Representing about 2.3 million businesses, the Australian small- and medium-sized enterprises (SME) market has become a key strategic portfolio for general insurers. Australian general insurers, however, have not tapped the sector’s potential. That’s partly because the diversity and complexity of SMEs make them difficult. Moreover, the way that SME insurance is delivered today strikes some as a race to the bottom — many SMEs are unwilling to pay high premiums but often require higher services.
The digitisation of the SME landscape has only accelerated post-COVID-19, bringing the SME insurance industry to a crossroad. Traditional business propositions for insurers are shifting as the industry changes across customer segments, risks, channels and competition. This includes the growth of millennial-owned SMEs; the entry of nontraditional insurance incumbents; extensive digital expectations among SMEs; and the emergence of insurtechs.
These changes in the landscape call for a new approach to SME insurance strategy. Winning players will be those able to convert these disruptions into opportunities and leapfrog with a future-proofed strategy. Here we’ll highlight disruptive trends; for additional recommendations for Australian general insurers as they build foundational capabilities into the future, see our white paper, “A Digital Way Forward for Australian SME Insurers.”
Seven key rule changes for the future
1 COVID-19 will spur unprecedented innovation and digital activity in the Australian SME industry across all sectors, redefining the traditional risk landscape.
The prolonged pandemic has focused attention on the resiliency of SME industries, but we believe the sector will continue to grow. A recent study by Amazon Launchpad reported optimism for the post-COVID landscape among 92% of the Australian SMEs and showed a big shift among SMEs, with 25% innovating through newer revenue streams or online channels and roughly 20% by creating new business or product strategies.
This innovation may consist of prioritizing and upscaling online platforms, or partnering with market solutions for customer service. In all likelihood, the SME sector will pivot to the new digital ways of business as it emerges from the crisis.
2 Millennial SMEs will form a large percentage of the Australian SME market, redefining the traditional moments of truth for insurers.
Roughly 56% of the country’s SMEs are owned by millennial or Generation X cohorts. This segment exhibits stark differences when compared to older entrepreneurs. A recent report by NAB, a leading Australian bank, highlights key psychographic differences of the segment: they are hyper-focused on expansion and are much more likely to focus on digital platforms and innovation. Indeed, 51% of SMEs are already leveraging online stores for daily transactions. Given their digital propensity and expectations of superior digital experiences, these millennial founders will expect more digital and personalised interactions with their insurance carriers.
3 Australian SMEs skew toward digitally based, data-rich tech startups, whose risk profile is far different from traditional companies.
Over 90% of technology businesses in Australia today are SMEs, with further sector growth in the offing due to eased regulations and access to funding. These customers present unique insurance needs and opportunities.
The risks associated with these businesses is greater. Their operating model houses troves of customer data, and opens gaps around worker’s compensation and business interruption. Their capacity to withstand and recover from losses is very low, particularly at infancy.
If the above is bad news for insurers, there’s plenty of upside as well. Success rates for these tech startups have grown substantially; in the past five years, the number reaching a $100 million valuation has doubled, posing an interesting premium opportunity for SME insurers.
4 The “micro-SME” sector (with at most 10 employees) will expand due to the gig economy, posing a volume-vs.-value dilemma for insurers.
Roughly 7% of working Australians are finding secondary jobs through the “gig economy,” signing up with digital platforms to make a living. The flexible nature of the services provided by the sector opens insurance implications and the likelihood of “uninsurance” and underinsurance in this sector. Are gig workers covered sufficiently to cover all risks while carrying out their jobs? Are they covered adequately on liability risks from the work being performed? The gig sector falls into the micro-SME segment, and the premium upside may not be as high here as in other segments. However, the rapid increase in the market activity posits it as an opportunity that can’t be ignored.
5 Australian SMEs will increasingly use “sharing economy” services to boost growth, posing new risks and coverage gaps.
Unsurprisingly, 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. However, with new opportunities come new risks, which often bring insurance implications. Imagine an SME employee who’s injured while at an accommodation-sharing site or travelling in a ride share. Does the liability coverage of the sharing economy provider have adequate coverage limits? Does it cover all the risks, including lost wages or rehab costs? Insurers can look to fill these coverage voids for SMEs.
6 The Australian SME industry will experience a convergence of heterogeneous competition, and most of these new players will own the consumer relationship.
Seismic shifts in the insurance marketplace will attract intense competition from traditional and nontraditional businesses alike, many of which will differentiate themselves by disrupting the conventional SME insurance business. The following figure illustrates this potential convergence. We believe this trend will gather momentum and that traditional insurers are bound to face stiffer competition into the future.