The SME insurance market has been viewed as the next big disruption opportunity since before the word disruption became fashionable. But the fact that articles about digital opportunities in SME are evergreen does not mean that they should be ignored. The SME segment is evolving and insurers and brokers should consider how they can prepare for the opportunities and threats this brings.
In our analysis, the arrival of the current generation of InsurTechs makes this evaluation particularly timely. This article considers the past, present and future of digital distribution in SME insurance.
In the late 2000s, several digital SME distribution companies launched in the UK – arguably a bellwether of digital insurance trends. These businesses – Simply Business, Coverzones and iPrism are three examples from a cohort of around ten – started off with broadly similar strategies. They generated leads online, automated the quote and buy process and wanted to become the dominant distributor in the micro segment (broadly defined as sub 10 employees) in a similar way that aggregators had come to dominate personal lines distribution in the UK.
Simply Business was the only major success story (it was acquired by Travelers for £400m in 2017, 50x 2016 EBITDA). Other companies in the cohort reverted to being bricks-and-mortar brokers, became niche players or folded.
In our opinion, Simply Business’s success was driven by three strategic decisions:
- Omnichannel: Simply Business has always had a digital-first, but crucially not digital-only, model. Its management recognised that SME insurance – even in the micro segment – was not a purchase that could be completed fully digitally by all customers and prominently offered offline support on their website. The company still has a large contact centre in Northampton (which recently announced it was trialling a four-day working week). One can argue whether Simply Business is best described as an insurance broker with a highly efficient tech infrastructure, or as an InsurTech.
- Data-driven decision-making: Simply Business’s pre-exit CEO cut his teeth at Match.com, the dating site. The company remains, in our view, one of the most data-driven insurance incumbents in Europe. Product decisions are taken based on detailed consumer insight built up through a sophisticated and long-term testing process.
- Owning the product: Simply Business set up an MGA in 2009 – just after it pivoted to business insurance – to give it greater control over product manufacturing. Its MGA allowed it to create products quicker than its insurance partners, and the company was able to create products under multiple brands which increased ‘panel fill’ (the number of quotes the customer sees).
We believe that Simply Business remains a robust case study for digital SME businesses today.
Despite Simply Business’s spectacular exit, the European and US SME insurance markets can hardly be described as having been ‘disrupted’. Many insurers now have online quote and buy propositions for micro SME, but our analysis suggests that many of these are clunky, secondary channels. SME continues to be dominated by regional brokers in the UK or agents in continental Europe and the US.
For all these reasons, SME has been an active segment for InsurTechs. Distribution InsurTechs include:
- Next Insurance: A Munich Re Digital Partners backed company taking a segment-by-segment approach to SME in the US. The company had GWP of $44m in 2018 and raised $83m in a Series B round in 2018. (Bitesize profile)
- CoverWallet: Also active in the US, CoverWallet has a similar approach and a strategic partnership with Zurich. (Bitesize profile)
- Gewerbeversicherung24: An InsurTech trying to bring aggregation to the German market. (https://gewerbeversicherung.de/)
- Assur’up: Tackling the French SME market. (Bitesize profile)
A separate cohort of Supplier InsurTechs is helping insurers and brokers with their own SME propositions. These include:
- Cytora and Digital Fineprint: These London-based startups (Members of the Impact 25) are helping insurers access new sources of data and make better marketing and underwriting decisions. (Bitesize profile on Cytora and DFP)
- Hokodo: A product platform serving niche products such as invoice insurance. (Impact 25 profile, Bitesize profile)
- INSTANDA and Kasko: Two policy admin platforms that allow insurers to build products quicker and with fewer constraints than traditional systems. (Bitesize on INSTANDA and Kasko)
We have attended enough focus groups to be convinced that SME insurance purchasing is not a pure commodity purchase and that this will not change quickly. Company bosses care about their cover: “what happens if my junior electrician gets electrocuted?”. As companies get bigger, insurance buying quickly moves from the business owner to the finance manager, whose incentives are not limited to “quickest and cheapest”.
