 By Marc van der Veer, General Manager at PartnerRe Wholesale
According to figures from the European Commission, 99% of the six million plus insurable enterprises in Europe are considered SMEs, and the market offers plenty of opportunity for those firms seeking to take advantage of the growth-strapped P&C sector. This opportunity is all the more appealing when you consider that the market is scalable, despite its relatively low insurance saturation, and as such has the potential to be highly profitable.
A growing market
Last year, a study from the leading international market research company Finaccord, looked at the 10 largest European markets for insurable enterprises and Professional Indemnity (PI) – PI being a typical specialty product. Gross Written Premium in the PI market in these countries has grown steadily since 2009 at more than 2% per year with similar growth going forward expected through 2017.
While semi-bespoke P&C, or ‘off-the-shelf’, products can fulfil SME insurance requirements in the majority of cases, there are a number of Specialty products suitable for SME’s, notably PI, that are not offered by most P&C insurer’s.
We have already seen considerable international appetite since forming, and have developed partnerships with a range of MGAs and Brokers in Italy, Spain, Latin America, The Middle East and the UK.
Dodging the pitfalls
So why aren’t more firms taking advantage of this market opportunity? The truth is that it’s a difficult nut to crack and few new entrants have managed to make a successful go of it. To avoid expensive mistakes you will need to be wary of these pitfalls:
Firstly, new entrants to the market must understand that they are unlikely to make money right from the start. The average premium of a single SME account is significantly lower than a larger general insurance account. So, as a generalist insurer looking at the SME specialty business, building a significant portfolio will take years of work or a major acquisition, and robust cost benefit analysis is essential.
Secondly, don’t think it won’t affect your balance sheet. A large portfolio is essential, to cover large losses. The settlement tail on large losses means that, insurers will need to build up meaningful IBNR reserves to account for the uncertain nature of claim settlements. A prudent insurer that recognizes the profitability in this line over time, while also making the right investments in the business will show a negative balance sheet hit early on. It is important to recognise that this is not a business new entrants can jump in and out of.
Significantly, brokers must also have the right ‘soft skills’ to deal with and understand the dynamics of smaller, local businesses such as actuaries and engineers, to overcome cultural differences and more importantly identify the specific needs of the SME client.
Variables to success
While dealing with high attritional losses and lower premiums is expensive, the SME market is still an exciting opportunity.
Perhaps the most important variable to consider is distribution power. This is because businesses need to ensure they have a mature distribution network to make SME products accessible to typically highly fragmented regional markets. This is something that as a business we have addressed, through our unique distribution model, by taking a portfolio approach and leveraging our partner’s distribution networks.
A robust and highly efficient IT infrastructure to manage large amounts of data is key. Investing in an IT infrastructure is often confused with online binding capabilities.
Moving forward
For firm’s that undertake the correct approach, the SME specialty market is an exciting new frontier. Partnerships can be the best way of bridging the knowledge gap and taking advantage of the distribution power. Traditional books of business have expanded and demand for specialty products has increased. Through strong specialist partnerships insurers, brokers and MGAs can exploit the massive potential in this space.
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