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Small Business Revolution

Optimism, Resiliency Open New Doors for Sector Sector Buoyed by Record Start-Ups, Pandemic Resiliency

The global pandemic, economic recession and worldwide supply chain shortages have not hindered the optimism and drive of the U.S. small business sector. In fact, the Great Resignation might lead to a small business revolution.

In its 2021 New Business Insights report, Intuit predicts 17 million new small businesses will be formed in 2022, a third consecutive record year for entrepreneurship.

“The jump from working at big businesses to people launching their own comes as the pandemic has had dramatic effects on how people want to work,” Intuit wrote in its report. Some 83% of the people surveyed by Intuit who want to start a business said COVID-19 has accelerated their plans to open the doors to their own small business. The Small Business Insights report surveyed 2,000 small business owners.

Even with today’s ongoing labor shortages, small business owners feel optimistic when it comes to hiring and investment plans.

The MetLife and U.S. Chamber of Commerce Small Business Index reported a pandemic-era high score of 63, with more than three in four (77%) small business owners feeling optimistic about the future of their business, with 38% of small business owners planning to hire more workers in 2022, up from 28%. More than four in 10 (42%) say they plan to increase investments in their business in the coming year — an increase of 13 percentage points from quarter’s index.

Small business owners have always been resilient and optimistic, Charles Hamann, deputy president of small commercial at The Hanover, told Insurance Journal. “Small businesses continued to open new operations even in the depths of the pandemic at near historical averages,” Hamann said.

In January, the U.S. Census Bureau reported that 5.4 million new business applications were filed in 2021, surpassing the record set in 2020 of 4.4 million.

The number of small business applications was steadily increasing over the last few years before the pandemic struck. There were around 3 million in 2016, with that number rising comparatively slowly to 3.2 million in 2017. Another slow but steady rise in 2019 brought the number to 3.5 million by 2019. Then, the pandemic led to a significant leap to 4.4 million applications in 2020.

The pandemic hit various small business sectors differently, Hamann noted. “Business to consumer businesses, especially those relying on in-person interactions, were especially hit hard including restaurants and hospitality, retail, and some service industries,” he said.

Meanwhile, manufacturers and wholesalers were much better positioned — aside from supply chain challenges, those sectors did very well throughout the pandemic, he added.

Insurers specializing in the small business sector feel optimistic, too.

“The small business outlook for 2022 is promising, and we are quite bullish,” said Jeff Updyke, division president, Chubb Small Business. “The pandemic has definitely spurred entrepreneurship, and through the first three quarters of 2021, Chubb Small Business saw new business applications (new business starts) increase over 50%.”

Updyke sees more opportunity ahead for the insurance industry as the pandemic becomes less of a burden on business owners and their customers. “Small businesses will benefit significantly as the COVID-19 environment becomes less onerous, as more businesses fully reopen, as new small business starts accelerate, and as people return more to pre-pandemic activities,” he said.

Eric Nordquist, executive vice president and president, Small Commercial and Business Insurance Business Centers, at Travelers, says small business exposures are changing along with the increased activity in the space. “We’re seeing a steady increase in small business activity as evidenced by strong exposure increases, especially with emerging startups and microbusinesses,” he said. The pandemic has fueled changes in the small business sector and today’s small business owners expect a greater focus on flexibility and digital capabilities from their insurance partners, he added.

“Keeping up with changing customer expectations is critical,” Nordquist said. “This means providing a more efficient experience for small business owners accustomed to today’s on-demand service marketplace. Digitalization is essential for making this happen, and it is one of the many ways carriers can help.”

Agents can also differentiate themselves by staying up to date on their customers’ specific needs and by working with a carrier that offers industry-specific programs, he added. “This effort helps ensure that agents will be able to serve as a trusted and insightful resource while keeping their customers’ businesses covered, both for the risks they know about and the ones that might not be on their radar.”

Top Risks for Small Business

Most businesses today — small, medium or large — have experienced labor challenges.

“Overall employment is rapidly getting back to pre-pandemic levels but there are labor shortages in lower wage industries,” The Hanover’s Hamann said. Many small businesses are struggling to fully staff and that has led some to restrict business hours. “The businesses that survived the pandemic often did so by adjusting their business model, whether it be more online sales or more virtual work, and many of the businesses have made those changes permanent, bolstering their future prospects.”

Updyke, agrees that workforce issues remain a top challenge for small business’s insurance risk. “The inability to find experienced workers or operating with fewer workers could have impact on workers’ comp and employment practices liability exposures,” he said.

Other top risks in 2022 are cyber and changing economic conditions.

“Cyber risks should certainly be at the forefront of how a small business thinks about its insurance needs,” Updyke said. “No business or person is immune to cyber-related threats, and small businesses need to make sure they are thinking about their cyber security appropriately.” Pre-loss mitigation is critical for small businesses who lack dedicated IT departments to support their needs, he added.

Nordquist added that while large businesses often make the cyber headlines, the reality is that small businesses are not immune to cyberattacks.

Other critical areas are the overall rising costs of goods and supply chain issues.

“Rapid inflation and supply chain delays are increasing costs everywhere, so ensuring proper insurance to value on their property risks should also be top of mind for small businesses — where an underinsured loss could be crushing,” Updyke said.