So what should incumbents think about when digitising their SME insurance business?
1) Define the strategy
The SME insurance market is large and diverse, ranging from individual yoga instructors to 200-employee highrise window-cleaning businesses. Last week WeWork arranged for a company to come and provide puppy therapy in our office building in London. ‘Digital’ will look different in different parts of the market.
Insurers must first consider how distribution works for each segment. For example, many standard products are still distributed through brokers or agents, where a number of software houses (such as Acturis and OpenGI in the UK) dominate.
Brokers or insurers who want to go online need to consider how their SME proposition can be adapted for direct channels. It is not sufficient merely to expose existing products to the online channel as question sets need to be shortened and simplified for a non-professional audience, and product complexity needs to be reduced for comparison channels, for example. This leads to different technology requirements.
On the other hand, some segments may require much more bespoke solutions. Hokodo, a Member of the Oxbow Partners InsurTech Impact 25, provides invoice insurance to SMEs through cloud accounting platforms. If this proves to be the dominant distribution channel for this product type, insurers without bespoke technology will struggle to deliver a comparable solution.
2) Build the operating model to support the strategy
Insurers should make sure that they restructure their operations both to serve their chosen segments effectively and to harness the technology opportunity. For example, should Cytora be seen as a new data feed into the existing underwriting process, or is it a transformational opportunity for the underwriting function that impacts people and processes? What does Zurich’s partnership with CoverWallet mean about the capabilities required within Zurich and those it outsources to its partner?
Therefore, as we have argued in a previous blog, insurers must step back and rethink their business models to consider how to embed technology solutions, rather than merely appending them to their existing businesses. This will require making tough choices because technology will change the traditional insurance hierarchy – elevating digital marketing to a central member of the team along with data scientists, and changing the role of the senior underwriter.
3) Identify partners that help you get an edge
There are dozens if not hundreds of technology partners (including InsurTechs) which can help insurers and brokers get an edge over their competitors in SME distribution or manufacturing. For example, Zeguro (another Impact 25 Member, Bitesize) helps distribute cyber insurance to SMEs by providing a tool that identifies and mitigates cyber risk, but also includes insurance protection. Cytora and DFP – mentioned above – as well as Groundspeed Analytics (Bitesize) and Planck Re (Bitesize) help on marketing efficiency and pricing.
4) Embed a technology backbone that enables your propositions
In a previous article we recommended that clients take an ‘ecosystem’ approach to building technology, an approach we continue to endorse. In short, this means combining a set of best of breed modules connected together via an API gateway. This approach has three benefits: 1) insurers have the latest and most appropriate technology for all elements of the stack; 2) it avoids creating legacy as modules can be swapped in and out as newer and better components become available; 3) it facilitates interconnectivity with third parties.
For SME the third point is probably most critical. Given the heterogeneous nature of distribution the technology needs to be open and flexible enough to integrate with these multiple distribution routes. An API-based approached does just this. The interconnectivity benefit applies equally when connecting with supply-side technology partners such as Cytora.
The precise delivery of this technology can vary greatly; the options range from full outsourcing of the technology (e.g. Zurich/CoverWallet) to making a series of build vs. buy decisions for each functional component of the stack (e.g. data and analytics, rating, digital front-end, product build).
5) Rethink the strategy when the digital requirements are clear
‘Going digital’ in SME is no small project. Unlike, say, motor, SME is a multi-niche market requiring a huge amount of customization all along the value chain from distribution models through to pricing and servicing.
Once insurers understand the variations between customer types (e.g. trade, size), and thus the effort required to build a market-beating business, they should revisit their strategy and confirm that they are focused on the right segments. This may involve exiting certain parts of the market via a portfolio divestment, or outsourcing customer types to a third party.
Oxbow Partners has worked extensive in SME insurance. We have deep experience helping clients build robust strategies for their SME business and executing on those strategies. Our database of over 280 core insurance systems is used to help incumbents select vendors to support their businesses. We have also supported several large players divest legacy SME portfolios when they have repositioned their strategies. Please get in touch if you would like to discuss your SME opportunities.