In a sign that the U.S. economy is finally on the (gradual)upswing, the entrepreneurial rate in the U.S. is now higher than itwas at the height of the dot.com bubble of 15 years ago, accordingto the Kaufman Index of Entrepreneurial Activity (KIEA)—whichcurrently lists more than 20 million non-employer businesses, withmore starting every day.

As defined by the U.S. Census Bureau, non-employer businesseshave no paid employees, have annual receipts of at least $1,000 andare subject to federal income taxes. These new businesses can rangefrom part-time consultants to billion-dollar startups backed by bigprivate-equity money.

But no matter the size of the business, the journey tosuccessful entrepreneurship can be treacherous. According tothe Census Bureau, 16% of companies fail their first year ofoperation, and 32% fail within their first three years. Most ofthose failures are due to incompetence and lack of experience,according to a January2014 study in Entrepreneur Weekly by the Small Business DevelopmentCenter at Bradley University and University of TennesseeResearch.

Based on a series of national symposia for agents and insuredshosted by the Travelers Institute, the public policy division of TravelersInsurance, small businesses' top issues are regulatory concerns,licensing and OSHA compliance, health care, access to capital, anddisaster and business continuity planning.

“Small businesses are hard to run and insurance products can belife or death for them,” says Joan Woodward, president of theTravelers Institute and executive vice president of public policyat Travelers. “Our agents are trying to raise their awareness ofthat.”

But although most start-up business owners understand the needfor basic coverage, they also underestimate how just one cyberbreach, natural disaster, or nuisance employment lawsuit coulddecimate their business.

“Most small business owners think insurance is something theycan put off until they get bigger,” says Tom Hammond, EVP ofFarmington, Conn.-based BoltInsurance Agency, which targets home-based businesses with 25employees or fewer. “What becomes valuable is when you can explaincoverage and match it with a price point that makes sense to them.We're selling policies for between $300 and $700 all the time. Whenyou tell someone what the coverage provides, most owners know itmakes sense to buy if they have the exposure.”

Spotting the indicators

Although government initiatives like Startup America and the 2012 JOBS Actprovide small businesses with additional support and easier accessto capital, most insurance experts working with start-ups have notseen a correlation between the programs and new companies seekinginsurance.

Rather, market supply and demand is the biggest driver of newbusiness ventures, which are directly tied to the economic activityin a particular area—whether it's a town, city, state or region,says Mike Berry, CEO of Specialty InsuranceManagers, an Austin, Texas-based managing general agency. Inhis region, that means big growth in the oil and gas industry:These businesses attract new employees, around whom spring upsupporting businesses like new hotels, restaurants, conveniencestores and health clinics—which in turn spur new venturebusiness.

Start-up businesses have always been a staple in theexcess/surplus insurance market because standard insurers preferinsureds with a minimum of three years in business, says RogerWare, CEO of GeneseeGeneral, an MGA/wholesaler based in Alpharetta, Ga. Although40% of Genesee's business is start-ups, he says, “we didn't targetit; it's always been there. We've just taken advantage ofit.”

Ware has seen an increase in start-ups beginning in about 2011,along with growing sales and payrolls of existing accounts,especially in construction—all of which points to a reboundingeconomy. “From 2007 from 2010, this was nonexistent,” he says. Warehe spotted the recession as far back as 2007 in shifts in thetrucking industry, which he calls the “biggest indicator on theeconomy.” Transportation insurance requires filings on the numberof units (trucks) a business operates, so when Ware began seeingtrucking accounts going from 30 units to three, he knew trouble wascoming.

Today, the pendulum is swinging in the other direction. Case inpoint: Genesee had an industrial painting firm client with 30 yearsin business and $100 million in sales that went out of businessduring the recession, taking a number of subcontractors along withit. Today, that same industrial painting firm is relaunching as anew business.

