The SME and charity sectors have been widely courted by brokers and insurers in recent years. However, questions still persist about whether these customers are having their needs properly met. With this in mind Post gathered together some industry experts to discuss how things could improve, Stephanie Denton reports.
More than half of the UK's gross domestic product (£2400bn) comes from small to medium-sized enterprises, while charities are often described as the very backbone of UK culture. Post, in association with Axa Insurance, therefore, took the opportunity to gather some industry experts around the table to discuss the needs of these sectors and ask if the insurance industry is meeting them.
David Ransom, chief executive of charitable organisation People United Against Crime, began the debate by stating how charities and small businesses feel about insurance: "In my experience, there is a saying where small businesses are concerned — 'security is a grudge purchase' — and that is equally transferable to insurance. Anything that takes off the bottom line is something they don't want to spend their money on. In addition there is the 'it will never happen to me mindset' so they say 'I'll take that risk'."
David Lamping, director and head of claims of broker Cooke and Mason supported this and added: "It is a grudge purchase and many don't want to buy it. The best time to sell it is when something has happened and it is more of a distress purchase, but by then they are already in trouble and it is getting thicker and worse. They buy it at renewal but it is sad that something has to happen to them before they focus their attention on it."
This was echoed by Gary Gallen, principal at Gallen Law, who added: "At the moment everything is reactive. There has been a problem and the first question is 'is it covered?', then 'how much is it covered for?'."
Simon Million, UK and Ireland directors' and officers' manager at Ace Europe, highlighted that this approach has led to major underinsurance in the sector: "The problem we have is that getting the client to buy is very difficult. If you look at the figures as to how many D&O policies are sold to SMEs it is a small percentage."
Despite the feeling that insurance for these sectors is a grudge purchase, the panel felt strongly that the risks that could be encountered were as numerous here as in any other segment in the corporate market. Mr Ransom raised the point of cyber security as being a major concern: "If they are a tin basher or engineer, the computer is just something that hums away in the corner but they have no idea about the threats that they face. Many businesses are stuck in the 1950s as far as their business IT security knowledge is concerned. They are not aware of that threat at all."
While Callum Taylor, head of management liability at Axa Insurance, added: "When you are visiting clients regulation is key to their concerns."
However, Mr Lamping asserted that clients' perception of regulation is that they are not interested in it until an enforcement officer appears at their front door: "Only when an Environment Agency or an environmental health officer turns up are they interested in regulation and regulatory protection. Then the first question is 'is there insurance cover for this?' and they are very upset and hurt if they haven't bought the appropriate protection. And then, of course, they will look to their insurance broker to say 'why didn't sell me the cover? Why you didn't advise me about it?'."
However, Adrian Jenner, head of mergers and acquisitions and management liability at Marsh, believed that regulation has helped to focus the mind of the SME insurance buyer: "In the last three years, with the changes to the Companies Act, Health and Safety Act, and Employment Equal Opportunities Act, more small businesses acknowledge there is a lot of legislation and risk here, and want some insurance for it. This is almost the tipping point where we will see a rise in the sale numbers as the product providers are there. The broking community has answers and hopefully we have a client space that is becoming more aware of the issues. Often they are not worried about their duties as a director they are simply happy to be running their business to the best of their ability.
"Where they are reaching levels of paranoia, if you like, is regulation. They are seeing publicity from the Health and Safety Executive, the cases coming to court and it is frightening. It is a visit from a friendly policeman at best. Even if they have not done something wrong they worry they are going to be called into question. As a small business, you probably don't have access to law firms that can provide you with that get-out-of-jail card. That is the fear factor and that is why buyers have taken up cover in the past couple of years."
However, despite many small firms and charities being aware they need greater coverage, or living in fear they may have to face a regulator, Mr Gallen stated that there is confusion about what policies are available and what they cover. He explained: "They are aware there are lots of risks but they are not sure how many impact their business; how many are a risk just for the individuals running the business; and how many are a risk for both. There is a gap and a lack of access to support, training and guidance, laid out in appropriate modern plain English language."
