For insurers, a fragmented and diverse U.S. small commercial lines market represents untapped possibilities along the lines of how automobile insurers were able to re-invent personal lines more than a decade ago, according to consultancy McKinsey & Co.
"This is a market in which there is latent demand for multichannel and in some cases pure direct" insurance coverage, said Devin McGranahan, a director with McKinsey.
"Many small business owners, particularly those with under five employees, are consumers just like you and me," McGranahan told Best's News Service. He added those business owners have become comfortable with shopping online and buying auto insurance with personal lines insurers like Geico and Progressive.
McGranahan said the "less complex" small business owner, such as a florist, with three or four employees and a vehicle or two, has gotten comfortable with the idea that they "can be comfortable with this online," without having to go through an agent who might not even have the business hours that would be convenient for the customer.
McKinsey said in its report the U.S. small commercial insurance market "is one of the few bright spots in the U.S. property/casualty insurance sector and is thus the focus of intense competition that is likely to ramp up over the next few years."
The report said the market "is both fragmented and profitable, a scenario that is drawing attention from carriers whose primary business lines are saturated and commoditized, as well as from attackers seeking fields that are open for innovation." McKinsey added small commercial insurance is one of the few U.S. property/casualty markets that has been growing in recent years.
While the small commercial insurance market is a good growth opportunity for insurers, it is prone to rapid change and "consumerization," making the market a target for those "attackers" that can go directly to the buyer with their proposition, much like what those auto insurers such as Geico and Progressive did with the personal auto insurance market, the report said.
"To illustrate the potential impact of this targeted approach, consider that when the direct revolution hit the personal auto insurance market, incumbent carriers spent hundreds of millions of dollars trying to hold onto customers that were not interested in what they had to offer," the report said. "By sharpening their focus on the customers they know will be profitable, small commercial insurers can avoid this wasteful and scattershot approach. Few incumbent carriers, however, have the capabilities to successfully adopt this new approach."
"We think there's latent demand and we think a number of carriers are starting to recognize that," said McGranahan. He added many insurers will target these small business owners with their direct-market propositions, just as the auto insurers did about 10 to 15 years ago.
McKinsey said in its report the U.S. small commercial insurance market is highly fragmented and divided among many carriers, with the largest accounting for only 6% of total premiums.
"Market share is particularly fragmented at the smaller end of the market (businesses with one to 29 employees)," the report said. "However, the largest carriers are moving quickly to secure their positions. In the past six years, the market share of carriers with over $2.5 billion in direct written premiums has increased by 12 percentage points, suggesting that scale is an important driver of growth."
McGranahan said there are a wide variety of types and needs among U.S. small business owners, and with the current fragmented state of this market, there will be a large number of propositions and opportunities for insurers through both the direct and multi-channel routes.
Insurers such as Hiscox and Travelers are moving aggressively to get into the small commercial space in the United States, he said.
"Nimble new firms, such as Hiscox on the carrier side, and Insureon in distribution, already have momentum" in this evolving market, the report added.
Hiscox recently cited its U.S. small commercial activity as a key component of its retail division, which includes both commercial and personal lines and accounts for nearly half of the specialist insurer and reinsurer's premiums.
McGranahan added there is enough variety of interest, ranging from the "self-servicers" who are comfortable with buying coverage direct and online to traditional buyers who are more comfortable with going through agents, that more insurers in the market will find their way into this arena.
More insurers are devoting efforts to small business needs, and some are setting up "virtual agents" targeting this segment, said McGranahan.
These trends definitely do not herald any demise for agents, said McGranahan. Citing that highly fragmented market, he said "there's a high degree of perceived complexity as most people never before bought a business policy or know the complexity of those policies."
Commercial auto coverage, for example, has complex variables that are much different than other types of commercial coverage, he said.
The report concludes "incumbent small commercial carriers will have company" in a new market. McGranahan added the big personal lines insurers may have an advantage since they have already built capabilities to address "consumerization" in small commercial insurance.