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Viewing report
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Commercial Insurance for Small Business Market Assessment 1999
Key Note Publications Ltd, Jan 1999
The market for commercial insurance for small businesses is an unlikely area for fierce competition, having been at the bottom of its soft/hard cycle since the start of the 1990s. However, it is an area in which many of the large general insurers not only have a presence but are looking to expand.
There are over 3 million small businesses in the UK with a regular flow of new businesses opening up each year. These businesses cover a huge range of activities and many require insurance which is specially developed for their business area and the particular problems they encounter. This emphasis on the nature of the business rather than its size has lead to the development of a segmented market where insurance is bought on the basis of being aimed at offices or shops rather than because they have a turnover of a specified amount or employ a certain number of people. The result of this is `package insurance'. The insurer puts together a package of insurance covering, business interruption, liability, motor, property, material damage and others in the proportions appropriate to that market. These off the shelf products are cheaper to sell and the only way really that this market can be catered for cost effectively whilst premium rates are so artificially low. The package provides everything the business needs at a reasonable price and requires less work than bespoke schemes.
Larger businesses need policies which cover the risks to which they are exposed in the relevant proportions. This leads to the `bespoke' policy which is tailored with the broker to provide the most appropriate cover for the business. The largest businesses, along with some very small businesses may decide to retain the risk and self-insure purchasing the legally required insurance, motor and employers liability, only.
The interest in the market for small businesses is the result, perhaps, of the place in the market which it occupies. Many small businesses have insurance requirements very similar to those of the household and motor policyholders. This more popular market has radically altered in response to the entry of the direct writers who revolutionised the market by putting emphasis on speed and efficiency, and by cutting out the `middle man' they have been able to competed on cost. This has been facilitated by the development of computer systems which can speedily process information and successfully formulate the risk profile which the insurer wishes to accept and those which are to be rejected. This has been possible because of the homogeneity of the market and the volume of premium in the market.
Whilst the commercial market therefore appears to be the next area to which the direct writers will turn their attention, there has not yet been a rush of activity in this direction. This could be attributable to a number of factors:
The market is less homogenous than the household and motor market.
The commercial market is naturally segmented requiring special features
depending on the nature of business they transact. Risk profiles may therefore be harder to develop.
The volumes are not as large.
The market is predominantly broker based.
It is however apparent that many of the major players are watching the market closely for developments and would certainly not rule out this as a potential marketing channel.
The market is also developing increased segmentation, looking for more niches either in addition to or instead of the standard range of packages which most insurers offer namely Shops, Offices, Hotels and Guest Houses, Restaurants, Wine Bars, Pubs, Retailers, Small Fleet, Contractors, Construction, Surgeries, Farms. Some insurers have found within their client bank a large number a particular business type, for example Hairdressers. By analysing the features of their products which make them attractive to this group they can then develop this market. The NFU for example have a natural market within the farming community both in terms of their products and their marketing structure which is through NFU secretaries. However, this does not preclude the selling of a more `standard' product to other businesses which may be encountered. Most large insurers will develop a branded product for brokers who identify a particular market but they will require volume business to make this worthwhile. This is an area of particular importance in this market.
IT is of importance to this market, especially through products such as Gilt Edge and Cleo which provide systems to streamline the administration process. Full cycle EDI, the logical destination for these developments will provide simple processing of information and in most cases instant documentation for clients. This along with streamlined underwriting will reduce administration and make this whole area more cost effective thus opening up the market. There are now more clients for whom it is cost effective to write the business.
The support of these products by insurers indicates the importance that they place in the development of the commercial insurance market for small businesses and their commitment to the broker channel for distribution.
The vast majority of sales in this market are made through brokers, the natural channel for small business owners who do not have the time or expertise to identify the many insurance needs of their business and then seek out the best insurance providers. Research also indicates that insurance is not an area in which the business owner is particularly interested. This makes them more likely to be inertia purchasers, there will be less shopping around. There is also evidence that the customers in this market are more likely to rely on family, friends and colleagues for advice this means that there is a market for direct selling, especially where advice is also given. This may well account for the presence of the home service agents in this market. The person who arranges household insurance may well be the first port of call for a new business owner who is looking to cover a small business perhaps operating out of the home.
The most heated area of competition is that of the medium sized and national brokerages. This is the area which writes the majority of this type of business and the marketing and promotional activity of broker companies is based here. Such activities include the development of the software systems mentioned above as well as telephone helplines, information on markets, preferential schemes for volume business and clubs for volume producers. Royal SunAlliance recently launched their broker division with those products most popular with their brokers but are also in consultation with brokers as to which features are most popular in commercial insurance products and what services and backup the intermediary requires.
Not all commercial insurers are committed to the small end of the market, some find that the commodity market which it has become, unsuited to their marketing plan and whilst offering package products to provide a full product range, are not actively seeking this type of business. One way in which a presence can be maintained in this way is by being on the panel of the software systems providers with simple products with minimum broker support costs.
The soft market has lead to emphasis on price and some providers have reduced premium rates, and have continued to do so for many years. However, those who have maintained premium levels claim that they have weathered the storm with reduced premium income but good quality business which places them in a strongly competitive position as the market begins to improve. The competitive state has lead to development of value added services with which to compete. Helplines are a popular service. For brokers there is assistance with queries on underwriting and administration and for clients there are 24 hour telephone lines which provide a holistic approach to dealing with claims. The aim of this is to assist the business to get up and running as soon as possible and to minimise the problems occurring as a result of the claim. Other popular features include ease of premium payment and credit facilities.
The current soft state of this market has been protracted. Some in the industry see this as the indication of the cycle having been broken others as a sign that it is due for an upturn. Previous cycles have improved after the withdrawal from the market of insurers, either by choice or by necessity. However, whilst both the Prudential and Legal and General have withdrawn from the market but this, it would appear is as a result of a streamlining of their business profiles and a desire to concentrate on other core activities. The action has not had any real impact on the competitive market. The merger between Royal and SunAlliance, two of the top ten insurers in the market, and Eagle Star with Zurich International, and AGF and Cornhill with Allianz, and Guardian with AXA, mean the market is much more concentrated.
Whatever the immediate future of this market it is apparent that many insurers see it as being appropriate to allocate considerable resource to its development.
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