In our previous post, we outlined the pressure of COVID-19 on small businesses, but concluded that the pandemic risk in the broadest sense is uninsured.
While insurers may struggle to cast a net for the entire world, the many by-products of the pandemic – and the new normal we are entering – represent ripe opportunities for insurers. We examine some of these in today’s post, along with some other pandemic byproducts that may prove thorny for risk carriers.
One source of opportunities is the SMB sector, which offers solid long-term growth prospects for insurers.
Small and medium-sized businesses (understood as having <250 employees) make up over 50 per cent of UK private sector businesses; Insurance penetration is currently weak, and there is nothing for business owners to undertake for risk identification and excise duties as in the previous year.
True, the market is depressed at the moment, with many cash-strapped firms canceling non-mandatory covers. And some lines – such as commercial property – are likely to remain sluggish for the foreseeable future as well. However, we can expect new demand for multiple types of coverage to hit the market in the second half of this year, now that the country is fully reopening.
Swiss cheese, without holes
In recent years, there have been attempts to standardize and simplify SMB cover, exemplified by Berkshire Hathaway’s Three – with the promise of its three-page policy documents. While this approach could certainly help popularize insurance, it also runs the risk of being Swiss cheese: too edible but full of pores.
Combining standard policies with point solutions – targeted to fill the largest of these holes – can be an effective way to create one large safety net out of many smaller ones. Policy optimization is obviously not a new concept, but what is new are the increasingly elegant and cost-effective ways it can be done, such as using parametric solutions.
Parametric products pay on a pre-agreed trigger event, eliminate claims processing irregularities, and are especially suited to the acute crises that businesses fear most.
Take COVID-19, for example. Following the lockdown, the UK government stepped in with commercial support, which has absorbed some of the pandemic’s old sting. However, despite its size and scope, this support was not immediate, putting the firms at risk of bankruptcy. Such “rapid phases” are fertile ground for parametric innovation.
Lloyds Lab participant Thimble has designed a Low-Limit Parametric BI Products Specifically for firms to provide a stopgap as a qualifying event – such as a lockdown mandate – happens. This short but immediate lifeline ensures that small businesses are not short of funds while waiting for government assistance, or potentially withheld or legal insurance claims.
Other areas of parametric innovation currently in Lloyd’s Market include IT downtime risk (such as Parametrics), terrorism risk (such as Qomplx) and cyber risk.
SMB Cyber Opportunities
While current market tightening and price hikes may undermine its near-term appeal for SMBs, cyber is an area with strong growth potential in the future. According to Accenture’s Insurance Revenue Outlook, this line will increase to $25bn globally by the end of 2025 (relative to the beginning of 2020).
Firms of all sizes have reported an increased perception of cyber risk during the pandemic. And they won’t be wrong. The National Center for Cyber Security (NCSC) reported 723 cyber incidents in 2020 (defined “incident” Here), an increase of 20 percent over the long-term average. About a quarter of these were looking for some kind of benefit from COVID-19.
Source: NCSC Annual Review 2020
While large corporations, especially those with multiple sites, had access to secure remote systems before the pandemic, this is rare among SMBs. The remote-working trend, which is likely to stay here, means that smaller firms with temporary arrangements are prime targets for hackers.
A lot still needs to be done for cyber insurance to be both affordable and effective in the long run. An important lever for insurers will be partnerships with cybersecurity providers – by ensuring that insureds have basic protection, carriers reduce unnecessary risk and position themselves at a more affordable price. There is also an opportunity to use cyber security software packages as an indirect sales channel for coverage.
Open Insurance for SMBs, through API and NeoBanAssurance
Increasingly, insurers can create precise solutions for many SMB challenges. However, the problem of how to take these to market remains a problem. One way we’ve touched on this is through standard policy documents, specifically as a bridge to more customized solutions. But intuitive policies aren’t the only way to gain mass appeal, intuitive delivery is a powerful tool, too.
One promising delivery approach is to embed Cover within other services – as in our example of bundling cyber insurance with cyber security software. In fact, approaches that leverage ecosystems and APIs (as in open banking) are particularly well suited to the SMB context.
Smaller firms often consume more services – ranging from finance and legal to human resources and risk – than they hire specialists. As a result, insurance is often eliminated as a side job or forgotten entirely. However, the consolidation of various services on a common platform unlocks administrative economies of scale. And the simultaneous consolidation of firm data leads to better-fitting services.
We see this dynamic action in neo-banks, some setting their vision on being a one-stop-shop for SMB financial needs.
for example, Tide Bank partners with Hokudo To offer on-demand challan insurance on top of its core banking services. Starling Bank through its marketplace has partnered with Dinghy (cover for freelancers), So-Sure (mobile phone insurance) and Nimbla, whose invoice protection service also integrates directly with accounting platforms such as Xero and QuickBooks.
It is the early days of neo-bancassurance and open insurance In general, and there are still many things in favor of traditional channels.
For a start, the complexity of the needs of smaller firms — especially if off-the-shelf covers are to be combined with custom products — bodes well for the future of advised sales. However, there are substantial improvements to be made here as well. Insurers can turbocharge broker channels through the right digital investments, for example by building their own self-service quote-and-bind platform.
Keep an eye out for rot in the previous book
As we have seen, 2021 presents commercial insurers with both traditional and emerging opportunities.
Conventional as strict rates across major lines, provided they can be free of long-tail liabilities from COVID-19. With an increasingly pragmatic approach to insurance, the SMB is emerging as a sector seriously affected.
However, just as the pandemic has created new risk opportunities for carriers, it has also created new risks within existing categories – some of which are less visible than others.
Let’s take healthcare as an analogy. One year of delayed procedures and voluntary postponement of GP appointments means one year of undiagnosed and untreated diseases. While new customers may be underwritten on an “as is”, it is not clear what the lockdown means for health insurers’ previous books. So, we ask: are similar issues hidden in the commercial and specialty lines?
Conservatively speaking, the past year has represented a “maintenance gap”, and this could materialize into higher rates of contingency claims as the country backs up. Commercial property is an obvious place to look, especially with regards to underused piping and HVAC systems.
The same concern applies to inactive marine and aviation stocks. And a related, perhaps more hidden, risk lies in the associated overloading of port facilities. When global supply chains are functioning optimally, such as fires and explosions, these dangerous accumulation risks are absent.
A particular contributor here has been the recent upward trend in shipwrecks. It hit a new peak in 2020, as maritime trade declined and financial troubles increased for shipowners, with the International Labor Organization (ILO) reporting a 76 percent annual increase in cases.
Source: International Labor Organization (from date of abandonment, not date of notification)
It is not only the hulls of abandoned ships that may prove to be ticking the timebomb, but so is their contents. The Beirut blast in August 2020 finally found 2,750 tonnes of ammonium nitrate stored in a port warehouse – a one-time cargo. rosus, was abandoned at the port in 2013 and confiscated.
Much of this back-book rot – a by-product of the temporary lockdown – can be rewritten, so it should go away as the global economy comes back to full swing. But it’s worth keeping in mind for commercial insurers who might otherwise be inclined to view 2021 as a long-awaited reward for their patience in a full twenty-year soft market.
So, this was the new normal for commercial insurers: a tough market, at least for some time; Opportunities in the SMB sector around product and distribution; And a slew of insidious claims trends to stay one step ahead. For our thoughts on the dynamic rather than bringing the new normal to individual lines, see our earlier entries.
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