All the small things

There is a continuing fight for market share as insurers and brokers recognise opportunities in the profitable small to medium-sized enterprise insurance sector. A market that is worth somewhere between £5.5bn and £10bn, according to analysis from Datamonitor. Tougher competition is one of the major factors that has led to one of the softest markets ever seen, with a continuing downshift in prices and an increasingly commoditised trading environment.

In a bid to secure a greater share of this SME market, insurance providers are driving many changes that are altering the market dynamics. Insurers are buying brokers, brokers are buying brokers, and there is a wider availability of networks and trading platforms. Other changes include the growing number of brokers now operating with delegated authority for underwriting and claims, and more managed general agencies. These changes in dynamics fuel different pricing structures as larger organisations take advantage of economies of scale, shared costs and combined expertise, contributing to product commoditisation.

There are many other well documented reasons, such as the soft market, that are contributing to decreases in prices. However, brokers quite clearly do have a place in the market, now and in the future, due to the added value that they can offer to this sector. While various organisations continue to invest in direct commercial insurance operations, the centre of activity remains around the intermediary market and proposition. Looking at distribution by channel, from the Association of British Insurers figures, the hold that the broker still has on the commercial channel is immediately demonstrated; a very different picture to the personal lines market.

However, brokers must not become complacent as there are real challenges facing them. The acquisitive market, price commoditisation and the digital era will be among the factors that continue to consolidate this market. Brokers have a service to sell and to survive they must promote it. A small business will often need advice, an insurance contract is detailed and can be complicated. It is a legal contract designed to protect their future against risk. A broker is well placed when it comes to explaining the plethora of information surrounding insurance. Adding value should be their key aim.

Adding value

A quick look at the Business Link website shows, encouragingly, that small businesses using the site for practical advice are referred to insurance brokers to find out more about insurance. Business Link provides more detail about some of the things that a broker can offer including: "An insurance broker will help identify and present your risks, suggest improvements for business continuity, obtain quotes from insurance companies and assist you in making claims."

There are other ways that brokers are developing efficiency and adding value. The digital era is accelerating change - we all knew it would but the rate of change is growing. Digital information is furthering transparency, awareness and expectations. At the touch of a few buttons, SME businesses can inform themselves about their insurance needs, arm themselves with a range of questions and even prices. If they do not want to buy online without seeking further advice, they are better informed about what is a 'good deal'.

There are more and more requests to develop different web functionality with individual brokers. These brokers are actively developing sophisticated systems to support their business. Functionality comes in all shapes and sizes, with the most advanced offering some form of comparative quote system. They employ their own web experts to develop online sites that link to their internal systems. They want to work with insurers that can work with them, on their platform and help them to increase visibility and reduce cost. Often these brokers are relatively small but growing fast - the 'progressives' who will survive and prosper.

Added to this is the activity amongst the software houses, all working to further develop commercial offerings. Imarket is gaining momentum and provides brokers with a comparative quote system (see page 24). These developments, employed in the right way, can all fuel efficiency, allowing the broker to elicit quotes quickly and promote the advice and services that they can provide. This can all be translated into suitable product and price advantage for the customer in a competitive market.

A traditional relationship

Many SMEs will stick with their local brokers for many years or even decades, they trust them to find the best value for money - and that does not mean the cheapest quote. This is often built on a traditional relationship - one small businessman to another. Increasingly, however, there is an expectation that they will find their broker online at any time.

Many brokers have risen to the challenge, and this has accelerated in the past three years. Most brokers that are predominantly commercial have their own interactive website providing quotes to prospective clients.

So, while on one level comparative quote systems fuel price commoditisation, they also enable the broker to provide a slicker, quicker service and still provide the mechanism to sell further expert advice. Brokers are well aware that they need to do this.

The Department of Trade and Industry calculates that in 2005 there were just over three million enterprises with no employees, just over one million small businesses (up to 49 employees) and around 30,000 medium businesses (50 to 249 employees). All of these businesses face a number of pressures, insurance is just one thing that they have to think about, and any business person will always be attracted by a cheaper premium.

Within this sizeable market there is a multitude of segments - motor traders, small contractors, shopkeepers and designers to name a few. Identifying these segments helps to indicate the buyer behaviour and provide an indication of the level of price sensitivity. Some sole traders will view their business insurance needs as similar to their personal insurance needs and are likely to have less interest in anything other than the lowest premium available. Others may view their business as something they have set up, nurtured and developed. It provides them with their income and is a hugely important part of their life. They are more likely to take interest in ensuring that the risks to their business are minimised and that they are also insured appropriately. They will be interested in advice and additional services that a broker can offer. The cheapest premium may not be the highest priority, they are more likely searching for value for money.

In this vast market, the degree of commoditisation varies, it is important to understand target segments and their likely needs in order to invest in and build the most suitable proposition.

Brokers are well placed to deliver insurance products to the SME market because they do add value to the SME client - the price easily becomes commoditised as market forces drive competition but the quality of advice and service cannot. The role of the broker is changing and will continue to evolve, with the smarter organisations adding value to the distribution of SME insurance.

To retain their substantial share of the SME market, brokers will have to embrace technology and ensure they are working with insurers providing suitable products at competitive prices. Most of all they must make sure that their targeted clients remain well informed about the added value that they provide.

- Kate Penrose, Head of commercial support, MMA Insurance.