Small-business customers are important drivers of economic health, but stay vulnerable to future shocks and are routinely hardest hit. Insurers carry the mantle to provide these businesses the resilience and stability to address volatility with greater confidence. Per American Bankruptcy Institute, 255000 businesses filed for bankruptcy protection in 2020, till May. The number of Chapter 11 bankruptcies rose 48% higher than 2019. The small commercial insurance market, serving businesses up to 100 employees, accounts for more than a third of commercial lines market in some advanced markets and in an expanding economy, is arguably the fastest growing segment.
Though fragmented, it’s profitable and draws attention from carriers with saturated lines and from innovative attackers. Between a third and half of sole proprietors lack small commercial coverage, due to characteristics that commonly inhibit purchasing of coverages. They tend to be skeptical, price-sensitive and time-starved. The market is split among many carriers, with the largest accounting for a little over five percent of total premiums. But, it has proved to be a bright spot in P&C insurance with strong growth in recent years.
Next Insurance, an insurtech transforming small business insurance, witnessed phenomenal growth last year resulting in valuation doubling to $4 billion in a mere six months. In that period, six-year old Palo Alto based Next announced two acquisitions, added new strategic partners and earned $200 million gross premiums, doubling revenue from previous estimates. As more small businesses reboot, investors are excited about Next’s embedded financial services opportunity, where following the Chinese fintech playbook, it has expanded to places where businesses can easily find its offerings. In March, Next bought AP Intego, an insurance agency that tightly integrates with small-business focused companies, such as Intuit and Square.
Comparison with GEICO and Personal Auto
Retention dynamics in small business insurance is not unlike personal auto. Research shows, while under 10% of personal auto customers switch carriers at their most recent purchase or renewal, small businesses averaged 6%. If one were to consider how auto lines market developed from pre-direct times, it can help explain how small commercial might evolve over time. In mid-1990s US, GEICO and few others used direct distribution and over 20 years, grew 3X the industry rate, largely attacking established incumbents. Eventually in mid-2000s, annual marketing spend breached $6 billion, as attackers pursued new customers. Premiums dipped and auto insurance became more and more commoditized. Small commercial disruptors like NEXT seem headed down a similar path. Fulfilling customer demand for digital education, quote and bind in this space isn’t easy for incumbents, so innovative, fast-moving players are snatching opportunities and disrupting the status quo. The small commercial version of GEICO seems to be not too distant.
The Next wave of insurtechs is ushering more digitized, flexible products. Incumbents need to spin up novel value propositions by targeting unique market needs, re-bundling products and meeting multiple needs at cost-effective price points. An example – cyber protection bundled with privacy liability pre-empting threats before they hit.
Few emerging tech implementations in SMB insurance are:
- Layr’s use of ML to sift customer data, compare customers to predict needs and match customers with relevant policies
- Parsyl’s use of sensor tech to provide accurate data and insights about customer’s supply chain.
- Tradle’s use of KYC on blockchain to securely verify clients and safely transfer personal data.
Much has been written and debated about the need to revamp business interruption insurance. Albeit having enormous potential, penetration remains low. During the generally upbeat economic period of 2019, a third of US small businesses were considered healthy, with 20% having sufficient reserve funds to continue normal operations in the event of revenue loss beyond 2 months. Business interruption insurance continues to be an insurtech focus area.
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