The small business market is big. The U.S. small commercial market represents about one-third of the total commercial lines market and generates between $99 billion and $103 billion in direct written premium, according to a 2016 McKinsey & Co. report.
It could be a much bigger market as more businesses are being started. Since 1994, the United States has had an average of 400,000 business startups a year. Business startup activity was up again in 2016, continuing a three-year ascension and reaching pre-recession levels, according to the 2017 Kauffman Index of Startup Activity, from the Ewing Marion Kauffman Foundation.
The number of startup firms -- firms one year old or newer -- rose to 415,226 in the year ended March 2017, according to the Bureau of Labor Statistics. In 2015, new startup firms created 2.5 million jobs.
"A three-year upward trend in new business formation is a promising sign for the economy," said Victor Hwang, vice president of Entrepreneurship at the Kauffman Foundation. "Recent research demonstrates that more startups lead to higher productivity, wage growth and quality of life. Growing startups not only support individual entrepreneurs but lift surrounding communities."
All of this small business activity presents opportunities for insurance agents and carriers because there is an insurance gap. Many small businesses have been caught without flood or business interruption insurance and many more report that they are not buying cyber insurance. But the gap is much bigger than that. The McKinsey report found that almost 40 percent of U.S. sole proprietorships don't carry any commercial coverage. Digital small business insurer Next Insurance surveyed 30,000 small businesses and learned that 44 percent that have been in business for at least a year have never had insurance.
The market is also very competitive. Again, according to McKinsey, the U.S. small commercial segment is divided among many carriers, with the largest accounting for only 6 percent of total premiums. Market share is particularly fragmented at the smaller end of the market (businesses with one to 29 employees).
However, the largest carriers are moving quickly to secure their positions. In the past six years, the market share of large carriers with more than $2.5 billion in direct written premiums for U.S. small commercial has increased by 12 percentage points, suggesting that scale is an important driver of growth, McKinsey said. Large carriers now represent 51 percent of premiums in the group of small businesses with 1 to 29 full-time employees.
Competition is coming from online providers. For every incumbent insurer committing to agents and the small business market like Travelers, Chubb, CNA and The Hartford, there is also at least one investing in or partnering with online platforms that bypass agents and brokers. In addition, there is a growing number of tech-oriented online brokers focused on small commercial lines including Embroker, Next, Bunker and CoverWallet to name a few.
Carrier positions vary within the small business segment because small business accounts range widely in size and scope, says Craig Welsh, distribution leader at Westfield Insurance Co., an Ohio-based independent agency property/casualty carrier, ranked No. 13 on Insurance Journal's Super Regional P/C Insurers list developed by Demotech.
"When you look at market size, small business is really the largest segment of commercial entities, mostly state-by-state, and overall, so there's huge potential," Welsh said. "It's also an industry that's fairly fragmented. When you look at market share by carrier, there's no single carrier, or I should say group of carriers that tend to dominate the market. That's because a lot of it is still handled through local agents."
Welsh sees plenty of opportunity for agents and their carrier partners in small business given the evolving definition of a small business account, a better economy, and the fragmentation of the insurance market serving small business.
Steve Tombarelli, vice president of SIAA's Business Insurance Advantage, sees opportunity for agents in the many new small businesses being opened. SIAA's insurance carriers are loving small business opportunity, too. "It's an area they want to grow and expand," says Tombarelli. "They all want to grow small commercial business."
The Hartford, which recently bought the small business accounts of Foremost, has been committed to the market for a long time. "It is a critical business for us," says Matt Kirk, head of sales and distribution for small commercial at The Hartford. "It's very important that we support our agency partners in this space."
Kirk says that from an agency perspective small business is an area with real opportunity. "When you look at the economic data, and who drives a local economy, small businesses tend to be the ones hiring and buying equipment," he said. Plus, small businesses sometimes turn into large businesses. "It's a great space but it's very important from an agent's perspective to ensure that their carriers bring product and capabilities that are going to be responsive to their agency and the small business owners."
So how can agents best capitalize on this opportunity?
Five Strategies for Small Business Success
Insurance Journal's discussions with agents and carriers unearthed strategies for succeeding in the small commercial lines segment today: rearrange and redefine; utilize service centers; specialize; upgrade technology and stay committed. Here are five strategies to agents to consider:
1. Rearrange and Redefine
McKinsey's definition of small business includes businesses with up to 100 employees and $100,000 in annual premiums. But not everyone follows that formula.
"Both agencies and carriers tend to define small business a little bit differently and there's some interesting aspects to that," according to Westfield's Welsh. "For a long time, small business implied smaller premiums, and oftentimes I think in our industry small premiums mean small service."
However, small business can be larger premium accounts, too.
Minneapolis, Minn.-based Hays Companies has managed to grow its small business book by reorganizing its overall book to create a dedicated small business unit.
Erin Keys, Hays Companies' Premier Programs practice leader, says the process began last year, and so far, it has improved the agency's profitability as well as its relationships with key carrier partners.
