Delving in to the SME insurance landscape
Three insurers in the commercial lending space are keen to put the pandemic behind them, but that does not mean it is time to relax. Issues to stay abreast of include new threats and a less-than-welcome ‘blast from the past’ – the question is whether brokers are ready to pivot once again and keep customers as well informed as they should be.
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Danny: [00:00:20] Welcome to Insurance Business TV. I'm Danny Wood, news editor of Insurance Business Australia. In this executive insights panel sponsored by Blue Zebra, DUAL and Vero, we're exploring the latest issues in the SME insurance space and the market trends and challenges that brokers and insurers should be looking out for. On our panel today, Mark Polglase, Chief Underwriting Officer for SMEs with Blue Zebra Insurance. Hi, Mark.
Mark: [00:00:46] Hi Danny. Thanks for letting us join.
Danny: [00:00:48] Sure. And we've got Damien Coates, CEO of DUAL Asia Pacific. Damien.
Damien: [00:00:53] Hi, everyone. Looking forward to today.
Danny: [00:00:56] And Michael Cooke is the executive manager of the Intermediated Packages portfolio for Vero. Hi, Michael.
Michael: [00:01:03] Hi, Danny and great to be here.
Danny: [00:01:06] Great. Well, as we start to talk, SMEs in towns across New South Wales and Queensland are taking some pretty big hits from the current flooding that's still unfolding. Let's touch on that briefly. What's one lesson for the industry from this flooding disaster, Mark?
Mark: [00:01:21] Well, I think from what I've seen in the latest statistics, I think 80% of the claims so far that have been reported are for domestic property insurance. I think the latest I saw again was 17% on motor, which suggests that that leaves only about 3% for commercial insurance. So between the lines, they're either underrepresented in these flood prone areas, which is unlikely, or that the necessary flood insurance for SMEs is not available. So there's a lesson in that I think for commercial insurance that we're potentially not offering the the relevant insurance necessary to keep these businesses surviving and enduring these type of events, which are not uncommon, they seem to be repeated.
Danny: [00:02:02] What are your thoughts, Damien?
Damien: [00:02:04] I think quite often in these these catastrophes, the reporting is very much of what's happening in the domestic segment. So I think what's going to happen in the commercial segment, there's going to be a tail on in the reporting, but undoubtedly we're going to see significant impacts again to SME businesses following the the, you know, the fires and then over to now the floods. So the impact on interruptions of businesses is just it's just tragic.
Danny: [00:02:31] What about you, Michael?
Michael: [00:02:33] Yeah, I agree with everything Damien and Mark said. I'd also I also think risk mitigation is really important. I think as an industry, we need to lend our weight with governments at all levels to try and ensure that we know future planning and rebuilding of these vulnerable communities takes place and to enable them to continue to operate their communities with insurance being available and affordable. And I think that's that's a key.
Danny: [00:03:00] Well, let's move on to a more familiar disaster over the last two years, arguably the COVID 19 pandemic, and how that's impacted your SME customers and clients. And when you share that, can you also share some examples of the extent of the impact and how it's affected different segments in different ways? Mark, let's start with you on that.
Mark: [00:03:20] Yeah, look, Danny, I think we were kind of lucky. Fortuitously, we had a delayed entry into the SME market with our commercial products, so we didn't enter the market with commercial products until November 21. So we had about a year to sort of review what was happening, particularly around the business interruption impact. So partly strategically and partly through restrictions from our our backing insurer and reinsurers gave us the ability to review the wordings, ensure they were market appropriate and provide a cover where we intended to provide cover and deliberately launch to only those businesses that we believed based on the evidence, or at least affected by through the health and economic impacts of the of the corona virus. So we were really fortunate that we didn't have any sort of immediate remediation activity on an existing portfolio, and we could strategically expand the occupations that we entered into throughout the throughout the last couple of years. So our business interruption was revised to make sure it was clear the intent was purposeful and provided a cover that was meaningful and one that we were well aware of about what we were intending to cover and also the industries. Whilst it was frustrating that we didn't sort of launch as anticipated as broadly as we wanted to, and we clearly had an advantage in terms of being able to act more strategically entering into the market, the commercial insurance market.
Danny: [00:04:41] Damien, what about you? Did you. You probably didn't share that that luck that Mark is talking about.
