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Aid to SMEs: it's not too late for some alternative thinking

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The insurance response to the coronavirus pandemic, which played out over the past week, was supposed to be an industry-wide solution to keep SME businesses insured and engaged. But it ended up being a solution that angered brokers and caused a great deal of debate.

What started off with the best of intentions has devolved into a bit of a mess. But – with the thought of that industry-wide solution still in mind – today’s bulletin features suggestions from senior industry figures that could resolve most of the objections and make for a better support package.

This whole thing started pleasantly enough. Several weeks ago the National Insurance Brokers Association (NIBA) said it was discussing the best way to “support communities” with the Insurance Council of Australia (ICA) and premium funders.

The insurers were under pressure to follow the major banks with concessions for SMEs, which risk being lost to insurance. But as has pointed out previously, insurance companies are not like banks.

The Australian Banking Association has 22 members, dominated by the Big Four, who are Australian-owned and tend to make decisions in lockstep. ICA has around 56 members, many of them internationals and each with their own business and strategic directions.

Australia is a tough insurance market. When it comes to working with competitors at ICA, agreement is achievable but it rarely comes quickly – especially when you’re discussing taking a voluntary revenue cut. Try explaining that to your boss in Asia, Europe or North America at a time when global earnings are in a coronavirus-infused nosedive.

At some stage in the past few weeks ICA and (presumably) its directors put together the plan being rolled out now by Suncorp, QBE and Allianz, with others to follow. The item that has stuck in brokers’ throats is the biggest one – a decision to defer premium payments for up to six months for small businesses experiencing financial hardship. It’s a move that move that will impact most sharply on brokers’ commissions, and hence their cashflows.

Did the insurers consult NIBA? Apparently not. Like Asian steel companies dealing with foreign iron ore producers, the insurers seem to have decided that when they take a hit (however self-inflicted), brokers who share the benefits in the good times should also “share the pain” in the bad.

Perhaps they took heed of the March 23 comment by NIBA President Eric Harris challenging “insurers and premium funding companies to support our communities”, which kind of indicated that he didn’t see brokers as active participants.

Whatever the insurers were thinking, the brokers were cut out of the process at some early point. But then IAG, the largest and the most conscious of the need to be seen doing something, changed the dynamic. While it was ready to go, IAG faced interminable delays while the competition regulator was formally consulted, and fellow members ran the numbers and obtained clearances from their bosses and boards here and overseas. Comforted by the regulator’s more relaxed attitude to decision-making in these trying times, IAG jumped off the ICA bandwagon and went solo.

From IAG’s point of view at least, it was a very rational decision, and the public response to its announcement of ways it would help SMEs was very positive. But not in the industry. The other insurers, gazumped and locked into a tediously long regulatory process, were incensed. But their heat was nothing compared with the brokers’.

NIBA CEO Dallas Booth said the IAG announcement “effectively meant the opportunity for an industry response was lost”.

Pointing out that the initiative could result in some brokerages collapsing under the weight of servicing customers without payment, he said these concerns could have been “ironed out” if an industry-wide position had been persevered with.

While Mr Booth’s comments did result in some rejoinders from brokers who saw merit in the IAG/ICA approach – or at least were willing to do whatever they could to support their clients – what has become obvious over the past week is that wider consultation would have given the insurers some options that are both more sophisticated and could be more effective in actually helping SMEs stay in business and buying insurance – without exposing brokers.

Many senior brokers were not willing last week to engage on the subject with to the point of being named, but some were prepared to privately express misgivings at the thinking behind the insurers’ solution.

Then AUB MD Mike Emmett stepped up on Friday to offer an alternative approach. He favours a monthly payment scheme rather than a deferral.

“If we can spread the impact rather than deferring it, that is better,” he said. “The cashflow impact can be more easily managed and everyone could have used it.”

Those sentiments are reflected in a suggestion doing the rounds of brokers late last week, which raises the fact that underwriters have given retail clients six months to pay, or – as one broker put it – “extended credit terms for brokers to 180 days where they are the intermediary”.

Under this idea brokers could work with premium funders to offer more competitive funding with a reduced commission rate – say 1% or 0.5% – which would represent a sacrifice of revenue for the broker to ease the load for the client.

Brokers could then extend the settlement terms with a funder to 170 days – except for their broker fees and commission, which they would require to enable them to stay in business processing renewals and dealing with changes and claims.

The clients would benefit by not paying interest during the 170 days, while still making monthly payments.

The present assistance package devised by the insurers is hobbled by the fact that many brokers, large and small, are unhappy with it. That doesn’t mean brokers are not prepared to make sacrifices for the benefit of their clients. But if there are more effective alternatives available, they should be considered, even if only as an option for SME customers.

The details of how the insurers’ support program is all going to work hasn’t yet been settled, but brokers are adamant that a deferral of premiums for six months isn’t going to be helpful at the end of that period to an SME struggling to get back on its feet. And some brokers would risk financial collapse.

That’s why it’s important to consider alternative arrangements that might have come up during the insurers’ deliberations had the brokers been asked.

For the sake of a united industry with genuine shared interest in supporting their SME customers, it’s not too late to think again.