All businesses must also worry about catastrophes and increases in litigation and higher claim awards, according to Hamann

Social inflation is impacting both general liability and auto liability, he said. While workers’ compensation insurance is readily available, staff turnover and hiring problems could negatively impact business operations and future workers’ compensation costs.

Travelers’ Nordquist agrees that the rising costs that come with inflation are affecting small businesses today. “As the price of goods in general increases, replacement costs are also growing,” he said.

“Severe weather continues to be an issue to consider, especially as these events increase in frequency and severity.”

Nordquist advised that small businesses revisit their property coverage to confirm that the values stated in their insurance policies are enough to cover replacement costs at today’s prices if a loss were to occur.

Next Insurance’s chief products officer, Effi Fuks Leichtag, said there are many areas in a small business that remain uninsured or underinsured. “There are plenty,” he said. “I think 75% of small businesses are underinsured and 40% are not insured at all,” he said. “Especially with what’s happening right now with the pandemic and with instability in the economy.”

Next began as a managing general agency in 2016 and became a carrier in 2018, targeting small and medium businesses. The company uses an online platform that leverages artificial intelligence and machine learning to target the small business market exclusively, directly to consumers and through independent agents. Since 2016, it has raised $881 million in funding.

Fuks Leichtag said that Next Insurance saw significant premium growth in 2021 and hiring rising by almost 600 employees.

“I think our vision plays well into this environment where people are looking for stuff that is affordable, simply-tailored, can satisfy their needs without loading into too much cost that is not really going straight to the customer,” he said. That simple approach is important to small business owners facing today’s challenging market, where nearly three-quarters of small business retailers have been negatively affected by supply chain disruptions, according to a survey of Next customers in November 2021. “Retailers began experiencing disruptions early in the pandemic due to shutdowns, and they’ve never fully recovered. A variety of global influences, including labor shortages and mobility restrictions, are making it difficult for retailers of all sizes to bounce back,” the Next Insurance survey said.

Hamann added that changing business models of small businesses are important to consider, and agents should keep their eye on new business operations in their small business book.

“The pandemic led businesses to alter their operations, products and services, sometimes temporarily but sometimes permanently,” Hamann said. “As an industry, we have helped many insureds mitigate the loss potential from these new operations and add additional coverage if necessary. More insurance coverages have become available to small businesses, but with that capability, complexity over what insurance coverage to buy has increased,” he added.

“Independent agents and the insurers dedicated to the small business marketplace have never been more necessary,” according to Hamann.

Success in Small Business

Agents looking to be successful in the small business market must be able to partner with carriers that are focused on the small business space and able to offer products and services for small business owners, according to Hamann.

“Small businesses do not have the time or expertise to know what insurance coverage is necessary and most cost efficient, he said. “Independent agents provide that valuable expertise. And carriers focused on the small commercial market have broad and comprehensive insurance products that are focused on what is necessary and practical for a small business’s insurance needs and cover varied exposures.”

Small business coverages have evolved to meet the growing needs of small business owners, he added. “In addition to standard property coverages for fire, water damage, weather and burglary, they provide specialized coverages such as data breach coverage to respond to cyberattacks. They provide general liability, product liability and auto liability coverage but they also offer employment practices liability, miscellaneous professional liability and cyber liability coverages that used to only be available to larger businesses.”

Updyke noted that with the digitization of small commercial insurance, having modern, capable technology is key. “This includes being able to integrate with alternative platforms through effective Application Programming Interface (API) connections, utilization of third-party data to reduce underwriting questions and the time it takes to develop a new client proposal, and through client self-service capabilities,” he said.

But technology isn’t everything to small business owners. According to the J.D. Power 2021 U.S. Small Commercial Insurance Study published in September 2021, a lack of proactive support and personalized attention has put a strain on customer satisfaction among small commercial insurance customers. The study examined overall customer satisfaction among small commercial insurance customers with 50 or fewer employees.

The small business J.D. Power insurance satisfaction scores have fallen significantly for two years in a row. Small commercial lines customer satisfaction has declined 15 points in the past two years — a 7-point decline from a year ago and an 8-point decline in 2020 from 2019. These represent the only declines in the study’s nine-year history. Satisfaction with interactions shows a 20-point decline from a year ago.

“We see a real pattern of small business insurers missing the mark on soft skills, such as interaction with agents and proactive outreach — both being areas in which commercial insurers have historically thrived,” said Robert M. Lajdziak, senior consultant of insurance intelligence at J.D. Power, when the study was released in 2021.

Lajdziak said small commercial customers “spend three times more effort” interacting with their carrier on websites, and on the phone or with agents. The largest declines in the study were among customers who had workers’ compensation coverage or commercial auto policies.

“Marketing to small businesses is all about demonstrating that the agency and carrier understand their unique business needs and risks, and how to protect them in the event of a loss,” Chubb’s Updyke said.

A small business owner’s primary focus is their business — not their insurance.

“They expect their agent and carrier to provide them with insurance solutions that will protect them, their employees and, effectively, their livelihood, and to anticipate and offer expanded coverage/solutions as their business grows and evolves,” Updyke added.

Despite challenges, small business insurers are anticipating a good year.

“We believe small businesses and their marketplaces are well positioned for 2022,” Hamann said.