Anne Hesketh says insurers should do more to adapt their policies to the specific needs of SMEs

SMEs make up the majority of UK businesses. This is also a lucrative and promising sector for insurers. But companies willing to grow their share of the market will have to deliver more than simple packaged solutions.

There are about 3.8 million small and medium-sized enterprises in the UK. And according to recent research by AXA, brokers believe they are underinsured and unaware of the potential risks they face.

This is a favourable scenario for insurers willing to tap into and deliver better solutions for this market. But SME needs are becoming increasingly complex and only those who fully grasp the implications of such changes will be able to reap the benefits.

David Martin, small business and e-trading manager at Allianz Cornhill, says that insurers must deliver "true customer" services. He adds: "The big question is whether insurers have the ability to deliver the breadth and depth of services SMEs need now, and in the future."

Martin mentions that legislative changes, for example, mean that small businesses need to adapt their liability cover and indemnity limits. They also need more support in understanding the risks they face. He says: "The main challenge for insurers in this sector is to understand their clients' needs. We spend a lot of time researching the end client. And while we offer a package product, we can provide more specific cover and price it accordingly."

In the private medical insurance sector, Dave Priestley, sales director at Pru Health, points out that insurers which fail to develop products to meet SMEs' specific needs, will do their businesses no favours.

"Employers are increasingly concerned about the rising cost of PMI. They are aware that premiums are going up, but they are not getting any more for what they are paying."

He adds that employers are turning to providers which can add value and offer flexibility. "Cash flow is an issue for small business. That's why we developed a product whose price is linked to the level of claims. If SMEs don't claim, they will get a discount the following year. About 90% of our SME clients have received this benefit with an average of 9% premium reduction."

New legislation

Many insurers are trying to deliver added value by offering add-on services such as helplines and web portals which aim to support clients in how they manage their business and keep up with new legislation.

Paul Upton, chief underwriting officer at Evolution Underwriting, welcomes such initiatives, adding that innovation in policy cover could benefit SMEs.

He says: "There is room for additional innovation and add-on benefits in terms of risk management and other non-premium income related products."

New market demands may have an impact on competitiveness. And Martin argues that, although some still value cut prices, comprehensive offerings are the way forward.

He says that not all insurers will be able to provide extra benefits to their customers, which is something those in the industry who are able to provide should promote more.

"Some of these other services could help an SME to avoid an employee claim which would cover their insurance premium for years to come, but the industry does need to get the message across to SMEs about what these add-on benefits mean."

It is not only SMEs needs that have changed. According to Steve Carroll, managing director at Markel UK, the dynamics of the market have shifted considerably over the last few years, fuelled by the consolidation of insurers and brokers and the influx of new capital.

He says: "Each insurer has to decide how they want to enter the fray - broker market, direct market, underwriting agent or a combination of all three, and then to what extent."

Business strategy will certainly play a part in a sector whose key component to profitability is handling costs. "What level of service can be provided as profit margins inevitably tighten with the influx of new markets?" emphasises Carroll.

"Insurers naturally focus on those areas that they are comfortable with, those that can be commoditised - less need for technical underwriters, easier to outsource overseas, easier to transact electronically. Not a great deal of added value, but an easier recipe for profit."

But not everyone agrees that the commoditised way of doing business will help insurers reap the benefits in the long run. Martin points out that although some would like to see this market commoditised, "the reality is that there are very different products out there".

He adds: "The market suggests that the most successful thing to do to achieve significant growth in this sector is to provide more and more support for SMEs. That is what they require. SMEs are realising that cut prices are not always the best option and may not protect them in the long term."

Correct document

Another main issue for the industry, according to Upton, is to make sure SMEs have the correct policy document within a reasonable amount of time.

He points out that end customers end up paying for inefficiencies generated by poor quality systems.

"If brokers are chasing insurers to get the right documentation, they will pass this cost on to consumers. SMEs would benefit from more transparent and efficient business transactions."

One way of improving efficiency is through technology. Brian Russell, chief executive of underwriting agency Anglo Pacific Consultants, agrees that clients should get their policies promptly.

"We are very proactive and SMEs using our system can get their quote and policy documents within minutes," he says.

"Clients are looking for the quickest and easiest way to get their policies and we will see more insurers becoming systems driven as a result."

But he recognises that online transactions may not suit every SME. "When you have premiums over £5,000, for example, they need to see their broker to make sure their needs are fully met."

The SME market is going through a "buoyant period", according to Martin.

Insurers will have their own strategy to tap into this growing sector, and tailor-made policies may well be one of the tactics they will decide to use.

"The market is gearing up to SMEs," says Russell. "Insurers are tailoring their policies to suit specific types of business such as restaurants and small offices. They have realised that this is a huge market with an incredible potential for growth."