Damien: [00:04:45] No, I think I think the first step that we took as many of many insurers did was to actually help SME clients and our broking partners to transition to remote working and suspending premium increases for that initial period of transition was a very important first step. The next part that's really impacted everything in SME has been cancellation rates. So we've seen a significant increase in policies being cancelled, particularly for allied health, personal trainers, all of those activities that really came to a grinding halt during the period of lockdowns. And then the impact on on financial lines has been broad. We are seeing an increase in the number of insolvencies, but really we're at the tip of the iceberg because the government support has been there to alleviate the real financial impact of long term of will businesses come back. So I think we're at the start really of what the impact of COVID will be on financial lines as we see the long term as to whether SME businesses are able to weather with with lockdowns and are starting to move back. But can they build that momentum again to see more doors open? I'm in the city today. It's great to see more doors open, but I think we're still a long way from seeing the true impact.
Danny: [00:06:03] And Michael, how do you see things from various perspective?
Michael: [00:06:06] We ran three sets of surveys. More than half of businesses saw revenue decrease, and the most impacted were, quite obviously, accommodation, food services for some customers. Their arts and recreation were very heavily impacted. The education sector and also the allied health sector and predominantly and particularly up two thirds of businesses in New South Wales and Victoria where we experienced longer lockdowns. And similar to what Damien was saying there, we had some measures to assist our customers through that period, things like limiting premium increases, but also six month premium deferrals and things like that which we found were very effective for our customers. And at Vero we've also got a vulnerable customer process they can tap into as well.
Danny: [00:06:50] In this current climate, including impacts of COVID. Mark What would you say are the businesses that have been the most resilient?
Mark: [00:06:58] I think of as well documented that potentially, particularly the construction and the trades section sector was perceived as the engine room of the economy and the government pulled out all stops to keep that moving. There was a lot of government support and obviously the working environments being mostly outdoors were less exposed. So that was a continuation and that was one of the areas that we initially launched. We felt it was safe to do so. Financial services, product primarily sort of tech enabled businesses were the ones that we looked at which were clearly less exposed. We did a lot of research before we launched our products on trying to produce a product that was suitable for businesses that operated out of residential premises. So we understood that there was at least a million Australians working from home, home based businesses. So we looked at what sort of occupations were were those ones. Even pre-COVID we were focused on those ones and no doubt the population of Australians working from home has increased since during COVID and also food retail. What we saw was particularly the non mobile and suburban locations. We thought they were certainly producing healthy turnovers during the pandemic as well. So no doubt all of us sort of own locations, but we're still getting the local coffees and the local food and those sorts of things in our local areas that they seem to be thriving as well as opposed to the CBD based businesses.
Danny: [00:08:17] Was that your experience? Damien?
Damien: [00:08:19] Yeah, I think resilience has been, has been a word that we've all had to endure over the last two and a half years, whether it was floods, COVID or now the or sorry, I should say the fires, the COVID and now the floods. There's no doubt the most resilient sectors have been retail and hospitality. How businesses were able to survive through that period is is incredible. And yes, definitely Cities financial services were also impacted by by those long term lockdowns. So I think every business, every Australia should be so proud of the resilience, resilience we've we've shown in dealing with climate change and also the impact of COVID in terms of keeping businesses afloat and moving forward.
Danny: [00:09:03] Michael, was it retail and hospitality for you, too?
Michael: [00:09:06] Yeah, it was. I'd like to echo what Damien and Mark saying there, particularly around we found a lot of businesses reinvented themselves when the COVID pandemic hit. So a lot of we've got a lot of cafes and restaurants and things like that. They move to home delivery services. They were quite successful in the construction industry, yes. Because of the outdoor working environment, things like that. They were less impacted from that point of view. What we did see was our survey called out 42% of our customers had some form of working from home arrangements with their staff and that was predominantly in the office. Office space, what color industries? Professional services industries. So we saw a big change in working habits. And I think that is is maybe something that the COVID pandemic has driven, which was happening anyway, but that's really driven it forward. And that's one of the social changes we've seen that I think will maintain post-pandemic.
Danny: [00:09:59] Hmm. We touched on this a little bit already, but Mark, I mean, what are some of the SME businesses that have been most heavily impacted over the last couple of years?
Mark: [00:10:07] Oh, I think generally the ones that are well documented, those that have been exposed particularly harshly to border closures, so accommodation potentially some of the CBD based businesses around hospitality, the travel related industries and arts and recreation have probably not had the voice and the I guess the the support that's been required from the Government to continue operations as well with some of the restrictions and not enabling them to continue to operate successfully. So again, I think the ability for businesses to adapt and reinvent themselves, as Michael mentioned before and operate in a cost effective manner subject to the guidelines was good, but also geographic proximity was was important to in terms of how you were positioned with where we're all based as we were continuing to work.
