Why open finance will transform SME insurance

Many insurers and brokers are seeing an explosion in demand, but lack the digital capabilities to make the most of this opportunity.

The global pandemic has laid bare the limitations of traditional business models that are not adequately serving the customers they seek to protect. Recent surveys suggest 51% of UK SMEs are cutting back on insurance spend as a result of the pandemic, further increasing the huge problems of underinsurance in the market.

At the same time, SME customer expectations have been transformed, particularly in the last 5 years, by experience in wider financial services like payments and banking. Many insurers have been slow to adopt, leaving them with an approach that is no longer fit for an increasingly digital world where convenience, simplicity, and flexibility are the order of the day.

Open finance is the solution

Open finance seeks to extend the principles originally applied to open banking to a wider set of financial data. It’s purpose is to provide consumers and businesses with greater control over larger amounts of their financial data, and in doing so, transform the way in which they can access financial services.

What are the opportunities with open finance for SME insurers?

The capabilities and technology already exists for forward thinking insurers and brokers to transform the way in which they interact with customers. This can be achieved by leveraging open finance and using this real-time company and financial data to better understand and serve customers with simple, timely, and relevant insurance.

The opportunity for insurers who get this right is huge. 60% of commercial insurance premiums come from SMEs. Digital platforms combined with open finance offer new ways to distribute insurance products efficiently.

In particular, the growth of digital ecosystems around cloud accounting and commerce platforms offers insurers an opportunity to leverage open APIs. These APIs can be used to support real-time underwriting and create scalable digital distribution opportunities via new embedded insurance products that better meet customer needs. To bring to life the size of the prize, recent analysis by Embedded Finance expert Simon Torrance estimates the size of the P&C embedded insurance market could be $720bn by 2030. 

How could that benefit SMEs?

SMEs do not want to spend time comparing and applying for insurance products. They want relevant cover, that provides peace of mind and is quick and simple to purchase. 

SMEs are increasingly purchasing insurance via digital channels as they search for simplicity, flexibility, and value for money. The past 12 months has also demonstrated that SMEs have a desire for convenience and simplicity, and are willing to share privileged information via APIs in order to ensure this.

Adopting open finance offers opportunities to make insurance applications simpler and quicker for SMEs. In the longer term, it offers insurers the opportunity to totally transform the way they deliver insurance to this market, built on real-time data exchange that offers digital distribution, pay as you go cover and fully embedded propositions directly within the ecosystems in which SMEs run their businesses.

Lessons to be learned from early innovators

Early innovators like Nimbla and TradeLock demonstrate the opportunities transforming traditional lines of commercial insurance presents. By taking a new, technology-led approach built on open finance, they have successfully enabled digital, self-service platforms that allow SMEs to insure individual invoices in a way that has not historically been possible, and by distributing this cover directly within accounting platforms to offer immediate protection at the point of need, they have increased relevance and adoption.

A timely opportunity

Open finance has the capability to transform the insurance industry, and the need for change has never been greater.

The pandemic has expedited the requirement for digital transformation and the emergence of tech-enabled competitors like Amazon entering digital insurance has also placed pressure on traditional insurers.

Open finance offers the single largest opportunity to transform the SME insurance business model by enabling insurers to deliver simple, digital, personalised and dynamic products to better suit the SMEs needs.

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Kit Lewin