue to chase business, there are concerns from brokers.

Paul Dyer, operations manager at Stuart Alexander, and in charge of the broker's commercial operation in Southampton, describes the current fight between insurers for SME business as "disquieting". He remarks: "They are all going for market share. This will place them in a good position when rates do go up."

However, he says such intense competition is hindering the customer who is being overwhelmed. He notes that five years ago there were around 10 insurers in the SME space, while now there are more than 30.

Dyer also feels insurers are not keeping their promises as regards to not driving premiums down. He adds: "Property is very aggressive - rates are going stupid. We want to see rates stabilise and they are in free fall. However, nobody is willing to stick their necks out." He says very little business is moving because "nine out of 10 times" the existing insurer is ready to match the price.

Colleague Neal Rea, head of property at Stuart Alexander, comments: "There is more choice which is having an effect on the natural market. When there are discounts for market share, customers will obtain lower premiums in the short term but there will be considerable increases when the market does harden."

Rea continues: "The businesses who are insured at a constant level will be best placed, and will be able to weather the market increase - which could see rate increases of between 25 and 50%." He agrees that current premium levels are unsustainable. According to Rea, Stuart Alexander does its "utmost to work with insurers to make sure its clients will not be hit hard."

He adds the recent win by Allianz of a property owners' team from Norwich Union may also contribute to a continued softening in the market.

Peter Robinson, managing director of PJ Insurance Brokers, which is a member of the Cobra Network, says it is easier to move "packaged" business in today's environment. He says NIG's internet initiative has helped this.

However, he is scathing about the service from insurers. He comments: "Most of them are hopeless and don't support local insurance brokers, in some cases, commission rates are appallingly small." He says some insurers allow them to select rates, and he would like to see this happen across the board.

New start-ups

Although some feel the market is loaded to capacity, there are still others eager to cash in on smaller ticket property business.

In addition to Zurich Commercial, Churchill founder Martin Long has returned to insurance underwriting as chairman of a new SME underwriting start-up M4 Underwriting. The company will enter the commercial insurance market this month and promises "to offer brokers access to a team of well-known underwriters".

Underwriting capacity will be provided by Allianz Cornhill. PB understands the new proposition will be a combination of motor, property and liability insurances.

Meanwhile, there is another new start-up iPrism, an underwriting agency set to enter SME commercial, including property. This is set to begin operating in the third quarter of the year, and has already signed up to imarket.

Fires and floods

There were a number of events in 2005 which reminded insurers that catastrophe is never far away. Although they were not exclusive to the SME sector, the Buncefield explosion and the flooding in Carlisle were costly events.

Hutchins comments: "Last year was bad for fire loss and the fourth quarter made it one of the worst on record. Many buildings are lightweight as they are put up for speed, and in many cases without fire breaks." Though he notes, the calculation of premiums takes into account the nature of construction in building.

The Regulatory Reform Fire Safety Order comes into force on the 1 October this year and there are concerns it will see the fire service prioritise its resources to where lives can be saved. Although this is a moral objective, the insurance industry is worried that large fires which are not life threatening could be neglected, causing more total losses.

Soft markets cannot last forever and the consensus is that rates will begin to rise before the end of next year. The challenge for insurers will be to hold onto the business won in the soft market by keeping customers on their side when rates do start to rise.

SME BUSINESS STATISTICS

The Small Business Service, an executive agency of the Department of Trade and Industry, has published statistics saying there were 4.3 million businesses in the UK at the start of 2004. This estimate comprises the private sector, including public corporations and nationalized bodies, and excludes government and non-profit organisations. 99.3% of these enterprises were small (up to 49 employees). Only 26,000 (0.6%) were medium-sized (between 50 to 249 employees), and 6,000 (0.1%) were large (250 or more employees).

FALL IN GROSS WRITTEN PREMIUM

Research from the latest Datamonitor report on commercial property claims that: "commercial property insurance's premium growth rates have fallen dramatically in the last two years. In 2005, it is estimated that GWP declined by 7.4%."