"It's very transactional business," said Keys, noting that the agency understood it needed a better way to handle the many accounts it had on the books for small business. Prior to the transition, Hays had about 14 marketers on the property/casualty team, and everyone was handling a book that included both small to large national accounts even though small business is handled a little differently.
"We wanted to get the proper procedures in place to handle small business and just keep everything together, get organized," she said.
Daily, transactional processing is now handled under the Premier Programs department. Keys says it helps to quickly turn around certificates of insurance and other endorsements, as well as answer any underwriting questions. They could immediately get ahold of someone to help in that front.
Producers and account servicers still interact with the clients to some extent, but the regular transactions are now concentrated within the new unit.
To make the change, Hays looked at its overall book of business and pulled out those accounts with $10,000 in revenue or less. "Then we looked at how many different carriers we were using and who was receiving the bulk of the business," Keys said. "We vetted each carrier, starting at the zero to $2,500 (range) in revenue."
Keys said that process made it clear that the agency could get by with fewer carriers to successfully run its small business and programs.
"We went from utilizing about 35 carriers and excess and surplus lines brokers to consolidating to just three. We are now up to about five," she said. Keys says there are still a few "outlier" partners in small business, but now the agency tends to push the bulk of the business to its five partner carriers.
"It's been great," she said. "They're all national providers, with strong Hays relationships on the small business side as well as the middle market, large/national account side."
The move has helped profitability all-around, including growth in contingency income as well as improved loss ratios.
Carriers welcomed the change, Keys said. "We said to them, 'Here's what our book looks like. We need to partner with you guys, and we need you to think a little bit outside the box, and not just write your typical, four-walls, in-office exposure. We might need you to help us on an account with a little meat on it.'"
Keys has seen additional benefits of the move. The agency's carriers have been writing some accounts they may not have written without the consolidation. Hays is now well-positioned as more "big name carriers" are making the move to build their small business books. New carriers to small business, such as Chubb and Liberty Mutual, as well as traditional legacy small business carriers, like The Hartford and Travelers, are investing in online rating systems and expanding appetite, she said.
Keys advises other agencies to find the right partner that has a large breath of appetite and is willing to think outside the box. "Then consolidate your book," she said. "It's been successful for us, on the front-end and on the back-end."
Redefining the small business segment has worked for others as well. Herman S. Peery, senior vice president, at Insurance Office of America Inc. (IOA) based in Longwood, Fla., has selected a different way to refer to its "small" business.
"Small business is a very broad term," Peery said. "In fact, we've eliminated the term 'small' in our definition of the clientele that would be identified for this group. We refer to them as 'select' because it is a select group of clients that would fit into this category."
Rather than size of revenue, number of employees or even size of premium, IOA uses other criteria to define its "select" business. "We look at it as a service need," he says. Once the account has secured coverage, and marketing is complete, "select" clients operate autonomously until the next renewal cycle comes up. "We would consider that a candidate for our select division."
Deseriee Wanson, IOA's director of commercial sales and development, says "select" accounts range anywhere from $500 in premium all the way up to several hundred thousand dollars in premium.
"We have a team here locally of 23 employees that are set up to support and provide a frictionless delivery of the policies to our clients, while maintaining our core coverages, and the high service levels that IOA as an organization displays to our clients," she said.
2. Utilize Service Centers
Agencies have also found success in the small premium segment by utilizing insurance carrier service centers.
Lou Mitchell, chief operating officer, at Sihle Insurance Group, an independent agency based in Altamonte Springs, Fla., says that over the past five years, Sihle has grown its small business book about 10 percent to 15 percent per year. According to Mitchell, the growth has been purely organic due more small companies starting up in Florida.
As a general rule, Sihle defines small business accounts as any account less than $15,000 in premium. If an account is on the smaller end of that, say less than $2,500 in premium, Sihle requires that the business go to a carrier service center.
Typically, small commercial would generate 15 percent commission, but using a carrier service center costs the agency one to two percentage points of commission. In Mitchell's view, the cut in commission is well worth the cost to the agency. "That eliminates us handling the $500, $600, or $1,000 policies that would put us in the 'red' as soon as we do a certificate of insurance," he figures.
The service center handles all servicing needs and renewal activity. Plus, the carrier then assumes any errors and omissions exposure for that account, he said.
"If that carrier decides they no longer want to write that type of business then they would give us proper notice at the agency level that it's going to be non-renewed for whatever reason and then we get involved again and find another carrier to place it with," he said. Sihle remains the agent of record.
Mitchell admits some carriers are much better at service centers than others. "But I think the overall key is that when a client is first written it has to go to the service center then. It's very difficult to write a client and give it the personal service that we deliver to our clients from an agency standpoint and then the next year say, 'Oh, well, you're going to a service center,'" he said.
"The ones who do it best offer extended hours, can handle changes efficiently, and have the know-how to determine how changes will affect policies of the client," added SIAA's Tombarelli.
Mitchell maintains that service centers are one reason Sihle has increased its small business book. "Because of the volumes that we write we have with some carriers assign people and direct lines that all of our clients call to," he said. "We even have one service center that answers the phone as Sihle Insurance and they have Sihle Insurance stationary and business cards. People have no idea that they're actually being serviced by a carrier service center."