Mr Jenner agreed: "Most SME owners are busy trying to run their business and keep track of every single thing they do. Within these organisations, one person can be the HR department, legal, sales and marketing all in one, and there is no time to become an educated insurance buyer. They don't have time to read the literature and they need a conversation to educate them on all the risks they face and the available insurance solutions. I believe 90% haven't even had that hour-long discussion with anyone, so there is a long way to go to educating the SME client base. When we get the phone call from a client it is normally driven by the funder or a new board member who is educated about the risk."
Mr Ransom then raised the point that this education needs to be focused: "Talking about risk is insurers' and brokers' day job but you need to stand in the shoes of a small business person who is busy being busy and has a limited amount of time to ponder other things. They don't have the capacity to stand back from their business and consider all the issues.
"There is a lot of power in education and awareness raising. It can give them food for thought if it is easy to assimilate."
Mr Million concurred and said that cost perception is an issue as well: "There is the view that cover is very expensive. The education part is getting people to understand what the insurance covers and that it is affordable for SME companies. The perception is it costs a lot and people don't understand it."
While Mr Jenner explained: "I'd turn it around and ask 'can an SME afford not to have cover?' I don't think you can." Mr Lamping added: "Doing a cost benefit analysis on it is a no brainer."
Therefore, the panel agreed that education of the risks is key but whose job to do it was another question. Mr Gallen said: "I don't think that it is just the job for insurers — if they are doing their jobs properly then lawyers should be doing this too. The accountant and consultants also get distress calls and are billing huge hourly rates to deal with problems once the horse has bolted.
"The whole professional sector should be looking at the business community, government and regulators, and putting a lot of effort into getting them engaged with professionals, brokers and underwriters to pass on the necessary information so the insureds do not get into trouble in the first place. It can work and we have seen it work before. Scaremongering does not help but education can if property marketed to businesses."
"I think it is a market thing," echoed Mr Million. "Education is key, regardless if it is insurers taking responsibility or brokers. Whether regulation will make this compulsory as other territories have done is yet to be seen. It is about making it easy and understandable. I have been to see a lot of SMEs that don't understand claims. They don't understand what will affect them and they want to know what risk they should be covering themselves against."
"But first of all we have to educate the brokers," he admitted. "There are specialist intermediaries with teams that just look at D&O but when you get out to the regions brokers deal with everything and D&O is a small part of their overall business. These people need to understand the cover to sell it to their clients."
Mr Lamping added: "There is little chance an SME will wake up one morning and decide it needs more cover. But professional education is needed for brokers, it needs to be build into CPD, and it needs an awareness programme."
And he added that the media have a role to pay in this as well: "The HSE uses publicity as a tool. It makes potential clients aware of the risk in an area so they buy appropriate liability insurance. If the other risks were subject to similar regulatory enforcement then clients would be less grudging on these purchases."
Mr Jenner commented that real live examples are key: "It is the tangible case studies you can give to clients that make a difference. Everyone knows someone that has had a car accident or lost property, but where companies are involved these examples are often hidden and not in the public domain. There is a barrier to overcome. Public information tends to revolve around the FTSE 100 public companies and SMEs think that they will never need to make a claim."
"We can publish these events anonymously and I think we should. That is the bit that is missing. There is no perception of risk among SMEs because they don't attract the same publicity. But anyone who controls premises can find themselves in difficulties. We need to bring these stories forward. Anyone can have a problem with a vehicle fuel tank in a yard that causes oil to get into a water course. We should share the stories as an industry and publish them," added Mr Lamping.
"The most powerful selling point is the employment practice liability extension. Employment tribunals are common events and do not come in at less that £20 000. A-day-and-a-half at an employment tribunal is £20 000, without the award."
"And you are 10 times more likely to have employment claim than a fire," added Mr Taylor. "How many SMEs would know that?"
And once awareness is raised, he believed that the industry should also take a closer look at its policies and pricing approach to support the market best. "There are numerous D&O policies out there but the industry has failed to present them in a clear and concise manner to the SME sector. You have policies that predominately protect the individual, packaged in such a way that pricing looks attractive. One thing that has quite clearly come out so far is that the main risks we are talking about are corporate or company risks but yet the vast majority of policies sold by the industry promotes individual D&O as a standard. As an industry, we should be selling a more comprehensive cover as a standard and really educating brokers and customers in that regard."
