Insurance for small businesses a growth opportunity, report says

One effect of the Great Recession and continuing economic turmoil has been the increase in the number of sole proprietorships and small businesses.

As a result, the small Commercial insurance market in the United States is seen as “one of the few bright spots” in the U.S. property and casualty insurance sector, according to a new report from McKinsey & Co., issued today.

The report, “Small Commercial Insurance: A Bright Spot in the U.S. Property-Casualty Market,” also cautions that the market is likely to face intense competition over the next few years, and carriers would do well to take action now to position themselves for the battles ahead.

That’s the good news. Now for the bad news: Small-business owners are increasingly using — or open to using — online sources to shop for and purchase insurance coverage, the report says. And it appears that few traditional carriers are positioned to capitalize on it.

Diverse, dynamic market

The small commercial market, which generally serves businesses with up to 100 employees and $100,000 in annual premiums, has good potential for growth in a “fragmented competitive and geographic landscape.” The report found that direct written premiums were between $99 billion and $103 billion for 2013, up from $91 billion in 2011. This represents just over one-third of the boarder commercial lines market and includes about $6 billion in non-standard specialty lines premiums that are fairly evenly distributed across the United States.

The report found that almost 40% of sole proprietorships in the U.S. don’t carry small commercial coverage. Some could be covered under home-based business owner policies or endorsements on their personal lines policies, which demonstrates the possibility for growth in the smaller business market.

This market is divided among many carriers, with the largest accounting for only 6% of total premiums. However, in the past six years, the market share of carriers with more than $2.5 billion in direct written premiums has increased by 12 percentage points, which suggests that scale is an important driver of growth, according to the report.

Actionable insights

As with many other industries, changing customer behavior has a significant impact on the way businesses make purchases. In order to remain competitive, carriers will need to improve in a number of areas: the ability to gauge the size and nature of the opportunity, targeting and reaching the right customers, and delivering value propositions that attract and retain them.

The research yielded a number of insights that insurance professionals can use to design their strategy for approaching the small commercial insurance market. For example:

• The universe of potential shoppers and switchers far exceeds the 6% who actually switch. The decision-making process for the small commercial insurance customer often parallels the decision-making process for the personal Auto insurance customer. Customer loyalty often relies more on customer inertia than in actively shopping around, and the challenge for carriers will be to identify the customers who would be willing to switch carriers for a good reason.
• Customer needs and behaviors are nuanced and present untapped marketing potential. But carriers must be able to take advantage of the volumes of data that they’ve gathered and use it to obtain more granular information about customer behavior. Currently, small commercial carriers segment their clients by size or industry while McKinsey’s research showed that the two factors with the most polarizing impact on segmentation are price sensitivity and reliance on agents. The more information and insight that small commercial insurers can bring to segmenting their potential customers, the less they will need to spend on maintaining and gaining share.
• Retention is a powerful hidden lever. The vast majority of small companies make their decisions based on loyalty, according to McKinsey’s findings. Of the 94% who renew with their incumbent carriers, 82% do so without shopping. This means that investments in retention can deliver better returns than investments in acquisition.
• Consumer demand for alternatives to agents exceeds supply. Almost 70% of small commercial insurance customers are gathering information for their decision-making through non-agent channels, including online, and almost half of these shoppers are using both agent and non-agent channels. About 50% of the survey respondents would consider interacting directly with a remote or virtual agent.
• Consumers see products as over-complicated and feel unprotected against emerging risks. Many customers want to simplify the process for getting the right combination of products and coverages. They indicated that most of their interactions with agents involve constructing the optimal combination of lines, identifying and modifying the required coverages, and then procuring the package at the most competitive rate. Among emerging risks, cyber is the most troubling to small commercial decision-makers, followed by slander and liability via social media.
• Partner to fuel growth. One product-related insight from the research was that 40% to 50% of customers would be comfortable buying health insurance products from their P&C carrier or buying commercial P&C insurance on a healthcare exchange, depending on the choice of carriers and quality of coverage. These results indicate that there are opportunities for carriers to drive growth through strategic partnerships outside the P&C insurance industry.

How the research was conducted

McKinsey’s research team conducted dozens of qualitative interviews with consumers and distributors. The researchers also surveyed a representative sample of more than 1,500 small businesses in the U.S. ranging in size from one to 100 full-time employees across a range of industries. The report is available from McKinsey & Co.’s website.