Embedded Insurance #8 | Adapting to a New SME Insurance Landscape

Sibylle Fischer
September 2, 2020
Innovation, Startups, Products, Sustainability
As Covid-19 losses continue to wreak havoc on small to medium-sized businesses, the need for insurance protections that address cash flow instability are paramount. Can insurers adapt their distribution models and product offerings for the rapidly evolving SME landscape?

The SME market segment, comprising a hugely diverse group of small to medium-sized enterprises, has historically been underserved by the insurance industry. This difficult-to-address group has been particularly challenged by cash flow instability – an issue now growing in severity due to the impact of the coronavirus pandemic on the world economy. As the fallout from Covid-19 continues to send shockwaves through global markets, insurers must be ready to rethink both the distribution and nature of their product offerings, especially among SMEs, who need income security more urgently now than ever before.

A traditionally underserved market

With a never-ending variety of niche businesses, industries and risk profiles, the SME market has long been challenging for insurers to serve at scale. The specialized needs of individual SMEs vary greatly according to industry (the insurance products a plumber requires, for example, may be quite different from those sold to the owner of a boutique PR agency). That means there’s also an accordant amount of difference in everything from price sensitivity to sales preference (i.e. reliance on brokers versus online DIYers). At the same time, insurers have mostly lacked an efficient mechanism for carefully and quickly assessing an SME’s individual risk profile in order to find the right underwriting approach – something that is even more crucial during moments of economic instability. Without a one-size-fits-all approach, the SME market continues to be perpetually underserved by insurers.

SME insurance and Covid-19

Chain symbolises Supply Chain.

In the early months of the Covid-19 crisis we saw disruption to huge swaths of the global supply chain, upended worldwide consumption patterns, and entire industries brought to a grinding halt. Many small SMEs were already suffering from cash flow and credit deficiencies; others (especially in highly impacted sectors like manufacturing, construction and tourism) faced impossibly low and even non-existent revenues, disappearing supply chains, and a glut of unsold inventory. While governments were initially quick to introduce measures to help struggling SMEs, insurers mostly enacted short-term changes (extending the claims period and eliminating late payment penalties, as a few examples). These policies, though helpful, were largely limited to cover the first shut down period of only a few months and didn’t address larger distribution issues, nor did they offer more diversified, long-term support.

Protecting cash flow and reducing risk

Some fintech industry players, however, endeavored to find new ways to support SMEs in the aftermath of Covid-19. Specializing in in single-invoice credit risk insurance, provider Hokodo partnered with Tide, the UK’s leading business banking platform, to design a product that would help SMEs protect their cash flow against late or non-payment of invoices. Offered to all Tide members, this protection product guarantees invoices for a small fee (typically 0.3% - 1% of the total invoice value), with Hokodo insuring up to 90% of the invoice value in the event of non-payment.

In a similar partnership with the cash flow software provider, Futrli, SMEs in France and the UK can now protect their cash flow in just a few clicks, with users insuring single or multiple invoices against non-payment (all without purchasing a subscription or creating any paperwork). Because Futrli already integrates with popular accounting apps (like Xero and QuickBooks), the introduction of Hokodo’s simple API was also solving a major distribution problem – bringing invoice insurance (and some measure of peace) to tens of thousands of SMEs who would otherwise be without any cash flow protection.

A challenge and an opportunity

Many signposts in backlight

There’s no arguing that in the current landscape the SME sector will need to adapt, pivot, and innovate at warp speed. At the same time, insurers now have occasion to evolve alongside their customers changing needs, with embedded insurance products that streamline sales and automate risk assessment and pricing. In many ways, the COVID-19 crisis has presented us with a mountain of opportunities for positive change, but to succeed we will need to be creative, persevere and work together.