Average premiums for start-ups are 25% to 30% higher than thestandard market, which translates into higher premiums for agents,Ware notes. The downside is lower retention rates when thosebusinesses either leave for the standard market or simply don'tsurvive

The educational hurdle

Small start-ups need more than just insurance. Because theowners wear many hats and can't afford internal risk managers, theyneed a hands-on insurance agent who can act a resource to helpestablish formal safety programs and other risk management tools,says Linc Trimble, executive vice president, Torus eCommerce, atTorus Insurance. Theneeds are different for midsized and larger start-ups, whichrequire customized solutions and more detailed evaluations, henotes. Basic coverage for a small start-up can be as simple as aBOP policy, or stand-alone general liability and propertycoverages, commercial auto and workers' compensation.

However, insurance requirements for new businesses can vary bystate or class of business, so agents should know the laws andregulations for the type of business being underwritten, saysKenneth LaBelle, broker at Burns & Wilcox. States andmunicipalities often require health care or recreation businessesto have proof of insurance before they are issued a permit tooperate, he adds.

New businesses of any size face exposures that aren't coveredunder the basics, including environmental liability, professionalliability, D&O, employment practices liability, fiduciaryliability, cyber liability, employee dishonesty, media liabilityand international travel, says Maura Verrone, vicepresident/underwriting for ACE Commercial Risk Services. Some ofthese policies may offer overlapping or limited coverage, which cancause more problems for small-business owners.

But educating small start-up owners about the importance of thiscoverage can be frustrating. “We sell and recommend E&O, EPLIand cyber liability, but they don't buy it,” Ware says. “Many havegone from the private sector to consulting and are now independentcontractors, such as construction managers. They have hugeprofessional liability exposures, but they're not asking for that.Agents explain it, but it doesn't sink in. There's never an issueuntil there's a claim.”

Particularly for new small businesses, such losses can becatastrophic. “Start-ups face similar risks as establishedbusinesses, but the potential impact of any claim is much moredevastating for a start-up that hasn't generated much revenue yet,”LaBelle says. “The defense costs for one frivolous employmentpractice liability claim could potentially wipe out a new business'cash reserve, which is crucial to its survival. So it's importantto work with a retail agent to ensure adequate and comprehensivecoverage for all risk exposures.”

The independent agent advantage

Like most lines of business, direct writers have made inroadsinto the start-up specialty, although they currently only controlabout 4% of the market, says Hammond at Bolt. Part of the reasonwhy independent agents own this segment of the business market isbecause of the wide variance in types of businesses insured. “Nodirect writer has a product that can span from a managementconsultant down to a contractor or carpenter,” he points out. “Theproduct needs to be diverse.”

Read related: “Small Business Entrepreneurs Eager to Buy Insurance Direct,Online.”

Bolt actually partners with direct writers to underwritestart-up businesses. “We've seen partnerships with direct writersas being very valuable to us because we're able to take anybusiness they can't write and fill that gap and maintain theirbrand,” Hammond says.

On the whole, however, independent agents deliver more bang forthe buck, including access to multiple carriers in various industrygroups in both the standard and wholesale marketplace; a grasp ofthe complex nature of insurance as applied to each individualbusiness; and understanding of regulatory requirements, Trimblesays.

“Independent agents and small business have a long history ofdoing business with each other,” says Woodward at Travelers.“Agents offer 'concierge services' that are critically importantwith for small businesses, and bring years of experience; they haveseen it all, every type of claim. Small businesses need thatexpertise and understanding of problems before they happen.”

There are big benefits for agents, too: a portfolio of smallerrisks lessens the notion of only working with one or a handful oflarger accounts, says Trimble. Smaller businesses are also lesssubject to market volatility, and their need to use an agent forrisk management functions adds to the strength of therelationship.

Knowing your client's business is essential for any agent, butit's especially resonant for those who want to specialize instart-up businesses, because in many cases you'll be acting as thatbusiness' risk manager, disaster planner and main mitigationadvisor, Ware says. “Know your risks and coverages,” headvises.

It's also important to protect yourself. “Get it in writing ifthey choose not to buy something you're recommending,” adds Ware.“Retail agents must understand their business and act as theirconsultant, but if they choose not to buy what you recommend, forGod's sake, get it signed off on.”