Insurers in Asia are turning their attention to providing cover to SMEs as they wake up to the potential of the sector, writes Nicky Burridge.
A combination of low penetration rates, the potential for higher margins and the need for SMEs to take out multiple products has put the sector firmly on insurers' agendas.
Peter Whalley, financial services partner at PWC Hong Kong, says: "Many of the insurers I have spoken to in Hong Kong this year have got SME strategies that they are planning to grow.
"A lot of people are talking about SME, it is very topical in the industry. It is a very underpenetrated market."
While there are no official estimates on the size of the insurance gap among SMEs in Asia, it is thought to be significant.
Todd Wilhelm, head of underwriting, QBE Asia-Pacific, points out that according to the 2012 Lloyd's Global Underinsurance Report, eight out of the 17 countries identified as being underinsured were in Asia.
He says: "Given that SMEs account for 90%-plus of business units, it is fair to assume that underinsurance is endemic in the Asia region."
The combination of underinsurance and the booming economies in the region creates significant opportunities for insurers.
Wilhelm points out that in Hong Kong alone there are approximately 320,000 SMEs, accounting for 98% of all businesses, while in Singapore 99% of businesses are SMEs, with these firms contributing nearly half of national GDP.
SMEs typically already have the mandatory insurance they need to operate in many Asian countries, namely general liability and workers' compensation, while they also typically have property and casualty, and cover that is required by trade partners, such as indemnity insurance.
However, as Rudolf Frei, of IBNR Insurance Consulting, points out: "They lack proper risk assessments and subsequently insurance cover for their direct business operations.
"SMEs typically lack cover for employees' theft, damage to employers' property, cyber risks and new risk fields uncovered by regulatory changes, such as discrimination laws, sexual harassment and data privacy protection."
Another area in which many SMEs are underinsured is business interruption cover.
Stuart Spencer, CEO of Zurich's general insurance business in Asia-Pacific, said: "There are a lot of SMEs in Asia-Pacific without business interruption coverage, which is an extremely important type of coverage for SMEs, but perhaps not well understood by them."
Wilhelm thinks all of the Asian countries have strong potential for sales growth in the SME space.
Spencer agrees: "There are growth opportunities in both emerging and mature markets.
"Two of Zurich's largest operations in Asia-Pacific are in Australia and Hong Kong, where we lead in providing packaged cover for SMEs."
But there is a need to educate SMEs about the products that are available and why they need them, while there is also a perception that costs are higher than they are.
Frei says: "SMEs are business oriented and have strong entrepreneurial cultures. They may not see or recognise the needs and benefits of insurance cover nor do they easily accept advice from insurance intermediaries.
"Insurers and intermediaries need to allocate staff with true insight into SMEs businesses who speak a common language and are able to propose true value to SMEs from tailor-made insurance solutions."
He added that key to success would be flexibility in pricing and administering SME insurance policies, in addition to strong claims services.
Whalley points out that SME business is a much more relationship-driven sale and tends to be done through small to medium-sized brokers.
Insurers are looking to use these existing broker relationships to sell new products to their clients.
He says: "The cornerstone is employees' compensation because it is a compulsory line of business in Hong Kong.
"Often the strategy will be to sell the compulsory insurance and package other products with it, such as public liability and property insurance. Insurers design a suite of products to go with it."
Zurich aims to offer a more bespoke service to the sector, in which companies can pick the products and the level of insurance they want.
Spencer says: "These small businesses are expanding and diversifying, which means their insurance needs are also changing. It is exactly this evolution of small businesses becoming middle market businesses that is driving a growing need for more tailored insurance solutions.
"At Zurich, we are increasingly offering vertical sector solutions that have a ‘drop-down menu', so clients can pick exactly what kinds of insurance they want, what sum they want insured, and then they are quoted a price."
Zurich is also looking to reach small businesses through some of the different entities that interact with them, such as banks, accounting firms, trade associations and industry groups.
Wilhelm says: "Building awareness and presenting solutions to reach these SMEs is the biggest challenge but also a great opportunity."
QBE has armed its intermediaries with point-of-sale material to help guide SMEs on how they can better manage their risks.
It has also developed an online insurance portal, QBE Qnect, that intermediaries can use to speed up the transactions at point of sale, allowing them to spend more time providing risk management advice to their clients.
Wilhelm says: "On the QBE Qnect platform, we have developed a comprehensive tailor made business insurance solution specifically targeted at this important SME segment.
"QBE have the ability to offer bundled packages or tailor-made solutions quickly and all within one transaction for the full policy life cycle."
As ever, where there are opportunities, there are always challenges.
Whalley says: "There are a lot of insurers in Hong Kong and premiums are very soft at the moment and that is a problem, particularly in the non-life sector."
Many insurers are also wanting to digitalise their distribution channels to make cost savings.
However, he warns that many small businesses are not high-tech enough to buy cover online, although he expects this to change as the younger generation takes over.
Whalley comments: "You have to approach the market in the right way for where we are today, but also have an eye for where we are going to be tomorrow."
Even with these challenges, the SME sector is likely to be one insurers will want to concentrate on.
Wilhelm concludes: "GDP growth in Asia is outpacing many of the world economies, and given the strong contribution that SMEs have to these economies, this sector presents a major growth opportunity."
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