Targeting SMEs in UK General Insurance 2009

Table of Contents

OVERVIEW

• Catalyst
• Summary

EXECUTIVE SUMMARY

• The SME market is attractive for its sheer size, though the recession will have an impact
  • The SME market was estimated to be worth £5.4 billion in 2008
  • The recession has put pressure on SMEs and is resulting in more insolvencies
  • Package products are the principle means through which SMEs purchase their cover
  • SME insurance needs are varied and encompass a range of products

• Face-to-face arrangement through established brokers is the main means by which SMEs arrange their cover
  • Brokers dominate among all sizes of SMEs, though they have greater market share among larger SMEs
  • Face-to-face arrangement is popular in the market but is more prevalent among larger SMEs
  • Most SMEs learn of their insurance provider through previous experience or proximity

• SMEs are generally loyal to their existing insurance provider but there is significant churn to exploit
  • More SMEs considered a change of provider in 2009 than in 2008

• Insurance providers need to make the necessary investments so they can offer quality low cost products
  • The recession will make SMEs more price sensitive, requiring brokers to invest in the ability to deliver at a lower cost
  • Direct players need to play up the potential cost savings which an SME can obtain from going direct
  • Banks can market themselves as low cost alternatives, appealing to SMEs' price sensitivity

MARKET CONTEXT

• Introduction
• The SME market was worth over £5 billion in 2008, with rates hardening in motor
  • The SME market was estimated to be worth £5.4 billion in 2008

• The SME market is attractive for its sheer policy volume, though the recession will have an impact
  • The number of UK enterprises grew by 4.7% to 4.8 million
  • More than 99% of UK companies are small businesses
  • The recession has put pressure on SMEs and is resulting in more insolvencies

• SMEs often require a range of cover, generating a wide range of premiums for insurers
  • Package products are the principle means through which SMEs purchase their cover
  • SME insurance needs are varied and encompass a range of products
  • SME insurance policies can vary considerably in value, depending on the size of the risk

• Affinity propositions are increasingly targeting the SME market
  • Traditional affinity partnerships in the SME market have been based on trade associations
  • There has been significant interest from some personal lines affinity players in distributing SME insurance
  • Two high profile affinity partnerships have announced their expansion into the SME insurance market

• Several insurers have adapted their SME broker offering, reflecting the competitive nature of the market
  • QBE has rolled out a range of online SME products
  • MMA reworked and relaunched its SME product range
  • Chaucer made changes to gear up for an SME push
  • RSA is aiming to increase its SME market share with better and faster service
  • SME insurance giant Aviva closed its direct commercial operations, concentrating on broker distribution
  • Brit Insurance expanded its SME product range with a new PI product
  • Allianz Commercial is targeting growth in SME business in Scotland
  • The motor trade has attracted a great deal of attention for those insurers looking at growth in the SME market

• Many brokers have organic or acquisition driven growth ambitions for the SME market
  • AXA rebranded Venture Preference and continued to add to it with acquisitions
  • Swinton has identified growth in the SME market as a priority, supported by its consolidation activities
  • Aon launched a credit insurance service to SMEs and acquired the specialist broker Supercover
  • Marsh is reaching out to regional brokers in an SME push
  • A new consolidator is looking to create a leading SME insurance presence
  • Broker Direct has also announced a number of acquisitions, and Our Network has expanded rapidly
  • JLT has acquired Ingham & Co to add range to its Thistle Underwriting platform
  • Broker-owned MGAs have become a common feature in the commercial insurance market

DISTRIBUTION DYNAMICS

• Introduction Face-to-face arrangement through established brokers is the main means by which SMEs arrange their cover
  • Brokers dominate among all sizes of SMEs, though they have greater market share among larger SMEs
  • Face-to-face arrangement is popular in the market but is more prevalent among larger SMEs
  • Most SMEs learn of their insurance provider through previous experience or proximity

• SME insurance providers are generally good at achieving high levels of customer satisfaction
  • SMEs are generally happy with their insurance provider
  • SMEs tend to prefer longstanding relationships with their providers, making an initial pitch critical
  • Whilst SMEs generally value provider advice, medium-sized companies are particularly receptive to it
  • When choosing a provider, SMEs value good service almost as much as price

