The micro end of the SME market is set to fall away but brokers are more optimistic about small and medium sized firms. Newsquest Specialist Media’s head of research Peter Joy outlines the findings of an exclusive survey.
What is the future of brokers in SME business – small and medium-sized enterprises?
First some definitions. To get some clarity on this issue, we have used the European Union manpower and turnover definitions, converted to pounds sterling.
The EU classifies businesses into four levels: micro-businesses, with fewer than ten staff and turnover of less than £1.5m; small businesses, bigger than micro-businesses but with fewer than 50 staff and turnover of less than £7.5m; medium-sized businesses, with fewer than 250 staff and turnover of less than £37.5m; and large businesses, with more than 250 staff or turnover of more than £37.5m. These seem as good as any.
Having established just what we mean by ‘SME’ business – how heavily do brokers rely on it? Very heavily, it seems. Judging by our respondents, 58% of brokers get at least a fifth of their business from micro-businesses while 68% get at least a fifth of their business from small businesses.
Of course, it varies greatly. But taking an unweighted average from our 65 respondents, who represented a cross-section of the UK broking market, the typical broking firm relies on micro-businesses for a hefty 38% of its premium income. Small businesses contribute 29%, medium-sized ones for about 20%. Businesses of more than 250 staff or £37.5m turnover account, on average, for less than a seventh of the average broker’s premium income. Indeed, for 69% of brokers they provide less than a tenth of business.
With micro-businesses and small businesses providing two-thirds of the average broker’s revenue – and a much higher amount in many cases – the future of these sectors’ insurance is clearly a vital question for the broking industry. Will direct writers really encroach here, just as they have with personal lines? We asked 65 brokers what they had to say about it.
Brokers’ Future in SME Business
Brokers’ expectations in different strata of the market vary a good deal. We asked brokers what changes they expected in their GWP revenue by 2011
At micro-business level, 31% anticipated a large (more than 20%) or significant (10% to 20%) rise, while 18% expected a modest rise. But 40% expected some degree of fall in micro-business revenue. When the question turned to small businesses, however, it was a very different story. Just 7% expected a large of significant fall in small business revenues by 2011, and 11% a modest fall – while a thumping 71% expected rises. Nearly 40% expected a large or significant rise. As for medium-sized businesses, the 50 to 250 staff bracket, 52% expected rises in GWP against just eight per cent expecting falls.
If, collectively, brokers are right, then by 2011 the typical micro-business share of commercial revenues will be noticeably lower. But medium-sized businesses will be increasingly important to the bottom line and small businesses – those with 10 to 50 employees or £1.5m-£7.5m turnover – will be far more important.
Micro – The Future for Brokers
What is the future for brokers in the micro-business market? Can they compete with direct writers? If so, how? We asked the brokers: What views have you on the future for brokers in the micro-business market? Can they compete with direct writers here – and if so, how?
Specialising, tailored products and personal service were key.
We also asked what role brokers anticipate for their own online technology and for aggregator systems when dealing with micro, small and medium-sized businesses?
Online technology and a credible, user-friendly web presence, it seems, will heavily influence brokers’ ability to compete with the aggregators’ speed and reduced overheads.
“People must touch the client to provide sound simple advice within the buying process
More SMEs will be looking to use the web for their insurance needs – not just as a pure quotation and buying mechanism, but also as an advisory resource and to manage their service needs.
Small business-owners like the convenience of dealing with insurance online, outside of business hours. Password-protected access will enable them, for instance, to change their own policies when they feel they need to. Brokers will need to provide out-of-hours functionality or lose market share to direct writers’ sophisticated websites.
The price differential between quotes that ‘ ‘ are auto-generated, and quotes that insurers have to provide manually, will probably widen. To compete, brokers will need up-to-date systems generating automatic quotes, policy processing and documentation.
They will also need systems that can give them a complete view of their customers and respond more quickly to sales opportunities.
When direct writers rolled into the personal lines market, brokers had little technological savvy. The market share lost then has never been regained. But today, most brokers have more ability to use technology to fight back. And as one broker remarked, it needn’t be their own technology. “The customer doesn’t mind who owns it as long as it does what he wants.” Others agreed. “We do not anticipate using our own broker technology, but we do anticipate increased use of imarket or similar – plus insurers’ own online solutions, or facilities such as Inghams Liability Facility.”
Some believed SME market aggregators could offer brokers an effective route to a large online clientele. Where small business owners might struggle to decipher the results of aggregator systems, brokers could find a role for themselves. But as one respondent remarked, “people must touch the client to provide sound simple advice within the buying process. The client who uses an aggregator will not be using a broker.”
We also asked what changes brokers were noticing in the insurance needs of micro, small and medium-sized businesses?
In some respects, it appears that little is changing. SME clients are keeping an eagle eye on price and are increasingly conscious of the state of the market, playing brokers off against one another. But there is certainly greater awareness among small businesses of directors’ and officers’ (D&O), professional indemnity, public liability, errors & omissions and business interruption cover. Health and safety pressures and legislative changes are making directors and senior managers more conscious of their personal exposures. Small clients’ principals are insisting they buy appropriate covers.
Several respondents said clients were increasingly interested in risk management advice and in risk-based approaches to identifying and meeting their insurance needs. Said one broker: “Understanding of the risks and readiness to take advice – at the right price – appears to have increased.”
With increased home-working another significant trend, many micro-businesses are looking for holistic combinations of personal and professional covers – particularly if combined with competitive pricing, pdf documentation and personal help with what the policy actually covers.
There was also growing pressure for efficient service outside of conventional office hours. There seems to be no reduction in the demand for specialist broker knowledge. “Business people are becoming busier doing their job and also with their own administration,” said another respondent. “So they are glad to get the insurance job off their desk, into the hands of someone that they can trust.”
