Risk management - premiums - Minimum overdrive

There is little question of the benefits risk management provides to businesses and the insurance industry alike, yet take-up by small firms has been relatively slow. As Sam Barrett finds out, small discounts and additional costs have caused some firms to miss the incentives altogether

Encouraging customers to take proactive steps to manage risk is all the rage in the health insurance market. The trend, which was kick-started by the launch of the Vitality programme on Pru Health's medical insurance plans, has resulted in discounts for all manner of healthy activities such as trips to the gym, eating more fruit and vegetables, and stopping smoking.

Just as the health insurers can see a connection between lifestyle and claims, in the small to medium-sized enterprise sector insurers are passing on discounts to companies that implement risk management strategies. "Many insurers will add a discount for additional security or risk management processes," says Lyndon Wood, chairman of the Moorhouse Group. "Up to 50% off a premium is possible if an SME has the right risk management strategies in place."

All sorts of strategies can result in a discount. These run from the fairly standard interventions - such as burglar alarms, sprinkler systems and security measures - through to having a business continuity plan in place.

But while there are plenty of discounts on offer, there are a number of obstacles preventing a wholesale adoption of risk management in the SME sector. "Risk management for SMEs has always been a difficult one with issues around time and cost," says Ken Smith, commercial underwriting manager at Fortis Insurance. "Our pricing structure allows for discounts of up to 15% for good risk management but the problem is measuring it. If our surveyors go out this has to be built into the pricing."

Uncompetitive premiums

Clearly when premiums are low, this additional cost can make them uncompetitive. "We do sometimes get good information from the broker and there are also some good web-based risk management tools available. If these are completed then it's a positive indication of the approach the company is taking. However with a fee involved, take-up can be poor," adds Mr Smith.

Some insurers prefer to stick with on-site surveys and David Martin, small business manager at Allianz Insurance, says the insurer's pricing is more granular. "We survey more than 50% of our SME customers so we can correctly assess risk. Customers value this; it encourages loyalty and it helps to drive long term sustainable business," he explains.

But where a survey is not seen as an option and there is little reliable information available, it can be a matter of relying on claims history. Terry Nichol, regional manager for UK middle market business at XL Insurance, says that this is not enough: "Commercial businesses can be quite complex so you need to be sure you're measuring the right things and look for the early warning signs. Claims are after the horse has bolted."

Among the areas he would consider monitoring are sickness absence, return to work statistics and the occurrence of workplace incidents that do not lead to injury. For example, if there is a risk that company employees might be exposed to harmful substances, further action might be required if there are any incidences of employees being off for more than three days due to a skin or respiratory problem.

"It's a partnership approach," Mr Nichol explains. "We'd agree the triggers with the employer and if they're hit we would bring in an expert to help them resolve the problem. They'd pay an agreed fee for the advice but this could be rebated at renewal if they follow the advice."

Another problem for many SMEs, especially the smaller ones, is that the level of the premium can also act as a disincentive for adopting risk management strategies. Unlike the large corporate market where premiums are much larger, the cost of some risk management tools can far exceed the value of any discount the SME will ever see.

"Premiums aren't high so neither are the discounts. This isn't much of an incentive for an SME to invest in risk management," says Martin Singleton, technical manager in property underwriting department at Norwich Union.

The costs involved mean that for many insurers, providing information and support is the most cost-effective way to help their SME customers. For example, Allianz, Axa and NU have websites with risk management advice. Additionally NU can help SMEs with discounts on everything from alarms to risk management advice through its preferred suppliers.

Promoting management

Insurers are hopeful that risk management take-up will increase in the SME sector. "There's a lot more pressure on SMEs to look at risk management," says Doug Barnett, head of customer risk management at Axa. "As well as the insurance industry, the government has been promoting better risk management with initiatives looking at business resilience, terrorism and the floods. This will help to drive take-up of good risk management practice."

Already some sectors are showing greater adoption of risk management strategies. In particular, higher risk industries and those with greater levels of regulation tend to be more risk aware. For example, with regular inspections by the Commission for Social Care Inspection, the care home sector is an area where risk management strategies are more readily adopted.

But while there is clearly an appetite for more risk management in the SME sector, the soft market means it is still an 'acquired taste'. "In the current market discounting levels are so small they can be easily matched by shopping around without having to adopt the risk management practice," says Mr Smith. "If the market does harden then much more attention will be paid to ways of controlling the increases. Then, just as security shifted from being a discount to being a compulsory feature a few years ago, other risk management factors could become compulsory."

Although it is a buyer's market, Mr Wood says that brokers and insurers are still missing a trick by not pushing risk management as a means of obtaining a discount: "The sales message should highlight these extra discounts. It's not a difficult message to get across as it's common in the individual market but it can have significant benefits for the insurer, the broker and the SME."

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