• Many SMEs rely upon their insurance providers for extra services
  • The majority of SMEs receive some services from their insurance providers, with legal advice the most common
  • Most SMEs that receive additional services from their insurance provider do so for free
  • The most desired services are risk management and legal advice
  • Approximately one fifth of SMEs that do not receive extra services are interested in obtaining them

POTENTIAL SWITCHERS

• Introduction
• SMEs are generally loyal to their existing insurance provider but there is significant churn to exploit
  • Approximately one fifth of respondents started their relationship with their provider in the last two years
  • SMEs that have been trading for five to 10 years have typically been with their provider the longest
  • Banks had acquired the largest proportion of new business in the SME insurance sector
  • Price was the major driver behind SMEs switching their insurance provider

• The number of SMEs thinking of switching has risen to higher, historic levels
  • More SMEs considered a change of provider in 2009 than in 2008
  • A variety of companies, from different industries, believe they will change their provider over the next year
  • SMEs that use the internet to arrange their insurance are the most likely to search out a new provider
  • Price is the leading reason why SMEs think that they will change insurance provider
• SMEs are open to alternatives to face-to face distribution, though the majority still require convincing
  • Micro SMEs are the most open to buying their cover over the telephone
  • The internet is attractive to SMEs due to its convenience
  • Most SMEs remain opposed to telephone arrangement, though their reasons are varied
  • Two thirds of the SME market would not consider an online sales process when arranging their cover
  • Of those SMEs willing to buy insurance online or via the telephone, liability products were the most popular

• Banks and direct insurers can sell into a sizable minority of SMEs but still need to convince most to give them a chance
  • Approximately one third of SMEs will use a bank as their insurance provider
  • The majority of SMEs are willing to purchase their cover direct
  • There remain significant obstacles to many SMEs considering banks as viable insurance providers
  • Direct insurers face less opposition but still have several issues to address

ACTION POINTS

• Brokers can focus on delivering services and low cost products
  • The recession will make SMEs more price sensitive, requiring brokers to invest in the ability to deliver at a lower cost
  • Flexibility and understanding during the recession can prove beneficial
  • Face-to-face arrangement is popular but investments in online and call center distribution can yield additional business
  • Legal advice and risk management are the key additional services to offer to medium-sized SME clients

• Direct players need to target smaller SMEs and address their perceived faults
  • Direct insurance players are well suited to the micro end and should focus on these customers
  • Direct players need to play up the potential cost savings which an SME can obtain from going direct
  • Stepped up advertising campaigns are necessary to drive consumers to a direct insurance operation
  • Direct players need to highlight the convenience and relative ease of their distribution platforms

• Banks need to address their image as expensive providers with no expertise to break into the micro SME market
  • Banks can market themselves as low cost alternatives, appealing to SMEs' price sensitivity
  • Targeting micro SMEs and start-ups would exploit some of banks' natural affinities
  • Banks need to reinvest in their overall reputations, which appear to have suffered among SMEs

APPENDIX

• Definitions
  • Distribution definitions
  • Premium income
  • SME

• Methodology
  • Datamonitor' s SME Insurance Survey Q2 2009
  • Datamonitor' s SME Insurance Survey Q1 2008
  • Datamonitor' s SME Insurance Survey Q1 2007
  • Datamonitor' s UK Insurance Broker Database
  • UK Commercial Insurance Broker Survey - March 2009

• Further reading
• Ask the analyst
• Datamonitor consulting
• Disclaimer

TABLES

• Table: Q: “On average, by approximately what percentage have premiums changed in the last year, for the following business lines?” (Q1 2009)
• Table: Profile of UK enterprise by volume, employee numbers and turnover, 2007
• Table: UK company insolvencies, 2004- 2009
• Table: SME insurance spend by company size (employee band) (£), Q2 2009
• Table: Top 10 brokers by number of clients with turnover below £20 million, Q1 2009
• Table: Q: "How long have you been with your current insurance provider?"
• Table: Length of time with insurance provider by length of time trading, 2009
• Table: Q: "How important is it to receive advice on an ongoing basis from your insurance provider?"
• Table: Q: "What were the most important reasons for choosing your commercial insurance provider?"
• Table: Q: "What services do you currently receive from your insurance provider?" (by SME size, Q2 2009)
• Table: Q: "What services would you like to receive from your insurance provider?"
• Table: Q: "How long have you been with your current insurance provider?"
• Table: Q: "How long have you been with your current provider?" (by length of time trading)
• Table: Q: "Why did you switch?"
• Table: Q: "Do you think you will change your commercial insurance provider in the next 12 months?"
• Table: Q: "What business sector are you involved in?"
• Table: Q: “How large is your company in terms of number of employees?”
• Table: Q: “How large is your company in terms of turnover?”
• Table: Q: "What business sector are you involved in?"
• Table: Q: "What business sector are you involved in?"
• Table: Industry sectors
• Table: Industry sectors continued

