Some insurers are targeting SMEs but John Hancock asks: does this represent a threat or an opportunity for brokers?
Small and medium enterprises (SMEs) have for long been a market served almost exclusively by local brokers. It's a relationship thing.
More often than not SME proprietors and local brokers are members of the same business community.
They meet on many occasions, some informal, and have the understanding that supports the kind of trust that is still at the heart of many brokers' businesses. So, the fact that insurers seem to be focusing more directly on the SME market is a cause for concern among brokers.
Many micro-businesses seem hardly different to personal consumers and are growing increasingly comfortable with online trading for all sorts of services, so why not for their business insurance?
Recent research suggests that up to 15% of SMEs would consider buying insurance online, which is half a million potential customers. Why wouldn't simple 'off the shelf' products - so popular in motor and household cover - not be able to meet the simple needs of small enterprises? Where larger businesses have more complex risks, the needs of smaller enterprises may more easily fit into a set of standardised criteria, and it would enable insurers with established direct businesses to further leverage their investment and experience.
Also, insurers can apply economies of scale to directly sourced business, which can potentially make prices more competitive. But, persuasive though all of the above may seem, not every insurer is convinced.
If 15% of SMEs would consider buying online that is not the same as them actually doing so, as the vast majority would still rather deal with an intermediary. And many insurers still value the broker distribution channel and would rather develop that.
Chris Parker, portfolio manager at QBE Insurance, is typical when she says she considers it "better to use technology in the relationship with brokers to assist them in more efficient business transactions with clients and FSA contract certainty".
The established success of the insurer/broker relationships will always be a strong reason for continuing to work together.
Whereas once, even small businesses were still businesses in the traditional sense, today's micro-businesses are hardly more than small self-employed arrangements.
Clients whose needs are very small will only generate commensurately small margins for whoever handles their business. Serving such micro-businesses may simply not be worth the traditional investment of broker time.
Conversely, it may be that structured products can offer a cost effective service without making protection premiums too large a proportion of their costs.
And a further accessible channel through which to transact insurance purchases is going to improve choice. Matt Frost, product manager at Norwich Union, says: "While the majority of SMEs still prefer to deal with a broker, some very small businesses act more like consumers (who buy insurance directly)."
But the simple presence of choice will not mean that everyone in the market will opt for the new channel. As Blane Roberts, director of Holland Insurance Brokers, says: "Even with simplified commercial products, clients will still need explanation and guidance in matching their business to appropriate cover."
There may also be benefits for brokers in this development. Some insurers report broker inquiries for very small clients and cases to be handled through the insurer's direct system while, on the other hand, where a client approaching a direct facility is found to have needs beyond its closely defined capabilities, insurers will usually refer that client to one of their intermediary partners.
More complex
Simon McGinn, trading director North and Midlands at Allianz Cornhill, feels that it could increase broker loyalty when "people trying to buy direct realise that it is a more complex matter than they at first thought and will begin to better appreciate the added value that a broker offers."
Perhaps the benefits for insurers are more obvious. Control over and cross-selling to an owned database is a clear advantage in leveraging the costs invested in gaining and retaining clients.
Chris Dobson, distribution development director at Fortis Insurance, can see how "the successful emergence of direct personal lines (underwriting) has led some companies to consider extending the concept to SMEs".
That said, Fortis is one insurer that works only through brokers.
The opportunities for brokers to prosper in this market seem undiminished. Schemes have always been a strong suit with brokers and, if a large group of similar SMEs can be identified, that represents an opportunity as does the related possibilities of developing their own 'direct' business within a market.
And the broker's traditional strength must not be overlooked. While small entrepreneurs may be very good at their own businesses, they will neither be insurance experts nor see it as effective use of their time to try.
Insurance needs
A broker will understand a business and bring to bear experience with similar businesses. Jeff Partridge, director at broker Richard Keen, explains: "It allows brokers to concentrate on insurance needs and added value rather than simply on price, and the business is more likely to be retained."
Ian Page, commercial underwriting manager at MMA Insurance, agrees: "The broker's role is still proving invaluable in guiding business owners, through not only the insurance but also peripheral areas such as fire and health and safety requirements."
Lynn Miller, senior manager for commercial new business with Coface UK, observes: "There are a lot of SMEs out there and (we) need the (broker introduced) business from those growing companies."
Given the current capabilities of direct systems, they are very unlikely to pose a threat to brokers in the foreseeable future. A greater threat would be if brokers decided that the game wasn't worth the candle and walked away from this sector, which could reduce long-term opportunities for themselves and insurers.
In the longer term, nobody currently believes that direct trading will catch on with commercial business as it has in personal lines, because it cannot match the service.