Much, of course, depends on the sector. In niche areas, clients seem ever more likely to examine risk more closely, to need complex cover that doesn't fit template products, and to appreciate expert business advice – something they just can’t get from a direct writer.
What sorts of competition are brokers experiencing from direct writers in the small and medium-sized business sectors? And what can brokers do to counteract it?
For many, the answer to the first question was “not much – at least so far”. Still, some mentioned losing business to cold-calling telephone broking operations over the past 12 months, or spoke of intensive direct mail and internet activity attacking the generic SME market.
“Technology is never going to make real personal service obsolete
Others highlighted that competition comes from the likes of Towergate – “who seem to have a presence everywhere in one guise or another” – and from semi-direct insurer-owned broking groups, particularly on small tradesman-type package liability policies.
One saw AXA Direct as the main threat to brokers’ SME business saying: “But this has reduced since AXA realised they were attacking their own broker book.” Several mentioned banks as significant competitors, with one suggesting that banks were pressuring business borrowers into buying their insurance products too.
Even if they’re not feeling that much direct writer competition, however, brokers are well aware of the threat. “Direct Line’s current TV advertising campaign could open the floodgates for other players,” said one. Some blamed clients’ increasing price-sensitivity squarely on such advertising.
So what should brokers do about it? “Take the time to understand the client’s needs and provide an effective solution,” said one respondent. “Establish as early as possible if the client understands your function and respects the role you perform. If not, leave them to learn from their own experiences.”
Another broadly agreed: “Review your client base and establish which clients you can afford to lose – and which you can’t.” Accounts worth less than £1,000 are probably not worth trying to retain. “Then draw up a clear strategy to retain and develop each client segment, be seen to deliver a best-value service. Perhaps more importantly, evidence it by carrying out a thorough insurance review and comparing it with a direct writers offer, using mystery shopping. If there is a big saving in premium to be had, the broker had better find it before their client does.”
Brokers will do best to focus on specific niche sectors, covers and schemes, compete on service and cover and strengthen their customer relationship management. One even recommended building key partnerships with insurers that have direct arms: “Our experience is that this enables us to protect our client portfolio.”
Technology is never going to make real personal service obsolete. One can fill in a tax return online – but the website won’t give you advice on tax savings. “When a small trader experiences a significant loss out of hours he expects his broker to turn up and help,” observed one respondent. “I can't see too many direct writers doing that.”
Looking to the future
The final question we asked was what views brokers had on their future in the micro-business market? Could they compete with direct writers here – and if so, how?
Brokers tended to see micro-business as a developing battleground between brokers with specialist schemes, direct writers with hefty marketing budgets and the local broker providing hands-on local service.
How will the battle unfold? Brokers stressed that many SMEs business-owners feel safer dealing with brokers and want a service and a point of contact. “They don’t want to entrust their livelihood to a faceless on-line facility.” Still, the general consensus was that brokers will steadily have to abandon general high street business. But they could do well by focusing on relationship business or a niche market.
Direct writers’ call centres can deal only with a fairly standardised risk profile – and that rules out big chunks of the available market for many products.
Brokers also needed to reduce their cost base, it was felt, and streamline the transaction process. The cost of a full broking exercise for small premium business will no longer be justifiable. This will mean more single-insurer offerings – and several expected to consolidate more income with one insurer anyway, to gain better commission and rates overall. Smaller independent brokers may struggle to access the competitive products and facilities available to larger brokers and network members.
Several also stressed that brokers will need to promote themselves and their services to business much better than they do at present. Quite a few felt that organisations such as Biba – and insurers that lack direct channels – could be doing more to help here. “We should be banging our own drum on the television just as the red telephone are doing,” said one.
Binding authority arrangements or managed general agency status would also help brokers to compete. “If allowed to change the underwriting rules and issue documents,” said one broker, “then we stand a chance.” IT
What changes are you noticing in the insurance needs of micro, small and medium-sized businesses?
We have not noticed many changes. Most of our clients demand a high level of service and we need to provide this to ensure that their business remains with us. Our clients are generally very loyal and will let us know if they get a cheaper quotation and allow us the opportunity to compete. This also gives us the chance to explain the benefits of dealing with us and even why they should pay a little more for that enhanced service.
Micro businesses are always having to review every single penny of expense for insurance needs, small and medium sized businesses will sometimes have to change underwriter in view of increased premiums and yet certain markets are still soft and competing at premium levels that are unsustainable.
Micro: none. But small and medium sized businesses are now more concerned with advice. With such influences as directors greater responsibility and accountability coming to their mind, they want to get as much help as they can (and, strangely, this can usually be free if you buy from the broker).
Sadly we can't offer our services to micro businesses. FSA regulations make it too much trouble to get involved. This is a pity as they're the ones who need a specialist the most.
I believe they are falling into the trap of thinking they can do it all themselves and taking everything they see online at face value. The reality is that you still don't get something for nothing.
More need for complex cover which does not fit template products and for detailed explanation of matters insurance and legal/ social that affect their trading relationships. Acting as business advisers.
In a soft market, clients are becoming more knowledgeable about the insurance and the state of the market and what they can get out of an insurer by playing brokers off against each other.
Changes are mainly in relation to newly identified areas of risk such as D&O and risk management (including Business Continuity) advice.
With increased regulation, there is a greater need for understanding the contract and more detail in what is and is not covered.
Peter Joy is head of research for Newsquest, Insurance Times’ parent company. To find out more about the research department, or to purchase a copy of the recent report, Working with UK Commercial Insurance Brokers, email: email@example.com.