FIGURES

• Figure: Most SMEs rely upon previous experience when learning about their insurance provider
• Figure: SMEs show the greatest willingness to purchase public and employers' liability insurance online
• Figure: A significant proportion of brokers have seen no increase in premium rates, except in commercial motor
• Figure: The number of UK enterprises reached 4.8 million in 2007
• Figure: Almost three quarters of UK companies have no employees
• Figure: Company insolvencies have picked up since the first quarter of 2008
• Figure: Most SMEs will purchase their insurance in the form of a package
• Figure: SMEs carry a wide variety of insurance cover
• Figure: A significant proportion of commercial brokers were approached by Swinton
• Figure: Brokers have the highest penetration among medium-sized firms
• Figure: Micro SMEs are most comfortable with arranging their cover over the telephone
• Figure: Most SMEs rely upon previous experience when learning about their insurance provider
• Figure: Direct insurance customers rely less on previous experience and more on marketing
• Figure: Satisfaction levels in the market remain high
• Figure: Very few SMEs have changed their provider in the last two years
• Figure: The most common length of an SME' s insurance relationship was two to five years
• Figure: Medium-sized companies are more interested in receiving advice from their insurance providers
• Figure: Direct insurers' clients generally place less emphasis on insurance advice
• Figure: Clients with more interaction with their provider are more likely to value their advice
• Figure: Price was almost matched in importance by service as a criteria for selecting a provider
• Figure: Internet clients are the most price-sensitive
• Figure: Direct insurer clients are slightly more price-sensitive
• Figure: Few SMEs do not receive extra services from their insurance providers
• Figure: Take up of extra services among SMEs declines as employee numbers increase
• Figure: Few SMEs of any size pay for the additional services which they receive
• Figure: Medium-sized SMEs are generally more keen on receiving services with risk management and HR advice at the top of the list
• Figure: Demand for services from those not receiving is relatively minor
• Figure: Most SMEs have a long-term relationship with their provider
• Figure: One quarter of bank clients in the survey had changed at renewal
• Figure: Price most often motivates SMEs to change their insurance provider
• Figure: Companies in the education sector are the most likely to seek out a new quote in the next 12 months
• Figure: Clients which arrange their insurance through the internet are the most likely to search for another provider
• Figure: Price is the key motivation behind SMEs looking to change their provider
• Figure: About half of SMEs that would buy their cover over the telephone would do so because it is quicker
• Figure: Micro SMEs are more likely to consider telephone arrangement
• Figure: Convenience, speed and the flexibility of arranging their cover outside of normal business hours are the top reasons why SMEs will consider online arrangement
• Figure: Many busy micro SMEs are attracted to the convenience of online arrangement of insurance
• Figure: The potential market for telephone distribution is low among medium SMEs
• Figure: Most SMEs are not comfortable with arranging their insurance over the telephone
• Figure: SMEs have a variety of reasons for not buying their cover online
• Figure: Medium-sized SMEs fear they will not obtain the proper cover online
• Figure: SMEs show the greatest willingness to purchase public and employers' liability insurance online
• Figure: Public and employers' liability were the most likely to be considered for an online purchase by micro SMEs
• Figure: Almost a third of micro SMEs can be persuaded to use banks for their insurance if it is cheaper
• Figure: Good cheap package products are what convince SMEs to consider banks
• Figure: Micro SMEs are most likely to consider a direct insurer for the potential cost savings
• Figure: Cost savings were the number one driver behind SMEs considering a direct insurer
• Figure: Larger SMEs are content with their current broker arrangements
• Figure: A lack of expertise as well as SMEs' general complacency and contentment are impediments to banks' growth in the SME sector
• Figure: A significant proportion of SMEs still view direct insurers as lacking specialist expertise
• Figure: A slim majority of medium-sized SMEs will not consider a direct insurer as their provider