Testing times

Testing times

An economic slide due to the coronavirus will put more pressure on brokers to demonstrate value as clients seek ways to cut costs

By Wendy Pugh

Brokers will have their work cut out convincing

SME business owners that insurance is not the area to cut as business conditions become increasingly difficult.

That’s one of the findings from the latest edition of the annual Vero SME Insurance Index survey, which took place last year when commentary about an economic downturn was already prevalent and the Reserve Bank was cutting interest rates.

SMEs at that time flagged changes in their insurance arrangements as a possible response to sliding revenues, and events have since taken a sharp turn for the worse as social restrictions imposed due to the coronavirus pandemic take an economic toll.

S&P Global Ratings says a deep recession across the Asia-Pacific region is guaranteed following an enormous first-quarter shock in China and subsequent international shutdowns.

A Roy Morgan snap SME survey of 621 Australian businesses last month found more than half believe the nation is in its first recession in nearly three decades.

The Vero survey shows revenue declined over the past year for 41% of respondents, while a similar proportion say they experienced growth of less than 5%.

Confidence levels looking ahead are mixed.

When asked what specific impact slowing revenues would have on insurance, more than 60% of SMEs said they would make some sort of change to their insurance arrangements, mostly by reducing their cover, pushing for better deals or changing the way they buy.

That’s an ominous indication for brokers. Of particular concern should be the finding that 12% of SMEs would consider purchasing direct.

Vero Head of Commercial Intermediaries Anthony Pagano says brokers can assist clients in difficult times by ensuring they appreciate the increased risks they are taking on if they reduce their insurance.

“When things are tough the last thing you want to be doing is making yourself vulnerable to a large loss by exposing your balance sheet,” he tells Insurance News.

“Reducing insurance cover can be a big risk for SMEs, which is why brokers need to be alert to their clients’ situation and provide them with support through the various lifecycles of their business.”

Medium-sized businesses, an important clientele for brokers, are particularly likely to change their insurance purchasing behaviour, and the report says their requirements may need special attention.

This year’s SME Insurance Index results show brokers are increasingly going the extra mile to help their clients.

Perversely, satisfaction levels have reached an alltime high even as trust issues remain a concern.

Mr Pagano says the survey findings reflect a new wave of information and engagement and the shift away from a traditional transactional model of doing business, as brokers become more astute in responding to individual preferences and requirements.

Discussions around client needs and community expectations have come to the fore following the Hayne royal commission, and broker training and education activity has also increased in recent years.

“Brokers are now doing things a little bit differently,” Mr Pagano says. “The environment and the landscape has changed.”

The survey finds 70% of broker clients are satisfied – up from 66% a year earlier – while the percentage who buy all or most of their insurance through a broker has rebounded to 27% after dipping to 16%.

On the worrying side of the ledger, trust ratings continue to deteriorate, seemingly contradicting other improvement measures.

Some 38% of respondents agree with the proposition that “at the end of the day you can’t trust insurance brokers”, which compares with 33% last year.

Two years ago, before the royal commission, sentiment was much more positive, with only 16% of respondents concurring with the statement.

Vero says brokers are caught up in wider social trends, which show trust in institutions and financial services remains low globally.

The royal commission and scandals elsewhere in financial advice also continue to affect brokers, who

are still to be swept up in a Hayne-recommended inquiry that will scrutinise intermediary commission payments.

Vero says greater transparency is the key to trust, and includes explaining all areas of broker operations and insurance, such as reasons for premium increases and how risks are assessed. The sensitive area of fees and commission should also be part of discussions.

“There is a need for greater transparency and clarity towards broker remuneration as a result of recent scrutiny, and customer expectations,” Mr Pagano says.

“Trust can be influenced by many factors. However, our experience tells us that one of the strongest and most consistent ways of building trust is transparency.”

Currently, only 14% of respondents are having discussions with their brokers about commissions, despite the fact that 70% of them are very or somewhat interested in knowing the commission rates their broker receives.

“The research suggests that more knowledge of remuneration could impact SMEs’ behaviours and attitudes, and more interestingly, improve trust,” Mr Pagano says.

“Client SMEs understand that brokers are also SMEs. They understand that they need to earn an income to run a business.”

The survey shows a surprisingly high number of SMEs don’t really understand the difference between their broker and the insurance company, with 36% thinking they are one and the same.

The factors that cause premium rate changes are often little understood, and SMEs can be particularly frustrated when their prices jump despite not having made a claim.

Half the clients in the survey say their broker has explained a premium increase, and 80% of those people found that to be helpful.

Respondents whose brokers haven’t explained a change say they would be interested in understanding more.

Receiving proactive updates about insurance issues is a key reason for using a broker, according to 31% of respondents.

Some 52% of respondents say brokers provide case studies and examples to help understanding, up from 36% two years ago, while 69% say brokers provide in-depth information and analysis on all the options available, up from 57% in 2018.

SMEs whose brokers undertake such tasks tend to be more satisfied than average, and the hardening market has provided an environment where more explanation and assistance is appreciated.

In further positive signs, the number of direct buyers who say they would consider using a broker in the future has risen to 48% from 41% last year and just 34% two years ago.

Many of the findings in this year’s Vero report highlight the fact that brokers’ efforts to better respond to clients are gaining traction, and they are well placed to build trust as they assist businesses in difficult times.

“It’s clear that SME clients value brokers for their expertise and the value-added services they provide,” Mr Pagano says. “I think we are only going to get to a much stronger place moving forward.”

For graphic representation of Vero SME Index findings please view desktop version of this article.