The coronavirus pandemic has accelerated digital transformation in Australia’s small and medium-sized enterprise (SME) space, bringing new opportunities and challenges for the insurance industry. But for insurers to stay relevant, they must take advantage of the digital disruptions in this “fast-growing and dynamic” market, a recent analysis by global IT consulting firm Cognizant suggests.
The Parliament of Australia’s 2020 figures show that the country’s SME segment consists of about 2.3 million businesses and accounts for more than half, or 57%, of the current gross domestic product (GDP). According to Cognizant’s white paper, these numbers paint a picture of a market that has become a “key strategic portfolio for general insurers.” Several factors, however, are hindering insurance providers from tapping into the segment’s full potential.
“Insurers believe that a significant portion of the SME sector is still uninsured or underinsured and is a large billion-dollar gross written premium (GWP) opportunity for insurers to capture,” the report said. “[But] the SME industry’s diverse nature and highly complex needs make it hard to serve. Moreover, the way SME insurance is delivered today is a race to the bottom because many SMEs are unwilling to pay high premiums and often require higher services.”
However, Australian insurance providers have been receptive to the opportunities provided by the market, Cognizant experts added. They cited insurance giants Zurich, Allianz, and Chubb, which have been building insurtech partnerships, rolling out specialised strategies, and ramping up claim and underwriting capabilities focused on SMEs.
“Traditional business propositions for insurers are shifting as the industry is changing across customer segments, risks, channels, and competition… These changes in the landscape call for a differentiated approach towards SME insurance strategy,” the analysts wrote. “Hence, winning players will be those able to convert these disruptions into opportunities and leapfrog with a future-proofed strategy.”
The Cognizant report identified seven disruptive trends, which “form the basis of play and highlight the rules that SME insurers must abide by to attract and retain customers.” These are:
The analysts predicted that the COVID-19 pandemic to would “spur unprecedented innovation and digital activity” in the SME sector across all industries and these changes would redefine the traditional risk landscape.
“With all likelihood, the SME industry is bound to pivot onto the new digital ways of business, as they emerge from the abyss of this crisis,” they wrote.
Among the innovations the experts expected insurers to engage in were “prioritizing and upscaling” of online platforms – including creating online tutorials for the education sector, online gyms and online pharmacies for the healthcare sector, and online orders by retailers, cafes and restaurants – and partnering with market solutions providers for customer service such as those accepting payments and automating their operations.
Read more: Biggest threats to Australian SMEs revealed
According to the report, more than half, or 56%, of Australia’s SMEs are owned by millennials or Gen Xers – the fastest growing segment in the SME landscape. The analysts noted that compared to older business owners, this age group “are hyper-focused on expansion and are much more likely to focus on digital platform and innovation.”
The analysts cited a recent NAB report that found 51% of millennial-owned SMEs were already leveraging online stores for daily transactions and half, particularly those in the consumer services industries, were using social media for advertising and promotional purposes.
“Given their digital propensity and expectations for superior digital experiences, these millennial founders will expect more digital and personalised interactions with their insurance carriers,” they added.
More than 90% of technology businesses in Australia are SMEs, which have a higher risk profile than traditional companies, according to the report.
“Their tech-based operating model houses troves of customer data as they grow, for which they are liable,” the report said. “It also opens gaps on the presumptions of the perils and risks assumed in traditional products like workers’ compensation, liability, and business interruption. Their capacity to withstand and recover from losses is very low, particularly at infancy.”
However, the analysts noted that success rates among tech start-ups have grown substantially in the past five years, doubling their overall valuation to $100 million.
“The time period in which they mature from an SME to a large enterprise is compressed, thereby posing an interesting premium opportunity for SME insurers with upstream value,” the experts wrote.
About 7% of Australia’s labour force take up secondary jobs by signing-up with digital platforms or what the analysts referred to as the “gig economy.” According to the report, the flexible nature of the sector opens insurance implications and raises the likelihood of uninsurance and underinsurance.
“The gig sector falls into the micro-SME segment, and the premium upside may not be as high here as in other segments,” the analysts wrote. “However, the rapid increase in the market activity posits it as an opportunity that can’t be ignored.”
Almost a third of Australian SMEs have used the services of an Uber driver, rented an Airbnb-type property, or otherwise participated in the sharing economy, data obtained by the analysts from a recent Monitor survey has shown. The analysts expect to see SMEs increasingly use sharing economy services to boost growth in the future but also predict that it will give rise to new risks and coverage gaps.
“Imagine an SME employee is injured while staying at an accommodation sharing site or while travelling on a ride share,” the experts wrote. “Does the liability coverage of the sharing economy provider have adequate coverage limits? Does it cover all the risks, which includes lost wages or rehab costs for employees? Does it cover all the downstream business interruptions caused? Insurers can look to fill these coverage voids for SME businesses, as the SME companies increasingly leverage these services.”
“The untapped market opportunity will attract intense competition from traditional and non-traditional players, many of whom will look to differentiate by disrupting the conventional SME insurance business,” the report stated.
Some of the potential disruptions listed in the report include:
The analysts also noted an increase in insurtech activity in the SME space in the past few years, with many of these tech-based companies attracted by the opportunities presented by the sector.
“Insurtechs seek to remake the value chain by disrupting product distribution; new-age insurers can fight back with innovative products and services across the value chain,” the experts wrote. “On the other hand, many insurers are looking to enable the insurance value chain through artificial intelligence solutions for underwriting or claims decision-making.”
According to the analysts, they expect this trend to continue as insurance providers turn to digital products to speed up the “execution of their go-to market strategies.”
Read more: SMEs: a glass half full
According to the report, designing customer-centric products, processes, and systems “illuminates the road to success” as insurance companies seek ways to respond to the digitalisation of the SME market.
“The SME insurance market is ripe with significant untapped opportunity as the industry tries to bounce back stronger from the ongoing crisis,” the analysts wrote. “Insurance carriers that are able to act on the opportunity will be tomorrow’s market leaders.” The experts added that Australian insurance companies, particularly those in the process of personal lines modernisation, should also extend their reach to the SME sector.
Here are five ways insurance carriers can take advantage of the technological changes in the SME segment, according to the report.
