How Technology May Alter Small Commercial Lines Advantage

As more small business owners become comfortable buying everything including insurance online, exclusive agent carriers will gain an advantage over independent agency carriers in the highly-fragmented and increasingly competitive small commercial lines insurance market, claims a new report.

Overall, the small commercial insurance market is a bright spot, one of the few P/C markets in the U.S. that has been growing in recent years. But a new report from McKinsey & Co. says the competition in this market will intensify as more large carriers enter the field and small business customers exhibit their openness to buying via direct and digital channels.

McKinsey says the market is attracting attention from carriers with primary business lines that have become saturated and commoditized, as well as from digital-based sellers. While the report says focusing on the profitable small commercial segment makes business sense, it also maintains that the shifting behavior of small business owners towards online purchasing presents new challenges for carriers, particularly those that use independent agents.

According to the report, Small Commercial Insurance: A Bright Spot in the U.S. Property-Casualty Market, agency carriers will need to adjust to compete.

“The ‘consumerization’ of small commercial insurance is likely to shift the balance of power in the sector. Carriers with customer-facing capabilities – particularly exclusive agent carriers with strong personal lines businesses and some small commercial presence – will have an advantage over those that distribute through independent agents. Independent agency carriers have deep industry experience and operational strengths, but will need to move quickly to develop marketing and customer-facing capabilities,” the report says.

McKinsey consultants also believe that digital sellers “unencumbered by legacy issues that can launch nimbler direct models” will be vying for their share of the small commercial lines market, too.

According to McKinsey, a segment of small commercial insurance buyers will always value independent agents, but an increasing percentage are open to the direct route and may only be using agents to close a deal because direct binding isn’t readily available. Sixty percent of the customers surveyed said they would consider binding direct.

The report surveyed 1,500 small businesses with one to 100 full-time employees.

The Market

For this report, the small commercial market is defined as businesses with up to 100 employees and $100,000 in annual premiums, a segment that is about one-third of the commercial lines market with $103 billion in direct written premiums. The market is highly fragmented with the largest carrier accounting for only 6 percent of total premiums.

However, “the largest carriers are moving quickly to secure their positions,” according to McKinsey, which found that over the past six years, the market share of carriers with more than $2.5 billion in direct written premiums has increased by 12 percent.

According to McKinsey’s survey, almost 40 percent of sole proprietorships in the U.S. do not carry small commercial coverage. “Some may be covered under home-based business owner policies or endorsements on their personal lines policies, but this finding raises the possibility of unexpected room for growth in the smaller business market,” the report says.

McKinsey believes that “changing customer preferences and behaviors are upending traditional business models” and carriers will need to improve in a number of areas to capitalize on the attractive opportunities in small commercial insurance.

Report’s Findings

Among the claims from McKinsey’s research:

Customer demand for alternatives to agents exceeds supply. Sixty percent of the customers surveyed said they would consider interacting directly with a commercial insurer, and more than half would consider binding direct. If carriers develop strong direct quote-and-bind capabilities, there will be no shortage of customers willing to use them.

Customers see products as over-complicated and feel unprotected against emerging risks. Carriers could offer simple packages tailored to the largest industries, and the major sub-classifications within them, to meet this need.

The number of potential switchers far exceeds the 6 percent who actually switch. These “passively loyal” policyholders represent nearly one-quarter of all small commercial insurance customers.

Industry sector and business size are ineffective criteria for market segmentation. The traditional approach to segmentation in small commercial insurance will no longer serve carriers. Segmentation based on customer needs and behaviors provides a more accurate view into what influences buyers.