Small Business Market: Rising Costs, Hard Market but Hope for New Opportunities

There are reasons to be optimistic about the small business insurance market. New businesses are opening their doors every day. Small business start-ups are booming with record-breaking new business applications reported in 2023.

While the rising cost of insurance for small businesses is pushing entrepreneurs to retain more risk and reevaluate their insurance partners, the surplus lines market is helping to fill some gaps.

Small businesses themselves remain bullish on 2024, despite high inflation, high interest rates, worker shortages, and higher costs to insure their operations.

The high percentage of underinsured small enterprises also presents opportunities. In terms of policy counts, small business is still big business.

Small business insurance specialists share the overall optimism for the sector, although they are having to work harder and smarter to serve the sector and they face new challenges every day.

Today’s challenges require more attention from small business insurance experts, says Yvette Prichard, president of small business, Heffernan Insurance Brokers, located in Walnut Creek, California.

“We are definitely seeing a lot of hands-on (attention) needed for renewals,” she said. “Clients are angry, they’re frustrated. Some small business owners are not just merely facing higher premiums at renewal, but many are also facing non-renewals.”

According to Prichard, some standard lines carriers are non-renewing small business for property and auto. “So, we’re having to move clients from our standard carriers with enhanced endorsements to surplus lines carriers with maybe less robust coverage,” she added.

Since taking the lead over Heffernan’s growing small business division five years ago, Prichard has grown the division from just three dedicated employees to 57 employees. Today, the division represents about $10 million in revenue for the retail agency and broker. Some of that growth came through acquisition but most has been driven from organic growth, she said. “Probably 70% of our new business every year is through round-out and referral from existing clients from our middle market large account division and from producers in our large account division,” she said.

Property and auto in the small business sector have been hit hard during this hard market cycle, especially in California.

“Auto is really difficult right now,” she said. “We’ve seen many of our standard carriers pull out of monoline auto. A lot of them are not writing property anymore when it comes to apartments and condos, strip malls and restaurants.”

The challenging times have led many carriers to lower commissions as well, she noted.

Also, rising insurance costs are causing some business owners to retain more risk when covering their assets. “They’re increasing deductibles, they’re lowering property limits, they’re deleting excess policies, and they’re also not purchasing cyber and management liability or they’re getting rid of those coverages altogether,” she said.

She feels that every day brings a new challenge, such as carrier coverage restrictions.

“I almost don’t want to answer my phone when it’s from a carrier,” she said. “We’ve had some carriers pull out of California altogether for small business and then some just make it really tough to do business with them by putting in new guidelines.”

That might mean delivering receipts from 15 or 20 years ago to prove updates were made to a commercial building’s roof, plumbing, or HVAC system. “So, what they’re almost saying is, ‘Yeah, we’ll write it, but we don’t want it, so we’re going to make it really tough on you to try to do this,'” she said.

Valuations for real property and business property have risen as well. “The carriers, especially on a property policy, they’re all wanting increases on building coverage and clients are hesitant to do that because it’s obviously increasing their premiums,” she said.

She is not alone in seeing that.

“Valuation is a big, big, big issue in the marketplace right now,” added Stephen Gennusa, vice president of P&C Underwriting — Binding, at Jencap. “We are constantly having to talk with our agents about looking at the valuation and helping them work through it to make sure that everything matches up. The last thing we want to do is leave the insured exposed and not able to rebuild appropriately.”

The high cost of materials and labor, catastrophic weather, and social inflation have all led to the increased cost of insurance, Mark Woods, assistance vice president, CAT Risk & Underwriting Analytics for Small Commercial at Travelers, told Insurance Journal in an email. “These issues have also impacted insurance availability, coverages, and terms and conditions of policies.”

Since business personal property isn’t seeing rising values in the same way, this becomes a target area, according to Prichard. “We’re finding that’s where clients are actually cutting coverage or really lowering (limits) to try to keep their premiums at a decent level,” she said.

Woods added that characteristics of the business, such as location, building maintenance, and type of operation are likely to determine which small businesses are most at risk in this type of market.

“Beyond these issues that have impacted customers broadly, it is also important for small business owners and agents to work together to assess potential coverage gaps due to business’ own growth, evolving operations, and emerging risks,” he said.

Under Pressure

While there has been a boom in small business startups since 2020, optimism over their future is fading due to inflation and the rising cost of doing business.

The National Federation of Independent Business (NFIB) Small Business Optimism Index decreased two points in January to 89.9, marking the 25th consecutive month below the 50-year average of 98.

The net percentage of owners who expect real sales to be higher declined 12 points from December to a net negative 16% (seasonally adjusted), a very negative shift in expectations, according to the NFIB.

The NFIB says that 20% of small business owners say that inflation is their single most important problem in operating their business today.

But these challenges are not dampening the American entrepreneurial spirit. In 2023, a record-breaking 5.5 million new business applications were filed, according to the US Census Bureau.