Danny: [00:10:56] What about for you, Damien?
Damien: [00:10:57] Cyber without a doubt, the biggest concern in the market outside of dealing with the impact of of climate change on in terms of but cyber is in the proliferation of social engineering, the phishing claims we really don't know and where cyber is going to end up. It's the severity losses of large companies with significant frequency that without doubt, I think cyber is the biggest challenge the market faces at the moment.
Danny: [00:11:26] And for you, Michael.
Michael: [00:11:27] Yeah, I think there's two challenges. I think the firstly, the increasing natural hazards, I think that's a challenge, particularly around how insurers meet their customers expectations at time of claim. I think that's really important. And the other thing is the technological advances that insurers are going through, meeting brokers and customers expectations around service as well. So those things are digitising about our business and our industry are really important going forward.
Danny: [00:11:54] With these businesses that are heavily impacted by these things, like like cyber. Mark, what what steps is your business taking to help them out here?
Mark: [00:12:03] I mean, we haven't really delved into some of those industries which we believe did have a high exposure to, I guess, cyber risk and and those type of exposures. One of those sort of segments, which we did identify quite quickly, was property managers who were seeing property vacancy rates now in excess of 10%. Some of them are CBD major population CBD centres. So we certainly took on sort of took some action in relation to our normal underwriting guidelines and created sort of more creative wordings and endorsements around allowing these businesses to operate, continuation of cover and of creating some more creative sort of endorsement wordings to keep the businesses and they and the policies current rather than declining or avoiding cover in the first place. So it was a sort of wait and see approach, I guess. And and as I mentioned at the outset, we were quite lucky that we had a really segmented approach to our launch. So we were conscious of which industries were exposing ourselves to what those exposures may or may not have been perceived.
Danny: [00:13:07] And Damien, what have you been doing to help out these impacted businesses?
Damien: [00:13:11] Well, it's really, you know, particularly with cyber is actually helping on the risk management side to see what what are the latest trends that are coming out in terms of ransomware claims, the social engineering crimes, what are these fraudsters doing and getting that information out to make sure that our insureds have got multi-factor authentication. They've got those key segregation of duty controls because without doubt, the biggest fear for any business at the moment, if your systems go down, you can't operate. We had a transport company that recently we paid a $700,000 claim because it had a virus that went through its system. It wasn't able to operate for two weeks. And we all know that technology is the lifeblood of many businesses now. So creating that awareness, last week we had a cyber webinar with over two and a half thousand brokers who are wanting to know what can they do to talk to their SME clients about the core principles of control, multi-factor authentication, strict controls in terms of managing passwords. They're the fundamentals now, and we really need to help communicate and educate SMEs as to what the core principles of cybersecurity are, because otherwise we will end up with a product that will be uninsurable.
Danny: [00:14:20] And Michael, what's Vero up to in this space?
Michael: [00:14:22] Yeah. One of the key initiatives we've done over the last 12 months is to look at all our traditional products across the property lines, liability lines and financial lines and understand what covers around cyber exposure exist and where we crossover with cyber products. We want to be really clear and we are going through a process of redrafting those products. We really clear around what traditional style cyber exposures these products should cover versus what these newer developed cyber exposures that the cyber products are designed to do. So we're working with our broker partners to be really clear around that. So there's clarity for customers.
Damien: [00:14:55] I think I think Michael's point there is a really valid one because there is that debate. Is that a first party loss in terms of the business interruption? Is that third party loss? I think the strongest advice is the more cover that an SME has for cyber, the better. It's best that we as an industry try to map where these exposures are. But it is it's an unprecedented exposure and it's not as simple as it's a property there to ensure it's an account providing financial advice. It's a blend there. And so we as an industry are still navigating as to where the exposures lie. And I agree with what Michael is saying. It's important that we map it and make sure there's no gaps. I think that's the most important thing as an industry, that there isn't anything falling through the gaps.
Danny: [00:15:39] So apart from cyber, that's clearly a big issue in 2022. What are some of the other areas where you see SMEs having to take greater attention? What are some of the other trends?
