How cost-conscious UK SMEs are finding best value insurance protection

With property and casualty insurance premiums rising for a 13^th consecutive quarter and COVID-19 disruption leaving SMEs financially stretched, how can business leaders tighten up on essential insurances – to strike the right balance between protection and price in securing cost-effective, ‘best value’ cover?

It is no secret that the COVID-19 pandemic has hit UK SMEs hard, with lockdowns and stay-at-home orders bringing disruption to normal operations, harming sales, and depressing revenues.

In fact, almost three quarters (71%) of UK SMEs experienced declining revenues between March and November 2020, and around 30% reported greatly reduced sales over the same period . Meanwhile, tough trading conditions seem set to continue at least in the short term, with the UK economy not predicted to return to pre-COVID levels before the end of 2021.²

The net result has been to leave SME owners facing some tough choices — with the ability to invest in business recovery hampered by poor cash flow driving many to focus hard on cost reduction, looking beyond “nice to haves” to re-evaluate even fundamentals like business insurance. 

Again, this trend is borne out by the numbers. More than half (51%) of UK SMEs stopped paying for a range of insurance policies during the pandemic — with crucial property, liability, and cyber covers a particular focus.³

A challenging SME insurance market 

That focus on managing the cost of insurance has been exacerbated by a uniquely challenging commercial insurance market, as insurers respond to heightened risk and increased claims. Those issues have helped to drive 13 consecutive quarterly price increases including, in the fourth quarter of 2020, the largest year-on-year quarterly price increase since the Marsh Global Insurance Market Index was launched in 2012.

Overall, according to the Index, UK commercial insurance prices rose by 44% in Q4 of 2020, though there is better news for SMEs in the detail — particularly in property and casualty insurance markets:

• UK property insurance pricing rose by 24% overall, but the brunt of the increases was felt by larger businesses.  Price increases for smaller firms averaged a more manageable 15%, while SMEs were less affected by renegotiation of terms and conditions at renewal than larger companies.
• Casualty pricing rose by 6% overall in the UK, with general liability covers — public and product liability — rising by 10-15% on average, and accounting for the bulk of the increase. In better news for UK SMEs, employers liability insurance remained largely competitive, with rises in the low single digits.
• Financial and professional lines saw the biggest headline rate increases, with prices rising by 90%. But that rise was largely driven by directors & officers insurance, where a deterioration in claims, a COVID-impacted economy, insolvencies, wrongful trading, and a lag on claims post government support saw prices rise by 100% and more; cyber cover also rose by up to 30% due to an increase in the frequency and severity of claims.

SMEs focus on best fit, best value cover

Those twin trends — cost-sensitivity and price rises — have ensured that UK SMEs remain focused on creating efficiencies in their commercial insurance arrangements. However, perhaps with minds turning to recovery, rather than survival, attention has shifted to finding efficiencies and not the outright cancellations that can leave firms exposed and under-insured.

In fact, deriving “good value” from insurance products is now the number one priority for 57% of SMEs — which is reflected both in a back-to-basics approach to insurance buying in which coverage, service and value are prized, and a general desire to tighten up by removing non-core covers from insurance programmes.¹

That is, SMEs responding to a recent McKinsey survey indicated an increased desire to maintain insurance coverage related to everyday operations, such as employers liability, public liability, and motor. On the other hand, 35% indicated they are likely to remove more specialist covers, such as directors and officers and environmental liability — as well as business interruption cover, perhaps driven by high profile claims disputes at the height of the COVID-19 crisis.¹

However, without real insurance experience, building a cost-effective commercial insurance programme can be complex and uncertain, particularly for smaller firms — and that is again reflected in SME perceptions.  Almost a third (30%) of SMEs admit to finding every step in the insurance buying process extremely challenging and, crucially, that includes the fundamental issue of finding the right cover for their needs.¹

So, the question is, how can SMEs find those “best fit, best value” insurance programmes — acquiring the knowledge and experience to design efficient cover and navigate price rises, without leaving themselves exposed through under-insurance or paying for cover they don’t need? 

Support, value, and strength in numbers

At least part of the answer, according to SMEs is to call on expert, independent support. The vast majority of the SMEs working with a broker to buy insurance pre-COVID-19 plan to continue to do so,1 and with good reason.

Arranging cover through a broker is often the best way to strike the right balance between cost and protection, and thereby achieve best value — in part because insurers may see cover arranged through a broker as lower risk than cover arranged direct.

Crucially, however, it is also because brokers are professionally trained to help clients choose the right cover.  In fact, it is the broker’s responsibility to ensure that adequate cover is arranged, which means understanding the risks facing each SME client and navigating technical insurance product wordings to arrange exactly the right level of protection. 

As a result, a broker’s role in quantifying risks and tailoring cover can be vital in striking the right balance between cover and cost. The outcome for SMEs is a streamlined, simplified buying process ultimately leading to the cost-efficient insurance that has become a priority for so many post-COVID-19.

There is also a wider potential benefit when SMEs choose to work with brokers: SMEs actually make up the largest commercial segment in the UK, accounting for 99% of all companies, 77% of the workforce, and more than 60% of gross premiums for key commercial insurance lines like property and casualty,¹ so their importance to, and potential influence with, insurers and insurance markets should not be under-estimated.

However, that influence can only truly be brought to bear through collective buying power; the more SMEs buy insurance through specialist SME brokers like Marsh Commercial, the more their needs can be communicated at scale through commercial relationships with insurers. 

For more information…

To find out more about the current state of the SME business insurance market in the UK, including price trends and other challenges, you can access the full Marsh Global Insurance Market Index here, while the Marsh Global Risk Report 2021, available here, offers a detailed view of the major risks influencing insurance markets worldwide.

If you have any questions, please get in touch with your usual account executive or contact your local branch now.

_Sources:

_{1. mckinsey.com/industries/financial-services/our-insights/insurers-must-rethink-the-sme-segment-lessons-from-the-united-kingdom}

_{2. poundsterlinglive.com/economics/15147-uk-economic-growth-forecasts-upgraded-bank-of-england-to-set-path-to-policy-normalisation-deutsche-bank}

_{3. insurancebusinessmag.com/uk/news/breaking-news/half-of-smes-cancel-insurance-policies-due-to-pandemic--survey-237719.aspx}