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Change is required to harness the small business market

Article by Gerald van Wyk (Head: Strategic Partnerships, Santam)

Challenging the insurance industry to evolve is a core component of our work in Market and Business Development. This includes driving the development of customised insurance solutions to serve different, more complicated markets, such as the growing small business segment.

Overall, small businesses tend to be some of the most risk-exposed clients on an insurer’s books. They face nearly all the same risks as large commercial businesses, but have significantly less capacity to absorb losses. Changing economic conditions, along with emerging risks, also have a tendency to impact small businesses the hardest.

The three key risks that pose the most significant threat to the vast majority of small businesses across all sectors are:

  • physical loss or damage to critical assets,
  • business interruption, and
  • emerging cyber risks.

Even with insurance in place, any claim for loss of physical assets has the potential to debilitate a small business and leave lasting damage to the operation. For example, in the case of a last-mile delivery service consisting of only one or two trucks, the immediate impact of a loss event can bring the business to a halt. While the vehicles can be replaced within a relatively short period of time, the damage caused to the business in the interim may be far more severe in terms of lost income and market opportunities, as well as damage to their reputation for reliability.

The business interruption that follows a loss event often has an even more enduring impact. Not being able to procure or transact for prolonged periods remains a critical risk for small businesses. Business interruption cover has limited efficacy in helping an operation rebuild its client base and re-establish supplier networks. The critical role that risk management plays in the small business market, cannot be emphasised enough.

There are also global emerging risks to be considered. Only 36% of commercial respondents (compared to 85% of consumers) consider cybercrime one of the top four business risks in South Africa. However, this growing threat has the potential to ruin a business, particularly a small one.

The asset base of many businesses is becoming more digitalised (client information, research and development, and financial records), and an increasing number of businesses now transact and exist almost completely in the cloud. As a result, intangible losses such as data corruption or theft can cause just as much damage, if not more than that of physical assets.

The rise of cybercrime has also exponentially increased third-party liability risks for small businesses. The introduction of legislation such as the Protection of Personal Information Act (PoPI), and its European equivalent, General Data Protection Regulation (GDPR), means that all commercial businesses are exposed to massive fines, third-party liability claims, and legal action.

“The Santam Insurance Barometer survey shows that 38% of commercial businesses interviewed had claimed for loss or damage of physical assets in the last 12 months. The mean value of claims for small businesses within this sample was in the range of R185 000”

A general lack of awareness is probably the biggest reason why so many local businesses are vulnerable to cybercrime. In South Africa, 91% of all cyber-attacks are initiated via email – which would be more easily preventable with better cyber risk education among employees.

From the above examples, it follows that insurance alone cannot adequately mitigate the threats that small businesses face. Better risk management should therefore be viewed as a key component of the business. Along with this, communication needs to form a greater part of our relationship with the client if we, the insurers, want to remain relevant as business and economic enablers in an increasingly tough environment.

We firmly believe that there is no substitute for the value that intermediaries provide to clients. It is still the best way to get client buy-in on value-adds that elevate policies to provide more than insurance. Furthermore, intermediaries have the ability to act as risk management partners, or coaches if you will, alongside insurers.

The evidence of this is visible in the survey, which shows that intermediaries are still the primary drivers behind insurance product selection for commercial businesses. When asked to evaluate the most important factors that determine how businesses choose their insurance cover, the intermediary’s recommendation scored a 9.5 out of 10 – second only to the product meeting the needs of the business (9.6).

This means that, with the exception of being absolutely sure that a particular product is an exact match for the requirements of the business, the vast majority of commercial businesses value the advice of their intermediary above the cheapest price (8.2), the exclusions listed in the fine print (8.4) or their own perceptions of value for money (9.0). Intermediaries are therefore still in the best position to positively influence this market.

However, communicating with the market and providing improved risk management information and assistance is becoming more challenging. The intermediary channel, which has historically provided the insurance industry with the best means of interacting with businesses, is becoming a smaller piece of this market. In many respects, they are the insurer’s crucial link to clients. Intermediaries have knowledge of the unique risks that each of their clients face, and are privy to client perceptions that shape their decisions when it comes to choosing cover as well as their attitude towards proactive risk management.

The survey findings show that 62% of small businesses prefer to purchase insurance via direct channels. Some of the most common reasons given by small and medium-sized business respondents were that it was adequate for their simple insurance requirements (63%), cheaper (51%) and quicker to access via online portals or over the phone (49%).

This challenge that our industry faces points to how we, as insurers and intermediaries, need to evolve to meet the expectations of this market. The rising prevalence of direct insurance has a lot to do with the speed and convenience of access to these perceived simpler solutions.

Given the heightened vulnerability of small businesses, it is problematic that the market penetration of insurance in this segment is estimated to be in the region of just 30%. Building partnerships with organisations which have a strong connection with small business owners is vital to increase the presence of insurance in this market. This is a big part of what we do in business development.

The informal sector presents many opportunities for insurance solutions that could help drive these micro- businesses forward. However, this sector has several unique risks, and adequate solutions based on the specific needs of this market have yet to be designed. This is a challenge that excites us, as we are currently exploring options for providing risk capacity to this important sector of our economy.

“Intangible losses such as data corruption or theft can cause just as much damage, if not more than that of physical assets”

It is perhaps our greatest challenge as an intermediated business, to explore ways to better utilise technologies that enhance the intermediary’s (and our own) ability  to engage with clients as easily as direct channels, while still providing the level of personalised service expected.

For the intermediary, embracing technology is key – and it will only continue to increase in importance over the years to come. Not only should they be exploring better ways to reach their client base through social media and online client portals, but they should also introduce clients to better risk management models that utilise technology to a greater degree. Interconnected technology such as internet-enabled geyser monitors and driver telematics can prove just as effective at minimising catastrophic loss in small businesses, as they have been in other insurance lines.

We see from the survey results that there is an increasing demand for further streamlining our user experience model. One can argue that if intermediaries could improve how they interact with clients, they would be able to match (and in some instances, outperform) the direct market.

It is also important that we find better ways of monetising the value-add that we provide for small businesses. While simpler products may be well-priced, value-adds in the form of advice, technology, and services that mitigate risk, are inherently more valuable to the client if they minimise the impact of potential business interruption.

With all this in mind, it is our responsibility as insurers to lay the foundation that makes it easier for intermediaries to compete with the direct market. The small business market arguably stands to gain the most from using the expertise of an intermediary, yet, as the statistics show; there is still substantial room for growth.

This article is an extract from the 2019 Santam Insurance Barometer.

Santam is a proud Partner of the NSBC

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