However, Mr Million said the market was making some progress in this area: "Five years ago, policies would only cover the individual but now some are including company or individual." Although he admitted there was some way to go in making policies easier to understand: "Most D&O policies won't win awards for being the easiest read. We need to make them easier to comprehend, more accessible and affordable for SMEs."
Mr Jenner echoed this: "D&O has now become a management liability policy, which often goes beyond covering the directors and officers for their duties under the Companies Act. As a product class it now covers health and safety regulation, employers practice liability and has moved a huge distance in a small period of time. In four years it has trebled in terms of the value of coverage and probably halved, if not more, in price. Our clients are all different, so we have a broad product that isn't industry specific. It is 46 sectors and growing at the moment. It is beginning to segment and that is a positive sign."
"There are different solutions for clients but it is down to what they want. If you go to them with a list of what risks a firm could be facing and get into that dialogue then there are some comprehensive insurance solutions. It is affordable and is not just there for the super rich and wealthy profit- making companies."
Mr Taylor acknowledged that a range of products exist but criticised the market's approach to selling in this area: "The market has evolved and cover is available but the difficulty is that often brokers have to present options and then the client focuses on the lowest common denominator — and often that is D&O and that is the part they then buy. I agree it has evolved but it has some way to go with regards front-end education, but I don't like the way certain insurers are presenting by focusing on price options as it facilitates a move away from comprehensive cover.
"I often compare it to the motor market. Would that sector dream of promoting fire and theft and then say comprehensive is an add on? No, so why in the D&O market do some parts of the industry follow this practice?"
Mr Gallen was also keen to raise the issue of the right kind of representation when it came to a claim. He said: "There are a lot of good corporate law firms out there, but when we are talking about regulation we are talking about criminal investigations and criminal investigation techniques. Insurers rely on corporate lawyers but you need people onside that have familiarity with the criminal justice system and courts. I have gone on raids and seen very good corporate lawyers opening up their text book on criminal law to see what to say."
Mr Lamping supported this: "The corporate lawyer is ill equipped. The correct representation needs to be offered to people, some of whom don't know the difference between a solicitor and barrister, and don't know where to go. It needs to be served up to them in a safe package."
"Corporate cover will remain a specialty product class — it is not something that will be general and this is a problem because buyers are not specialist and won't read the small print," added Mr Jenner. "So the product has to continue to become clearer. The SME market faces criminal and commercial issues — so the product can never be too simple — but the fundamental principle would be to get you the best legal advice and service possible. That would be a good start. "
Reviewing policies is a positive step but Mr Gallen felt that the industry and government could and should do more to get information out to the market on day one: "We need to be looking at being more proactive, taking the information the criminal and business regulatory lawyers have learnt and give it to business for nothing.
"I think this information should be available for SMEs. So, package it and present it in a modern, accessible manner and give it to them to help them run their businesses better. We need to change our culture and not charge for this information, as it will benefit all SMEs today."
The panel agreed that there is much to be done, and, unfortunately, there was acknowledgement that this help won't come from the government. "The government has done research and SMEs have said they would like a regulatory support line to help them understand all the legislation that impacts them, but the government can't provide this," explained Mr Gallen.
"I would love to see it be a regulatory obligation from government but I can't see how that can work," added Mr Lamping.
However, Mr Gallen believed there are levels of service that should become market standard for everybody.
A view supported by Mr Taylor: "As an industry acting together, we should be putting pressure on government or representatives to raise the standard. In the liability sector this pressure worked. As a group we have responsibility to put pressure and make management liability, instead of individual D&O, the standard."
"It is clear it is a complex problem and they rarely have simple solutions," concluded Mr Ransom. "The base of the pyramid is information, education and communication but there isn't a simple silver bullet that will solve the problem it needs a multi-layered approach. and as an exercise it is a bit like painting the Fourth Bridge, in that once you've finished you need to look at it all again."
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