InsurTech for SMEs — A new era of customization & flexibility?
In the general opinion, there is the feeling that SMEs are not that well served by insurers — traditionally because they have small basket size and could be quite demanding in terms of customer support and sales cycles. Myth or reality?
At BlackFin Tech, while witnessing the rise of different new InsurTech focusing specifically on SMEs, we decided that we wanted to deep dive a little bit on this hot segment, and try to understand how and what opportunity lies for InsurTechs today! We had a lot of questions regarding this segment, that we wanted to challenge:
- Are SMEs really underserved by traditional insurers?
- Is there a unified market in Europe, or differences between geographies?
- What drives the demand for this market?
- Are US-based startup “models” on this segment replicable in Europe?
- Isn’t the market too much fragmented?
- How can you crack the distribution challenge in order to keep a low CAC?
- How can you create trust and a strong brand with unsexy products?
- How long could be the payback in the mid-long term?
- …we could go on and on for hours!
First, what do we mean by Insurance for SMEs?
Insurance Policies are often complicated and difficult to assess — it’s even one of the major pain points on this market! We tried first to understand the different policies available to SMEs, mandatory or not, depending on the countries & regulations, and trust us: it’s not a small task!
In Insurance, people often differentiate between:
- The P&C segment, covering commercial insurance products such as General Liability, Business Interruption or Motor & Fleets for example.
- The Health & Life Insurance segment, covering Temporary disability, Health Insurance, Accident & Hospitality, etc.
Our main take on this is the fact that depending on your specific customer targets among SMEs, the policies you need are not at all the same! There is much more diversity than you could think in the first place. For example, a low-digitized SME with a physical office will have much more expensive insurance policies (and expectations) than a freelance.
This leads us to our following consideration: an InsurTech (and investor) needs to bear in mind the great difference of “customers’ persona” within the SME space. We observed that most of the InsurTech tend to mainly focus on these 3 following sub-categories, carrying each their own challenges, especially regarding distribution :
- The gig economy & solo-entrepreneurs (main market in terms of number but low average basket and high price sensitivity)
- Startups & Digital native brands (growing fast, high UX expectation, not so numerous)
- Low digitized SMEs — more often under 10 FTEs than bigger companies (huge market, mainly “low digitized” go-to-market for now)
Understanding the SMEs’ needs
We tried to understand SMEs’ attitudes regarding commercial Insurance, their major needs, and pain points.
What strikes us (among other in this Strategy&’s report) is the fact that SMEs are unknowingly under-insured in the most advanced economies: If more than 75% of SMEs are quite confident about their understanding of their policies, in reality, they are not that well covered against damages, as shown in the graph on the left.
How do you sell Insurance products if your target customers don’t even know that they’re not properly covered, and need your product? For SMEs in particular, the key purchasing moments on these products seem to be at incorporation, for renewal, or when filling a claim in case of an incident.
If you first take into account this lack of understanding & education on the market, what are the other important differentiators in the eyes of a small company? We also understood that fluidity & user experience are key as far as insurance is concerned, with new differentiators such as the efficiency of the buying process (with online as a growing preferred channel), the sentiment of transparency regarding pricing, and the customization of products.
The price appears to be not the main buying decision factor regarding insurance, among other “human touch” and guidance along the process remaining highly important.
What’s the impact of this need for trust and advice? From a startup perspective, it means that you shouldn’t underestimate customer service, or find an intelligent way to advise your customers! Moreover, if an InsurTech chose to be an MGA, it has to tackle itself the Claim Management challenges.
The examples of the most successful startups in the field prove it right: The UK SMEs’ InsurTech Simply Business, acquired $490m by Travelers Insurance (at a price equivalent to 50x its operating income!), has a huge customer care physical center.
Are SMEs underserved by incumbent insurers?
As we said in the intro, there is the general feeling that SMEs have not been considered for a long time as a top priority for Insurers, a “scattered market of small customers” (BCG Report), often handled through intermediary and brokers.
But does it mean in reality that SMEs find themselves underserved by traditional players on the market?
- We found that most SMEs trust their insurer or their broker and that they value a lot this brand image when choosing a commercial insurance policy. This brand image & trust is a barrier to the full online automation of selling insurance products by not-know players! It seems important for new entrants to build partnerships with incumbents to generate trust.
- Insurers today are interested in this segment: it’s interesting to point out that SMEs account for more than one-third of all commercial insurance premiums, with a market size larger than $1Tn worldwide, and that traditional Insurers are now launching initiatives to better serve this market!
In Spain for example, Zurich Insurance partnered with CoverWallet in Q2 2018 to launch a new platform called ZurichEmpresas to target micro-enterprises & startups. One year after the launch, this platform is responsible for 20% of Zurich’s new business for SMEs.
To conclude on this point, maybe it’s worth noticing again that Insurers are trying to better serve the SMEs, and they still generate trust, which is a big advantage for them, even if as we’ve seen in the beginning there is a still a big part of the market that is not well equipped.
Are US-based InsurTech startups role models ?
Next Insurance, CoverWallet, Embroker…
As usual, the US has much more advanced startups in the field than we do in Europe! Could their model be reproduced, or at least, what are the takeaways from their success?
Let’s deep dive a bit on Next Insurance’s case, which we found insightful:
- Launched in 2016, the unicorn has raised to date more than $381m — with a last round of $250m led by Munich Re.
- It’s a (recently) full-stack insurer for SMEs in the US, with simple products that can be instantly bought 100% online at an affordable price, and 100% tailored. Next Insurance obtained its insurer license in May 2018. Its value proposition reflects perfectly the needs of the SMEs regarding insurance!
- What’s highly interesting is first its customer targets: Next Insurance focuses mainly on 1 to 10 FTEs companies, being able to sell tailored policies to 1,000+ different professions. It accounted for 40,000 clients in 2018, with an average GWP per client of $1,100 per year. It seems with this example and many other ones that it’s easier to sell to companies with FTEs under 10 people, but that average premium per client increases on some non-digitized professions (with premises mostly).
- Regarding Distribution, Next Insurance is also a really interesting example: It started as a Direct to Consumer player, but added in 2018 tools for external agents to distribute its products — highlighting in its discourse that SMEs valued “in-person relationships”!
Even though Uk and Us markets are quite digitized, in other markets such as France, Italy, Spain and Germany, the distribution channels are still mainly F2F.
Mapping of some European players
Last but not least, we mapped some European InsurTech players focusing on SMEs. Our way to differentiate them has been by clients type, and also by their distribution! The indirect distribution matches in most cases with the maturity of the companies, don’t you think?
Don’t hesitate to reach out to us if we missed one > firstname.lastname@example.org
To conclude, we’d like to highlight some of our understandings of this market, that would require further investigation:
- Distribution is a key success factor regarding Insurance for SMEs: As a startup, you have to find the right balance between offering real customer support, automating your purchasing process, while probably building some partnerships to reach small but numerous customers!
- Generating trust is essential in this market: if some SMEs are ready for some digitalization, the human touch will remain a major component of what they are looking for!
- Within SMEs, it’s highly different to serve digital-native solo-entrepreneurs versus non-digitized SMEs: Distribution, business model and brand image shouldn’t be similar.