The direct insurers are using their money and marketing might to target the SME sector. But Ann Hesketh asks if brokers should be concerned.

Direct Line’s £17m television and press campaign to promote its business insurance products to SMEs has started fresh discussions around the old battle between insurers and brokers.

Brokers have a strong foothold in this market, estimated to be worth between £5.5bn and £10bn, with over 90% of SME insurance being bought through intermediaries.

But although they have the biggest slice of the pie, brokers face stiff competition – not only from direct insurers, but also from other brokers willing to go the extra mile to hold on to their business.

Direct Line launched an SME insurance brand service in the middle of last year, Direct Line for Business. The service is aimed specifically at the smaller end of the SME market, says head of Direct Line for Business Kate Syred.

“It was quite natural for us to move into that space,” she says. “It’s a natural step for Direct Line to look at people who know about us and are responsible for making the insurance decision. Obviously it’s not going to be for us to target big corporates where you need board approval for a decision. It’s about targeting people who have the ability to make that insurance choice.”

Policies so far include tradesmen and commercial property cover, with a further four products going live over the next few months, starting with office, and ‘business from home’ products. Although in its early days, Syred says the new venture is meeting its targets, with good levels of response for all the products.

The insurer’s launch follows one by Royal & SunAlliance (RSA), which sells commercial insurance through its direct brand, thus joining a number of other insurers such as Zurich, AXA, Hiscox and Norwich Union, which have already gone direct in an attempt to beef up their SME books.

But will brokers lose business to direct writers? Kevin Pallet, managing director of Fusion Insurance, says it is a make-or-break time for intermediaries.

“They need to make up their minds up about their strategy for this market. Are they going to sell on price or added value? I’m not saying either is right or wrong. If they are going to offer more service and advice they can sustain a slightly higher price. If they decide to compete on price, they will have to look closely how they can take costs out of the equation, perhaps using technology more effectively,” says Pallet.

“ It is a natural step for Direct Line to look at people who know about us and are responsible for making the insurance decision.

Direct Line

Economy of scale

“However if you are a small broker, it’s a no-brainer really. The big boys have money for advertising and economy of scale. So you need to show your clients that you can add value.”

He adds that off-the-shelf policies offered by many direct insurers are not always suitable. “Brokers have a real role to play in this market. SMEs need professional advice on the right cover, how to manage their risks and, perhaps more importantly, they need help to get their business up and running again should something happen. This is the message brokers need to get across to their clients.”

Biba believes that direct writers will have only a limited penetration into the SME market and commercial insurance in general, because this market requires greater expertise in terms of understanding the needs of individual businesses.

Biba technical services officer Steve Foulsham says: “The commercial insurance sector is more complex than personal lines. Businesses need to ensure that they are advised correctly and that their assets are properly protected to satisfy their shareholders or other stakeholders. Brokers are best placed to do this.”

However he recognises that insurance for very small businesses has become commoditised, which will bring some success for direct writers in package business and liability for small contracting companies or sole traders.

Some direct insurers do not believe they are taking business away from brokers. “On the contrary,” says Gary Head, director of commercial insurance at Hiscox UK. “The vast majority of our sales are for customers who didn’t buy the covers beforehand. If these customers grow and their insurance needs become more complex, then we will refer them to a broker to advise them.”

He adds: “Where the customer’s needs become more complex, either due to their size, or to the nature of the work which they undertake, then it is essential for them to get advice from a broker. Hiscox has introduced a huge amount of customers to brokers in this way.”

And brokers remain bullish about their presence in the market. Amanda Blanc, chief executive of retail broking at Towergate, says that despite the new direct entrants, “over 90% of SMEs buy insurance through brokers and the trend is not changing”.

“We believe in the intermediary market and we will do everything we can to support it.

Cathie Bruce, Groupama

She says businesses recognise the value of a good broker as a trusted adviser that offers personal service and advice on complex matters that could mean the difference between an SME continuing in business or not, after suffering a loss.

It is all very well to praise brokers’ personal services, which are appreciated by many clients happy to pay a bit more for these benefits, but money does come into the equation. And insurers which remain committed to brokers, such as MMA and Groupama, say that brokers need to face the threat from direct insurers head on, particularly by adopting electronic trading, which will create efficiencies and give them a competitive edge.

“Groupama has no plans to go direct,” says Cathie Bruce, the insurer’s distribution and customer service director. “We believe in the intermediary market and we will do everything we can to support it.

“Electronic trading, to ensure you reduce the cost of the business as much as possible, has to be embraced in order for brokers to fight off the direct challenge.”

She adds that the threat from direct insurers has been there for brokers since Direct Line launched the first direct operation in the 1980s. “It’s not the threat, it’s how they counteract such a threat that will make a difference. And, really, in the small commercial market there is very little than can be done directly online, especially if you have something that doesn’t fit.”

Buying behaviour

Kate Penrose, head of commercial support at MMA, agrees, adding that the question is more about customer buying behaviour rather than direct versus intermediaries. “Many brokers have grown their business over the past few years and many of them now have a strong web presence. They have built competitive models based on service and their understanding of the market, not only price.”

According to Jason Gandy, chief executive of SME Insurance Services, it is a question of choice. His firm, which doesn’t have a high street present and services its 15,000 clients over the phone, is about to launch an online offering as well.

“Our customers have a choice. We work with a panel of insurers and we have delegated underwriting authority which means we can be efficient and provide tailored solutions to their insurance needs.”

He is not fazed by Direct Line’s aggressive marketing push. In fact, he says it can benefit his business. “Its campaign will build awareness among small business that they can go online and buy insurance. And whereas Direct Line can only sell its own products, we can offer customer a choice of nine insurers which offer different premiums and cover. Business is going well and there is a great market out there.”


The SME insurance market is changing rapidly. According to Datamonitors UK Commercial Insurance Distribution 2007 report, the dynamics shifted between 2003 and 2006, with certain categories of broker seeing their share of distribution diminish. In particular, national brokers saw their distribution share decline from 54% in 2003 to 48% in 2006. Conversely, chain brokers and telebrokers increased their share of commercial insurance distribution from 5% to 8% in the same period, the report says.
Datamonitor says this has occurred as a result of consolidation in the commercial broker market, as the growth of broker networks and chains has concentrated business into the hands of players like Towergate, Cobra and Oval, and large regional players.
Despite that, the share of independent intermediaries has remained largely unchanged, only declining by one percentage point since 2003.
Independent intermediaries are still the most influential distributors in the market by far, controlling 83% of distribution in 2006, states the report. This reflects the fact that most commercial insurance customers seek advice before purchasing cover.
Business insurance can be costly, so when dealing with premiums worth thousands of pounds each year, clients want assurance from an independent source that their insurer is charging a fair price.
The bad news is that brokers are forecast to see a 1% decline in market share between 2007 and 2011. Datamonitor says that will happen as a result of competing distribution channels challenging brokers for business, especially the direct channel.
However, commercial insurance brokers are expected to retain their market share much more successfully than personal insurance brokers have in recent years.
But Gary Head, director of commercial insurance at Hiscox UK, argues that the market is also growing. The fact is that in what we call the emerging professions area, a minority of potential customers buy all of the covers, which could benefit them. So there is a huge need for customer education and a huge amount of potential for future growth.
He adds: All of us will know some IT contractors, media and PR consultants, trainers, management consultants, teachers, charitable organisations, and the question has to be, do all of these buy the right level of cover?