Far from being able to raise rates, insurers are currently faced with a client base that is shopping smarter – demanding competitive premiums and even cutting back on cover. In these belt-tightening times, insurers and brokers must accept that every little helps

This is the age of the bargain-hunter. As the recession lingers on into its second year, and unemployment rises, clients across the UK are feeling the pinch. Cash has seldom been tighter – but look after the pennies and the pounds will look after themselves; get more for less.

Perhaps that’s why the industry’s leaders – including Aviva, by its own admission – called rates wrong in 2008. “We honestly believed the market was going to harden,” its chief executive Mark Hodges told Insurance Times earlier this year. “We were wrong.”

Twelve months later, and rates are still in the doldrums across most personal and commercial lines. Is this because clients simply cannot afford to pay more? And where does that leave insurers that need to turn an underwriting profit?

This time last year, 58% of SMEs admitted suffering decreased trade. That figure has dropped to 40%, but trading conditions remain harsh. A third of SMEs say they are still being paid late by debtors. Meanwhile, a report last week from insolvency specialist Begbies Traynor said 140,000 companies experienced severe financial difficulty in the last quarter of 2009, a 6% rise from the previous quarter.

Furthermore, because companies are employing fewer people and doing less business, they have less risk. RSA, for example, reckons exposures dropped by about 10% over the past year.

SMEs want cheaper premiums and the market has had to respond, leaving brokers scurrying around remarketing policies. Bluefin chief executive Stuart Reid says: “Clients are demanding ever more competitive premiums. Whereas before a client might have a root-and-branch review every two or three years, now it is becoming annual.”

Slim pickings

And it seems that all the big talk about rate rises last year has died away to a whimper. Instead, insurers such as Aviva, which saw premiums shrink at the beginning of last year when they tried to force through rate increases, are now taking a more flexible approach. “Insurers at the moment are desperately trying to maintain, if not repair, GWP,” Reid observes. “It means many different insurers are writing premiums at a much reduced level.”

Another factor keeping the market soft is the number of firms and tradesmen cutting work or going bust. It leaves insurers fighting over a shrinking market and, as always, more competition means lower prices.

“We’re finding it’s just bumping along the bottom,” Groupama commercial lines director Malcolm Smith says. “Renewal pricing is up very marginally, new business pricing is flat and quite a few insurers have differential pricing. We are seeing a lot of insurers being competitive on new business.

“The building trades have had a lot of downturn in activity. The self-employed and sub-contractors that we sell a lot of our tradesman policies to – some of them are probably not consistently working.”

So insurers, already suffering from decimated returns, have found themselves unable to force through anticipated rate increases. That means working more closely with the client and broker to come up with other solutions.

Fortis managing director Mark Cliff says the way to mitigate price problems, while helping the customer, is to be more creative. “We have to be smarter around areas such as excess, letting people spread the cost of their premiums. I think it is a difficult balance but it is one we can achieve if we highlight between us the

risks people are facing. In reality, it has never been a more complex environment in terms of the duties in running their business.”

RSA’s commercial managing director Paul Donaldson is doing similar things – for example working with corporate clients that wish to retain more of their own risk. This helps the insurer retain the customer, even if the premium goes down.

This is a situation when brokers can really prove their worth; their skills in advice and persuasion are vital. For example, a worrying trend to emerge from the recession is that SMEs are cutting back on cover such as business interruption.

Smith says: “Whereas business interruption is historically considered an essential part of the commercial combined package, some customers are looking at leaving business interruption out to save costs.”

What was once seen as an essential part of the insurance package is now being excluded as SMEs cut costs, despite the risks to their business.

Directors’ and officers’ (D&O) cover is also being left out, even though there has been a rise in litigation during the downturn, insurers say.

Bring in the bread

It is up to the broker to stress the importance of cover, not just to prevent another bleed in brokerage, but also to guide SMEs safely through choppy waters. Cliff says: “There has never been a more pressing time than now for small companies to focus on risk management and how to protect their business, rather than just saying: ‘I can’t afford it so I’ll just cut back on cover.’ Brokers and insurers need to make sure they are working with clients and helping them with risk management.”

As well as staying on top of clients with the giving of high-quality advice, Reid says the recession is forcing brokers to raise their game in sales and marketing too.

“Historically, marketing and sales in the broking industry is very poor. It is more recommendation and referral than marketing campaigns and CRM systems. I think if this soft market continues, and it has all the indication it will, it demands that the brokers professionalise something we do in the background, if you like.”

Despite some early signs of a gradual revival in the economy, a return to the halcyon days of double-digit growth is still some way off. The country may be leaving recession, according to official measures, but the full impact of the slowdown on the real economy – such as through unemployment – has yet to play out.

“I think this year is going to be really tough,” Towergate chairman Peter Cullum said recently. “All our planning for 2010 is that it will be as tough as 2009.”

The message to insurers and brokers emerging from the SME market is clear: work harder and smarter for your money. And don’t get your hopes up that it’s about to change for the better. IT