The small and medium enterprise (SME) sector is growing in importance. Employing over 70 percent of the Australian workforce, the sector is becoming an important target customer base for a range of services providers, from banks to telecommunications companies to utility providers. And the insurance sector is not immune. It too is seeking to better understand how to service this large and growing customer base.
In response, McKinsey launched a survey of SME businesses in 2017 aimed at better understanding the insurance buying characteristics of this segment of the economy, the McKinsey Australia Small Commercial Insurance Consumer Survey (see sidebar). The survey points to an Australian SME insurance market that is ripe for sizable change. Nearly three-quarters of small business owners are dissatisfied with, or are not loyal to their insurance provider. However, they are not aware of or actively pursuing better options—only 19 percent of small business owners switch provider each year. This suggests there could be significant rewards for insurers who are able to better meet the needs of small business owners. While it might require adopting entirely new business models, the potential gains are significant.
Australia’s small business sector (comprising companies with fewer than 250 employees) is sizable, consisting of over two million businesses. These account for nearly 70 percent of all employment in the economy and almost 40 percent of the country’s GDP.1 Currently, the SME insurance market accounts for an estimated AU $9.4 billion in general insurance premiums.2 However, a recent report by the Insurance Council of Australia found that some 13 percent of these companies are not insured, and 1.9 percent report being underinsured.3 Reasons reported for lack of insurance or underinsurance include being too busy to arrange insurance, price levels being too high, and a lack of awareness of risk exposures.4 Although rates of no insurance or underinsurance are commonly understated, if even just the reported 13 percent gap of uninsured companies could be closed it would be worth AU $1.4 billion in new premiums.
However, the McKinsey Australia Small Commercial Insurance Consumer Survey found that, similar to other markets, the SME market in Australia is far from homogenous, making it challenging for insurers to serve it. Indeed, the variety of niches and different risk profiles makes it difficult for insurers to build efficient, at-scale business models. SME niches vary in at least three important ways:
- Size: Organizations range from sole proprietors to larger SMEs with fewer than 250 employees.
- Industry: From solicitors to plumbers, each profession requires a distinct set of products.
- Attitudes and behaviors: With such diversity, there is substantial variation across SMEs on price sensitivity, the need for advice, willingness to self-serve, and dependency on brokers.
The variation in attitudes and behaviors underscores the need for insurers to define a distinctive value proposition for the diverse SME segments. Our survey revealed four groups of customers who exhibit similar attitudes and behaviors: convenience seekers, online DIYers, expert seekers, and bargain hunters (exhibit). Based on the results of the survey, the first two segments likely comprise around 63 percent of the premium value of the market, and are the “value play.” The other two segments make up the remainder of the market and are the “volume plays” for insurers.
Understanding how to reach each segment successfully requires a more nuanced grasp of what drives insurance purchasing decisions for small business owners, as follows:
- Brand awareness, availability of information, and strength of brand equity are the key factors in the consideration set.
- Price changes are the main trigger for the decision to switch provider, but low prices are much less important in driving loyalty.
- Online channels are gaining importance, but brokers still have a significant influence on the market.
- Industry expertise and the ability to build a trust-based relationship with customers significantly drive customer loyalty.
Success in this market may not be easy; the needs of the customers vary so widely that few players will be able to serve them all. The winners will be those that apply a sharp customer segmentation, demonstrate a deep understanding of their customers’ needs, and find a cost-efficient way to serve the diverse segments.
Success will also require building distinct capabilities for the SME segment that straddle the border between personal lines and commercial lines. Some capabilities will be universal—in particular, those around standardization, automation and cost-efficient customization—and others will differ by customer segments. For example, a proposition for the volume segment may be to boost marketing efforts and investment in direct distribution channels, while value players may invest more in the broker channel to ensure brokers have the latest digital tools for managing customers.
Insurers will need to learn from the best consumer-oriented institutions how to build their brand and how to communicate the right emotional message, at the right time and via the right avenues. Digital innovations, data and analytics, and the ease of doing business will be critical to the new operating models. Price competitiveness will continue to be important, and traditional elements of the proposition such as product, service, and claims experience should remain strong.
SME insurers certainly face challenges as they seek to better serve their customers. Those that adapt will thrive while those that stick to old models risk being left behind. The time for action is now.