A closer look at SMEs in the Construction PI insurance market: their risk profile, their approach to insurance and the types of claims they are experiencing - Part 2

In this paper, the second in a series of three, we will look at the approach construction-based SMEs take to insurance.

The SME approach to insurance

Following on from our first paper which focussed on the risk profile of construction based SMEs. In this paper we look at the construction-based SME approach to insurance, particularly professional indemnity insurance.

Key factors drive the SMEs approach to insurance: cost and coverage.² With PI insurance being a regulatory requirement for many construction professionals to operate, the cost of insurance and the extent of and limitations placed on cover, are of key importance to SMEs.

Because of the large variance in the size of SMEs the approach of SMEs to insurance varies considerably. Bigger SMEs will likely have a dedicated risk manager dealing with the business’s insurance program (often the finance director) and usually a dedicated broker advising the SME on its policy needs. At the other end, smaller SMEs are likely to be more focused on growth and cash flow and not so focussed on insurance. In the case of small SMEs the founder of the business will usually be the person dealing with insurance.³ A survey conducted in 2017 by global strategy and management consulting company McKinsey of Australian based SME consumers identified four categories of SME businesses, grouped by their attitudes and behaviours towards insurance⁴:

• Convenience seekers – who depend almost exclusively on brokers to source the best policy price, right coverage and claims services. They make up 45% of the value of all SME businesses surveyed, have less inclination towards online channels and are loyal to their insurers’ brands.
• Online DIYers – who are comfortable with purchasing insurance online and typically have standardised product needs. They are the least loyal amongst the four groups to particular insurers and account for 23% of volume and 18% of premium value of the survey respondents.
• Expert seekers – need tailored products and expect solid insurer expertise and reputation as well as a high level of customer service. This sector has a higher than average level of sole proprietors and shows high levels of loyalty. They account for 27% of volume and 21% of premium value of respondents.
• Uninvolved bargain hunters – who do not usually have a need for extra coverage or tailored offerings. This group accounts for 21% of the volume and 16% of the premium value of respondents.

The McKinsey survey identified that small business owners will generally consider three or four brands during the insurance purchasing process and the drivers that influence the SMEs decision in then selecting an insurer are influenced by multiple factors with the highest 3 factors being (in the order set out):

1. Traditional advertising (easily the most influential factor)
2. Social media
3. Price comparison website.

Whilst price is the most important factor in purchasing the insurance product, the primary drivers in the moment of purchase (as distinct from the researching phase where 3 – 4 brands are selected for consideration) are broker recommendations followed by recommendations from business partners and colleagues. Of the construction and industrial SMEs surveyed some 55% were loyal to an insurer brand (whether passively or actively).

The McKinsey Consumer Survey from 2017 also identified that online channels were growing in popularity for SMEs. Fast forward to 2020 when the world was by then amid the COVID pandemic. Surveys of UK based SMEs by McKinsey show online applications have taken on more prominence for SMEs during the pandemic.⁵ The convenience of online interactions and the restrictions imposed on person to person interactions during the pandemic likely causing SMEs to turn to digital options. The McKinsey study highlights that insurers need to rethink the SME market by creating more user-centric and flexible offerings and by taking actions that promote trust and transparency with clients.

Engineers Australia published their response to the ICA Consultation Paper in which they identify the key concerns⁶ of their members, including structural, geotechnical, civil, fire safety and façade engineers, about the impact of the hardening insurance market:

• Rise in annual premiums with some businesses reporting premium increases of 600% over the last 2 – 3 years
• A limited number of insurers willing to provide coverage
• Inconsistent and poorly defined policy exclusions
• An ongoing increase in deductibles and exclusions and a reduction of coverage level
• Continuous pressure from clients requesting arbitrary large amounts of PII coverage with no apparent risk assessment to justify the figure.

These concerns echo those reported by McKinsey in their reports referred to above and the sentiment of the wider construction SME sector.

In a hardening PI insurance market with a condensed pool of insurers covering construction PI risk and in the midst of a global pandemic that has caused extended lockdowns and restrictions of movement, SMEs are likely to be feeling vulnerable and limited for choice. New lower policy limits are likely to make it difficult for smaller SMEs to tender for larger jobs that are likely to have minimum PI cover requirements that the SME may not be able to fulfil. Ultimately the cost of premiums, policy limits and coverage are likely to be key concerns for SMEs in the construction PI space. Broker assistance and insurers who are willing to work with SMEs to assist them navigate the challenges they face at renewal time are likely to be welcome.

¹ ABS Swiss Re Institute