“Small business is the backbone of our country, the backbone of our business, and the past few years of the hard market have been tough,” said Bart Dugdale, associate managing director, Burns & Wilcox, based in the Ruston, Louisiana office. “Explaining to individuals how the hard market ultimately affects their pocketbook and all the factors that come into play, but then keeping them insured correctly can be a challenge.”

Small business owners are an essential part of the U.S. economy, with 56 million workers employed at firms with fewer than 50 employees, representing about 45% of all private-sector jobs, according to the U.S. Bureau of Labor and Statistics.

“We’re seeing a lot of new businesses starting,” said Heffernan’s Prichard. “We’re seeing people with positive attitudes becoming entrepreneurs and sole proprietors.”

But she sees small business owners closing shop, too.

“Unfortunately, with the way the market is going, a lot of those really small or sole proprietor type businesses are closing their doors and going back to work for people due to the costs of insurance or just the cost of owning a business in general,” Prichard added. “We’ve also seen many people, especially our contractors that had one or two employees, now just taking on all the work themselves to save on costs.”

Even so, the small business market is bringing in new business opportunities. “There are people out there starting up businesses.” Consulting firms and the health care sector are two hot areas for small business right now, she said. “We’re seeing a lot of those still popping up every single day.”

Underinsured

Too many small businesses are already underinsured even without today’s hard market conditions.

According to the 2023 Hiscox Underinsurance in Small Business Report, which surveyed more than 1,000 small firms, found that 75% of small businesses are underinsured. Also, some 70% do not understand what their business insurance covers, leaving them open to loss risks ranging from property damage to lawsuits, the survey found.

As insurance prices have gone up that gap in coverage has widened, according to Troy Santora, executive vice president, Amwins Access.

“Premiums are rising substantially in different pockets for different reasons, and there’s a breaking point,” Santora said. “At what point can the insured continue to sustain that cost?” Insurance, payroll, cost of goods sold, have all gone up in recent years. “There’s a lot of pressure and I think at some point the insured says, ‘I want to stay in business, make money, take care of myself, my family, and the people who work for me.'”

And when an insured does not completely understand the value of what they are buying, insurance might be an area that they cut to stay in business, he added.

“We’re selling legal contracts and they’re difficult to understand,” added Mick Kroll, executive vice president, Amwins. “As an industry we could do better to help small businesses,” he said, because more often than not the small business owner is everything.

“He’s the risk manager, he is the HR person, he’s the entrepreneur, he’s the service manager, he’s everything rolled into one.”

Business growth is welcome but it can also lead to gaps in coverage as the physical footprint of the business changes, according to Travelers’ Woods.

“As businesses grow, the size of inventory and equipment needed to operate the business can expand or change as well,” he said. There are also emerging risks that can affect new and established small businesses, he added.

Burns & Wilcox’s Dugdale says relationships are just as important in the small business space as they are in the larger business sector. Covering gaps goes back to the relationship a small business owner has with its retail agent, he said. “Being able to explain that we’re going to look out for their best interest as well as with our carriers” is important. “The rate is what the rate is, but maybe we can look at the risk from a form perspective and give them the coverage that they need.”

E&S Market

Surplus lines brokers are helping to fill the gaps in today’s small business world. More small business accounts have been pushed into the E&S space as a result.

“We’ve seen a lot of businesses enter surplus lines, especially in the property space, as buildings age and come over from standard markets as they start to raise their guidelines to try to improve their loss ratios,” said Amwins’ Kroll.

But in Santora’s view, what’s entering the surplus lines market is just more of the same – older properties, risks with loss history, and, of course, new types of business.

“The three main reasons that we’re seeing business is new ventures, losses, and then just difficult risks,” said Matt Lynch, vice president, Central Binding Region with RPS. As the U.S. economy remains strong, there’s more opportunities for the surplus line sector to insure new ventures and startups in the small business space, he said.

“Small businesses are very conscious of their spend on insurance and because their profit levels are lower, because they’re smaller, they’re trying to use every dollar for the main coverages,” Lynch said. That means coverages such as cyber, employment practices liability, and even umbrella liability may not be as commonly purchased by smaller business, he added.

But from a policy count perspective, small business is still big business.

“Small business from a policy count standpoint makes up a big portion of the marketplace and continued focus and efforts on small business are needed,” Lynch said. “New ventures starting will always be there and there will always be a need for experts to explain those coverages to those insureds.”

Success in small business means streamlining and efficiency, these specialists say.

“It’s streamlined, and technology is key to operating small business efficiently,” Prichard said. “We’re constantly vetting new things when they come out, making sure we have the best technology or whatever is next out there, so we stay on top. It’s really about making the best customer experience for our clients.”

Workflows, efficiency, and procedures. “Everybody in our division does everything the same way, and that is what allows us to be successful,” she added.

Heffernan also uses the help of virtual assistants for a lot of the day-to-day needs, but only for those needs that do not touch the clients, she adds.

“We want our clients to have a one-on-one account manager that services their account every single day,” she said. “It’s the processes and procedures that are what helps us be successful.”