Where the potential for growth lies in commercial insurance
For commercial insurers, opportunity lies not only in discovering new markets, but in capturing more market share. Here’s where to find the potential for both.
By Martin Stewart : 14th of November 2020
The small commercial insurance sector is one of the few property and casualty markets that’s been growing in recent years, with huge potential for further growth.
However, small commercial faces increasing competition from new entrants. Digital insurers offering niche products directly to consumers are disrupting the usual channels of distribution. To compete, traditional insurers must embrace digital technology and consider partnering with an insurtech.
Why is the small commercial insurance market such a growth opportunity?
Commercial insurance is highly fragmented, with many products and many players with just a small percentage of the market. With the field wide open, insurers who aggressively launch new direct products stand to capture a significant percentage without needing to compete with ‘name brands’.
It’s also enticingly underserved. The majority of small businesses have less cover than needed. Even more striking, a recent McKinsey study found that almost 40% of sole traders have no commercial coverage at all. Many, if not most, may not even realise that they need coverage.
The challenge of a fragmented market
Fragmentation in the commercial insurance market stems from the high degree of individualisation in commercial insurance policies, many of which are targeted at specific industries. Within each type there can be hundreds of variations, with individual premiums highly dependent on the details.
This has led to a proliferation of highly bespoke products, many created by specialised underwriting agencies. One agency might sell professional indemnity insurance for childcare centres, while another is just for accountants and financial advisers.
In order to win business at volume and retain market share, insurers will discount premiums, often below profitability. The underwriters and product managers who issue the final quotes, therefore, like to have a range of options to vary the premium manually to meet the market. This creates further fragmentation, with premiums varying from customer to customer.
Two underserved opportunities in the commercial insurance market
Small commercial insurance covers small businesses, sole traders and freelancers. While these categories have overlapping needs, there are also unique opportunities in each demographic.
Small and micro businesses
Small and micro businesses make up over 97% of all businesses in Australia. 61% of those are sole traders and another 27% are micro businesses employing four or fewer employees.
While no customer wants to pay for cover they don’t think is needed, this is particularly true for small and micro businesses (including sole traders and freelancers), who operate on razor tight margins.
Small business owners often work from home and their assets are often used partly for both personal and business use. This creates an opportunity to combine personal and business cover. Auto insurance might cover dual use for owners of one car using it for both business and personal requirements. Bundle domestic contents insurance with property cover for work items and add in cyber insurance and business interruption insurance.
Research reveals that 43% of small commercial customers already bundle personal insurance with small commercial insurance. However, in most of those cases, the customer leads with the personal insurance, so someone who’s already looking for car or property insurance will then add small commercial insurance, rather than the other way around.
Gig economy workers
The gig economy, an umbrella term that covers freelancers and short-term contractors, is even more underserved. Gig workers aren’t covered by workers’ compensation insurance or the liability cover of their customers. An Uber driver won’t be covered for a crash by their personal car insurance and a dog-walker who’s injured on duty has no public liability to claim against.
Globally, gig workers make up between 15-25% of the workforce, with Gartner predicting that it may rise to 40% by 2025. They’re looking for flexible, short-term coverage as opposed to costly annual premiums. Insurers who can meet these demands can tap into an enormous and fast-growing market.
How can you capture more market share?
Traditional approaches focus on distribution, but every option is expensive. Some have grown market share by acquiring competitors. Smaller insurers can follow suit on a lesser scale by buying portfolios from insurers who have a book that’s too small to service, provided they’re able to find operational efficiencies.
Alternatively, you can focus on customer experience of both customers and agents. The temptation could be to pay higher and higher commissions to appeal to agents and brokers. However, by making it simple and effortless for agents, brokers and end customers to write business, you can attract those looking for ways to make writing business more profitable.
On average agents spend 50% of their time servicing customers—time that isn’t spent writing new business. Many may be open to a lower commission if you can reduce this servicing work and make it effortless for them to write new business.
To offer this level of service excellence, insurers need to employ great technology.
How to use technology to capture the small commercial insurance market
Use digital platforms to simplify the process for customers and agents
Buying new products should be possible via a single transaction with no or minimal paperwork. Renewals should be equally seamless, as this is a key moment where insurers are vulnerable to losing customers. To do this, you need a digital system.
Ask only necessary questions and avoid duplicating those questions down the track. Your system should have the ability to recognise data in any format and share it across the system so you can avoid tedious manual processing and siloed systems. A digital end-to-end process makes things simpler for staff and cuts down on the time and information your customers have to spend on you.
Offer an omnichannel experience
Customers increasingly expect to be able to interact with insurance providers digitally and from a range of devices. Use features like online chat and succinct help documentation to assist them in the initial stages, so that by the time they’re talking to a human they’re already part way through the process. Gig workers, in particular, will require the ability to apply for short-term cover quickly and from wherever they are.
Don’t overlook the personal touch
Offering an omnichannel approach doesn’t mean removing humans from the equation altogether. McKinsey research indicates that while customers use omnichannel options at the information gathering stage, 82% of them prefer to complete their commercial insurance purchase with an agent.
By moving as much of your process to digital as possible and allowing customers as well as agents to have direct access you can streamline processing while providing a better service. For example, customers may be able to self-service simple tasks like changing an address or renewing a policy, allowing agents to focus their attention on service and selling.
Partner with insurtechs
Insurers should consider partnering with insurtechs to facilitate this digital experience.
Increasingly, insurtechs are seeking to enable insurers to pivot to digital, rather than supplanting them.
We’ve used our insurance platform Axelerator to help firms like US-based Propeller Inc digitise the process of writing surety bonds to capture new markets. Their challenge was to support rapid online applications and fulfilment for over 10,000 different bonds. We created a template-based configuration tool that allows each bond to be quickly added and tailored.
Now, customers can apply and be approved for insurance without requiring any intervention from their agent—a win for both agent and customers.
The adaptability of Axelerator means building a similar system for small commercial insurance is straight forward. A template-based approach means complex products can be quickly set up and thousands of variations (for example occupations) can be catered for. Or, products can be bundled together into packs for small business so customers can buy multiple products with a single application.
Direct access can be provided to all involved—customers, agents, brokers, reinsurers and insurers—streamlining the process and avoiding the deluge of emails currently needed to complete the sales cycle.
With a highly configurable system like Axelerator, you can add new products and fine-tune the existing ones quickly to adapt to rapidly changing markets and stay ahead of the competition.
The future of small commercial insurance is bright, but a lot of insurers are entering the field at once. To compete, insurers must be fast and agile, which means adopting technology that offers a better customer experience and automates processes for greater operational gains.