Mark: [00:15:49] Mark we're certainly seeing. One of the things that's high on our agenda at the moment is the inflation, particularly running through the client cost spectrum. You've got materials really subject to high inflation at the moment, labour shortages, particularly around the diversion to some of the natural disasters that we're currently seeing and delayed repairs. So those things are starting to flow through in all our modelling. Investment in people and technology is an interesting one at the moment. Now we're trying to create and potentially sustain some of the flexible work models. So that will be an interesting sort of evolution in terms of the struggle to retain and attract talent. And we're kind of we're hearing a lot from our broking partners around about responsiveness and accessibility to insurers. So we're working on making sure that the technology and the people that support the responsiveness is it continues to continue to exceed expectations. And also, obviously, profitability is always a challenge. But insurance such as ourselves, there's a there's a search for more entrants seeking market share. So there's there's a whole lot of challenges on the horizon at the moment that we're working our way through. But certainly, probably inflation is the one that we're keeping a really close eye on in the short term.
Danny: [00:16:57] But what about from your point of view, Damien, what are some of the big challenges in 2022?
Damien: [00:17:01] I think it's really two big challenges. The first is, unfortunately, we are going to continue to see premium increases. The long term impact of climate driven Nat Cat is, as we're experiencing now, continuing the economic impacts of of COVID as we move to the next stage in terms of will businesses survive and recover, I think it's such that we need to price those risks and we will be seeing premium increases continuing for the next 12 to 18 months. The flip side to that is we as an industry have to fix our cost base and we've got to, as Mark said, become more efficient. We've got to stop the ping pong that's going on. We've got to use technology as an enabler to make sure that we are connecting capital that's prepared to take a risk with an insured who has a risk. And I think we need to look at our cost base and try to see how we can streamline and use technology to ensure that we're as efficient as possible to marry those risks together. So, yes, sadly, premium increases will need to continue to fund the losses that are there in the market and will continue to be there. But to we need to, as an industry, work on our cost base.
Danny: [00:18:09] And what about for you, Michael?
Michael: [00:18:10] Echoeing what Damien and Mark said. And just building on what Mark said, we're really focused on underinsurance and we've done a survey of 1500 customers and 94% of those customers believe that they're adequately insured. And when you talk about the customers who place their insurance through brokers, that rises to 97%. Yet the survey also called out the fact that less than half of those SME customers had had advice on the adequacy of their insurance at their last renewal. And if you think about the last two years with COVID and all the natural hazards and all the other changes going through society, we think that's a big gap for brokers to try and fill because we can see that in the claims data, particularly around building content sums, insured and business interruption where we are seeing underinsurance. And if you look at what Mark was saying around building costs, there is inflation there. We do very, very closely manage those with our supplies bureau, but it's really, really incumbent upon brokers to be looking at their customers insurance programs to make sure that they're adequate.
Danny: [00:19:10] And let's let's pick up on that underinsurance issue, Mark. I mean, how how do you see brokers helping out their potentially underinsured clients?
Mark: [00:19:19] We're fully supportive of the broker advice model. So if you're in the industry or you're doing home renovations yourself, then you're probably pretty directly exposed to what you're seeing in the building cost inflation at the moment. So I mean, the general level of insurance needs to be assessed on renewal every renewal at the moment, I would suggest, and some insurers need to be carefully considered. I mean, the other area at the moment is around the flood. It's generally an opt in option in the SME commercial space at the moment. So despite the floods penetrating into areas that have never seen this level of sort of flood before, there's certainly going to be a lot of underinsurance and uninsurance. The flood covers is simply not available for a lot of SME businesses in these environments at the moment.
Danny: [00:20:03] And Damien, how are you taking tackling this underinsurance issue?
Damien: [00:20:06] Yeah, well, we constantly are hearing from brokers the three main areas of underinsurance are business interruption, cyber insurance and management liability. And there is no doubt that that we need to do more. I think things like education and communicating with brokers and to their SMEs because I wish I shared the the statistics that Michael was survey was showing because I really think underinsurance is a much bigger issue, particularly in those three main areas business interruption, cyber management liability. And we need to communicate that you can't operate a business without those. We've seen the impact of cyber attacks. We've seen the impact of of natural disasters that we need to get those as core insurance. You can't really run a business without property insurance, liability insurance, these other business critical insurances.
Danny: [00:20:58] Would you agree, Michael?
Michael: [00:21:00] Yeah, I would. Absolutely. And like Damien said through, it's really about how insurers can partner with brokers around educating customers. Because, you know, that survey statistics that we were I was quoting before that we share those broadly with brokers and we run seminars around those and things like that. And it's through that process that we can get that understanding out there. And it's very, very clear that customers do want to rely on their brokers advice, just they don't always receive it. So it's really important in this time and this part of the cycle where we've got a lot of natural hazard disasters and other impacts around cyber exposure, etc., that customers and brokers work together.