Mitchell particularly likes Westfield's approach. "I've dealt with tons of them but they're by far the most unique in the way they're set up and how they execute day to day business," he said.
Sihle doesn't discriminate on the type of small business account, which has helped the agency grow its small business, too, Mitchell says.
"We don't market the size as much as we market the general community itself," he said. "We don't turn people away and we very seldom ever refer to somebody else. That's why we use the service centers on the mini-accounts as we call them, so we don't have to turn somebody away."
SIAA's Tombarelli says one of the most important things about succeeding in small business is to have a diverse book. "We encourage agents to have a diverse book," he said. "Each year, different segments of the economy go well or slow down. For instance, when the economy is strong, construction thrives and when the economy is weak, construction is one of the first industries to have cuts."
Connecticut, home state to Smith Brothers Insurance in Glastonbury, lags behind the nation in job creation and drumming up new small business accounts has taken a bit more planning, according to Jared Carillo, director of foundation accounts at Smith Brothers, a core agency partner for BroadStreet Partners Inc.
"Connecticut is a challenging place to be attractive to bring new people in the door," Carillo said. "In our world, where we're growing is really by seeking out those clients that require the services of an advisor. To a degree, we are profiling those business that rely more heavily on the advice that we give them -- businesses with a little bit more complexity than just vanilla."
Smith Brothers defines small business clients as those generating commission income of $5,000 or less. Carillo estimates that roughly 90 percent of new small commercial business is organic, new business. "Most is being generated strictly through word of mouth via referrals," he said.
Carillo says that while a lot of new business stems from typical "general insurance" in the small commercial space, the agency has found some areas where specialization has helped drive growth.
"We have three different spaces in our agency that we specialize in for small commercial -- lawyers, trucking and transportation exposed risks, and jewelers," he said.
For Smith Brothers, the ideal small business client is one that will really listen and understand the risks that they face, as well as the valued advice of an independent agent. "That's the level of client that we desire and seek," he said.
According to the Connecticut agent, success in this market comes with being deliberate in profiling the type of client that the agency wants to interact with, as well as having a variety of specialties.
"It's not just the size of the revenue," he said. Carillo says that it's "pretty easy to start throwing more money at advertising, go door to door, distributing pamphlets" to get any client. "But we are finding the best success by getting solicitations and networking within our current satisfied group of clients."
4. Upgrade Technology
Both carriers and agencies believe it is important to stay on the cutting edge of technology to make it in the small business market.
"As we move into the future in small business, a real key component to being successful is to stay on the forefront of the technology that's available to us to deliver both product and service to our small business customer," says Chris Rooker, managing director of commercial property/casualty at Higginbotham, headquartered in Fort Worth, Texas.
Rooker believes the industry lags at times in its delivery mechanisms for small commercial policies, which is a threat to agents. "We're going to have to be able to utilize the technology that's becoming available both in our agencies and as we interact with our customers, and partner insurance carriers." In his view, the industry isn't quite there.
Today, most people like to do business on their iPhone, he says. But most small businesses right now, from an insurance perspective can't do their business off their iPhone. Rooker says that needs to change. "I think if an agent is going be successful five years from now, or maybe less, they're going to have to develop the technologies that allow these small business owners to access their insurance policies -- their auto ID cards, their certificates of insurance, and other service related matters in an easy fashion," he said.
Some small business carriers and agency management systems provide some sort of mobile technology to meet customer needs, but most do not, according to Rooker. "There's a true gap in the ability to service customers via an iPhone or mobile device," he said.
5. Stay Committed
Whatever agencies do when it comes to being successful in small business they must be committed to the market, says Andy Wood, Insureon's executive vice president of retail operations.
Headquartered in Chicago, Insureon provides online capabilities that connect small business owners with insurance providers. Insureon has made small business its only business by delivering fast, online insurance to micro-small businesses, or those typically with less than 10 employees.
Most agencies cannot invest in the type of technology it takes to write more than 200,000 micro-small business customers, like Insureon, but Wood says independent agents can still find success.
"You've got to be committed to it," he said. "It's not something you can just jump into and jump out of."
Insureon is a high-volume agency that emphasizes efficiency. "For us, that translates into imagining a funnel when somebody comes to our website and being able to drive them through the application process very quickly without a lot of people falling off, having processes in place to pick up those people who have dropped off to save them. Then once you get them in through the application process, get them quotes quickly and then bind quickly," he said. "You're not wasting lot of energy. You're not wasting a lot of space. Obviously, there is money to be made, if you can do it efficiently and effectively."
Woods says some agencies struggle in small commercial because they don't have the economic mindset to invest in small business.
"By necessity, they will jump to where the opportunities are, so they work on some health. They might work on some personal lines. They might run across a small commercial account here and there," he said. "But if you really want to be successful at it, you've got to have resources that are dedicated to it, and you've got to have a very well-defined, clearly articulated marketing plan on how you're going to go after that small commercial space."
Economics drive success in small business. "You've got to be super-efficient and super-effective," he said.