SMEs make up the majority of businesses worldwide. In Australia SMEs account for 99.8% of businesses, with construction based SMEs making up 14% of the SME market.1 When looking at PI insurance through the lens of a construction SME, there are particular drivers of purchase power and influences unique to the SME market.
The COVID pandemic has created a new set of challenges and compounded an already challenged construction PI market still recovering from the recent departure from the PI market of Lloyds syndicates and the cladding fallout following Grenfell in the UK and Lacrosse in Australia.
In this paper, the second in a series of three, we will look at the approach construction-based SMEs take 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:
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):
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:
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
2 See survey results
3 McKinsey, ‘SME Insurance in Australia: A market ripe for Change’, 2017 at 12
4 McKinsey Australia Small Commercial Insurance Consumer Survey 2017 n=405
5 Albonico, Grimaldi and Horsh, ‘Insurers must rethink the SME segment: Lessons from the United Kingdom’, McKinsey & Company, 2020
6 Engineers Australia ‘Private Insurance Market submission to the ICA Strategic Review of Commercial Insurance’ June 2021.