The future of small commercial insurance—a perspectiveBy Rick Stoll | August 27, 2018
The small commercial insurance market is estimated to represent $100 billion of direct written premium (DWP),* which is a significant part of all commercial property and casualty. It’s a diverse market, with $75 billion of that amount consisting of commercial lines such as workers’ compensation, auto, general liability, property, and professional liability, and the remaining $25 billion is BOP.
Even more important to insurers, 40 percent of small businesses don’t have business insurance*—that’s an incredible opportunity for carriers and agents.
It’s important to note that, according to the Small Business Administration, about 3 million, or 10–12 percent, of small businesses enter and exit the U.S. economy every year. That makes it a dynamic industry, presenting both risk and opportunity for insurers. However, although some lines of business struggle, the small commercial market has been generally profitable, especially as BOP loss ratios have held at about 65 percent. That has led to a race to win more business without increasing underwriting expenses.
The future of the small commercial insurance market will be dictated by the use of data and analytics and how both are integrated into workflows and technology. The convergence of these factors is re-shaping how the industry thinks about achieving success with small commercial insurance and supporting the small commercial market.
The small commercial market
Insurers need to aggressively pursue the small commercial market segment of the industry. It’s a unique opportunity with specific challenges in communicating to the customer. That’s because businessowners in this segment might not know about insurance or understand the need for package policies to protect their businesses. It’s up to the insurer or agent to help them navigate their needs and make sure there aren’t any coverage gaps.
Small commercial customers align more with personal line customers in many ways, and it’s prudent to take a customer-centric approach when communicating with them. Small businessowners appreciate having all products under one policy. Considering their possible lack of insurance knowledge and the fact they are more concerned with running their businesses, insurers need to keep each interaction with the small business customer simple. They don’t want to be distracted from their primary business concerns. Along with simplicity, keep interactions as transparent as possible to earn their trust.
Because these are often simpler risks than they would be with larger customers, underwriters traditionally use businessowner policies (BOP) to write such lesser risks. When BOP is issued on a simple risk, it can provide a tremendous opportunity for workflow efficiency. BOP lends itself perfectly to an automated underwriting experience, which fits the small businessperson’s preference. Also, BOP can open the door to other coverages, perhaps added by endorsements, allowing the insurer to expand its customer footprint.
Dealing with the small business mindset
Insurers who wish to increase their footprint in the small commercial market need to understand how the small businessowner differs from customers in the larger commercial markets. Their mindset is that they want to know they’re covered and not have to think about insurance as they tend to their business. The small commercial businessowner is often unconcerned with the nitty-gritty of the policy. In many ways, he or she is closer to the individual consumer purchasing personal insurance. Many small businesses are comprised of one-person operations and don’t have personnel dedicated to risk management. Some may have misconceptions about their personal insurance policies and assume that those policies automatically cover their businesses—especially if the businesses are home based. Others may not understand that the manner in which they’ve created their business (such as incorporation) doesn’t protect them from claims or losses.
To help small commercial customers, insurers need to establish trust and convince the customer the insurer is the coverage expert. You want the customer to be comfortable as you guide them to the right coverages. Inform them on what exactly they need to know, and educate them on important points, such as the differences between personal lines and commercial lines and what types of coverages are necessary to support their businesses. All that information can overwhelm the small commercial businessowner, so speak in noninsurance terms as much as possible. Address how you can help them with premium costs, how a combination of coverage options can meet their needs, and perhaps start with simple BOP coverages—then expand into other areas. Always provide a quick, reliable quote.
Complicating the issue, many industry experts believe that 25 percent of small commercial policies will be automatically written end-to-end by 2020. To be successful with small commercial customers, insurers should simplify underwriting through back-end tools such as prefill, straight-through processing, and advanced technology. These tools will make the application process simple, easy, and more attractive to customers who might not otherwise invest the time and resources to purchase coverage.
To serve the needs of the future small commercial market customer, insurers and agents need to make the coverage process extremely simple and keep it behind the scenes, assembling policies regardless of whether they’re separate policies, endorsements, or even from different insurers. Insurers need to change from a product-centric (it’s all about the insurer) to a customer-centric (it’s all about the customer) point of view. Help customers find the path to the additional coverages they need, not necessarily the most complex versions, and coverages that can’t be added by endorsement.
In the small commercial world, it’s all about speed, simplicity, and savings. After all, to small commercial businessowners, there’s a big cost difference between a $1,000 and $1,500 policy. If an insurer can give them the coverages they need in one package, save them money, and make them feel secure, that insurer will profit in the small commercial market.
Data vs. personal contact
Data and analytics will play a key role in the future of small commercial insurance. In this market, speed is essential, but that often conflicts with the need for accuracy and reliability. That’s a challenge for insurers as competition heats up and speed and accuracy become even more crucial. Instant prefill with reliable data and analytics can help ensure both.
However, some intangibles will be hard to measure, such as management competency, an x-factor many insurers feel is hard to quantify without independent verification. It’s an important factor that has the least hard data. A reliable management competency tool can help to quantify this variable and provide more concrete measures for the insurer to underwrite and rate a policy.
The move to a more data-dependent process will help eliminate any information void. As data and analytics get more precise, and technological solutions more advanced, that void could shrink even further. In fact, in this age of pre-approved credit card applications, pre-approved insurance for the small commercial underwriting market is a definite possibility as data technology creates data with accurate SIC codes, reliable credit revenue, and more prefilled information.
Automation will answer the desire for insurers’ “race to zero,” letting them gather more data while asking fewer questions and creating a positive customer experience. Of course, insurers and agents will need a reliable and trusted third-party source to base their decisions on.
As always, emerging issues will affect the small commercial market, both on the customer and insurer side. The advancement of 3D-printing techniques, the proliferation of drones and their ever-broadening uses, legalization of marijuana, and cyber security will present challenges to the small commercial customer—and opportunities for insurers. Insurers need to address these emerging risks and maximize opportunities by analyzing the strengths and weaknesses of these issues and capturing as much claims data as possible. Predictive analysis will demand as much real data as possible for future planning.
It’ll be possible to capture additional premium through endorsements to policies, enabling insurers to respond quickly to emerging issues and customer demands.
Changing demographics and consumer habits are other areas of concern. The prevalence of online shopping and dominant retailers like Amazon will seriously affect small commercial businesses, especially mom-and-pop stores. Contractors could take a hit as online do-it-yourself sites and the gig economy become more popular. The industry may need to change to capture potential losses in premium. For example, some mom-and-pop stores are changing with the times and becoming Amazon sellers.
'Incubator for new opportunities'
The magic of small business is that it’s the incubator for new opportunities, especially for emerging risks, rate-driven efficiencies, and innovation. Insurers who understand the small commercial market and prepare for it will profit and grow in this area. Opportunities will come along swiftly, and insurers must embrace the changes that come along—or be left behind.
* McKinsey & Company estimates.