Danny: [00:21:39] Well, let's move on and have a look at a McKinsey survey, which found basically that while good value is the most important factor for SMEs when they're choosing their insurance, there are other factors starting to rise in importance, like fast and fair claims settling and even just the ability to talk to a human. They've all taken added importance over the last couple of years. But what do you think separates the strongest SMEs, Mark, in terms of their insurance proposition?
Mark: [00:22:06] Yeah, I think no matter what survey you see, it's always comes out with the most important buying criteria for an SMEs affordability. And I think what we tend to do in this market is highly commoditized, the SME segment, but each SME business is unique in its own respect. So I mean as an insurer we focus a lot on technology, but what we're finding from brokers, once they have an efficient and a healthy sort of experience with us, the most important thing for the moment, at the moment is the personal engagement. So we're finding that's critical, particularly access to decision makers that are sort of solution focused as well. So we've focused just as heavily on the technologies, making sure that we're delivering working solutions in collaboration with brokers to make sure that the needs are met. And as I mentioned, each of these SMEs have sort of unique needs as well. So technology and people, that's a really tight combination to make unique needs.
Danny: [00:22:58] What about for you, Damien?
Damien: [00:23:00] Well, I think without doubt the most important is the promise to pay. Ultimately, the reason SMEs buy insurance is for insurers to be able to deliver on their promise to pay. And I think it's important that we have and continue to develop internal dispute resolutions, escalation processes, steadfast work closely with their triage as to a lot of the other big broking groups. And if we've got to make sure that we're treating customers fairly, but also making sure that we've got the ability to manage claims and deliver what is what is expected in our promise to pay.
Danny: [00:23:34] And Michael.
Michael: [00:23:35] Yeah, I think it's really important the relationship between brokers and insurers and a good working relationship for clients, because our survey tells us that more than two thirds of customers would prefer to deal with a broker through their claim than the insurer directly. So that's really important that we've got good, strong working relationships there and also ease of process. So things like the fact that we've introduced one touch claims where for claims up to 10,000 in value, we can settle those in 15 minutes. And also the fact that we have dedicated claims handlers on any claims. So it's not shuffled round. So we can build that rapport with with the broker and working through that and making sure that the claims service meets customers expectations because that's that promise to pay. That's the moment that really makes a difference. And I guess that has resulted in winning the Gold Mantle Claims Award for the last two years, which we're really proud of.
Danny: [00:24:26] Well, let's try and finish on another high. Let's leave our broker broker audience with a tip, a success tip, if you like, for how they can succeed in the SME market in 2022. Mark, let's start with you again. What's the tip that you'd offer a broker watching today?
Mark: [00:24:42] Oh look, I think SMEs will be feeling more vulnerable than they ever have about key risks. In the last couple of years, they've been confronted with things that have never been front of mind, such as the pandemic. Government mandates, big limitations in terms of wording, flood, earthquake, fire, all those sorts of things in the cyber threat that's been mentioned earlier. So for us, the advice is the tip is really that advice is more important than price. So ensure that your products and all your partnerships and we have a very close partnership with our brokers can meet the customer needs.
Danny: [00:25:14] And Damien.
Damien: [00:25:15] I think three things is, is continue to demonstrate the value of an intermediary in settling and managing a claim. It may not be covered, but at least the claim is managed in a true and fair way. Two is is focus on those uninsured exposures really deal with they don't want a broker doesn't want their customer to go bust because they haven't got cyber management liability business insurance in place. Get those critical business insurances in place and and three, continue to communicate and work to drive cost out of it. We need to use technology to make our industry more efficient. So three big messages for brokers, advocacy on claims, uninsured exposures. And let's focus on the cost base.
Danny: [00:25:59] And Michael.
Michael: [00:26:00] I think the last few years have told us to expect the unexpected or even the unprecedented. So I think if brokers are thinking about adequacy of insurance and the types of covers they're buying, their customers think very, very broadly like Damien and Mark spoke about because there's all sorts of things, businesses and their products out there for them.
Danny: [00:26:17] Thank you, gentlemen. We've been talking about the latest issues in the SME insurance space and the market trends and challenges that brokers and insurers should be looking out for. Thanks to Mark Polglase, he's chief underwriting officer for SMEs with Blue Zebra Insurance. Damien Coates is CEO of DUAL Asia Pacific and Michael Cooke is the executive manager of the Intermediated Packages portfolio for Vero. You've been watching insurance business TV. I'm Danny Wood bye for now.