The market dominance of IAG, Suncorp and QBE in the lucrative SME space is under threat from the potential entry of new insurers over the next two years, a new Macquarie Research report says.

At present the three market leaders control about 64% of gross written premium (GWP) in the business pack product line aimed at SMEs – as well as 81% of the profitability generated.

IAG has the biggest GWP share at 27%, followed by QBE on 20% and Suncorp on 17%.

But analyst Andrew Buncombe says about $350 million the trio now make from providing business pack insurance could be impacted should the new players mount a successful challenge.

He says the new players are targetting the SME market because business pack insurance is one of the few commercial products that are consistently profitable. Premium rate growth per policy for business pack went up 4.8% in the June quarter.

Their methods would probably be simple. The challengers could quote 20% lower for products in the market, while offering higher broker commissions. They operate on a lean outsourced underwriting expense base to gain a competitive advantage.

“Based upon our industry meetings, we understand a number of new insurers will enter this market over the coming 24 months, potentially placing profitability at risk for the incumbent insurers,” the report says.

“We conclude [that] not only is GWP at risk for IAG, Suncorp and QBE, so is profitability, albeit from an exposed cost base, rising broker commissions or lower loss ratios as price competition increases.”

The report says the result could be similar to what has happened in the home and motor lines markets, where the incumbent insurers have seen their lead eroded by challengers’ aggressive growth strategies.

“We believe the only way to stem these losses is to run ongoing cost-out programs, and launch low-cost/outsourced models to compete with new entrants,” the report says.

“We continue to see downside risk and maintain our cautious outlook on the sector.”