Expanding Into Small Commercial - Insurance Thought Leadership




April 9, 2018

Expanding Into Small Commercial


Small commercial is a large and interesting market that has changed little and is now ripe for disruption.

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Small commercial remains a fundamentally attractive sub-segment of commercial insurance. It is intrinsically a large and underserved market; while many small businesses are confident about their business needs, they are often unknowingly underinsured. For example, according to our recent global survey of small business owners, nearly two-thirds of U.S. small businesses do not have business interruption coverage, and 53% lack indemnity coverage. Additionally, once small business owners have a policy in place, they are generally less prone to shopping and switching carriers than larger customers. Their agents also have limited incentives to facilitate this process given lower levels of commission. This has traditionally helped well-established small commercial players better navigate the ebbs and flows of the underwriting cycle, with more than decent levels of profitability for those who can navigate the more sophisticated pricing environment and agency consolidation trends.

A market primed for significant disruption

Most traditional small commercial players, which rely primarily on agency distribution, have operated the same way for decades and are now saddled with inefficient operations and bloated cost structures. While some of them have made sensible strategic moves (e.g., expanding their underwriting appetite by acquiring or building excess and surplus lines capabilities), none has demonstrated a “silver bullet” solution that puts them safely ahead of the pack or better positioned to deter entrants. In a challenge to incumbents, technology (e.g., advances in automation transforming underwriting and servicing) is increasingly lowering barriers to entry.

Additionally, there is unmet demand among small business owners for digital insurance offerings due to a shift in purchasing preferences. Nearly 90% of small commercial purchasing decisions are made by business owners, many of whom have been conditioned by their personal shopping experiences (e.g., 77% of customers who purchase personal insurance online prefer purchasing commercial insurance online, as well). This has had a major impact on their attitudes for other insurance products, as 33% of U.S. small businesses would prefer purchasing commercial insurance online. For millennial small business owners, that number climbs to 75%. Despite this rise in demand, only about 1% of commercial insurance policies are currently sold without any intermediaries, compared with around 10% of homeowners policies and 30% of personal auto policies.

This confluence of factors may convince a number of players that entering or further breaking into small commercial and successfully underpricing incumbents should be a relatively straightforward exercise. However, we have yet to see even early disruption of this sub-segment, even though it has grabbed recent headlines and many players have increased their focus and investments in the space (either as new entrants or incumbents who have not traditionally prioritized their small commercial business). While incumbents have generally maintained their dominant position, small commercial outsiders, including 1) predominantly middle market carriers moving downmarket, 2) personal lines carriers moving upmarket and 3) startups, have found the market challenging. We explain below why this is has been the case.

A) Middle market and super-regional commercial carriers

The lower end of the small business market can constitute a logical growth opportunity for middle market and super-regional commercial carriers, especially as their producers avoid small and micro risks. For carriers, these risks are attractive because they are generally less price-sensitive and easier to underwrite than the more complex business they typically handle.

Channel conflicts. One key challenge is managing channel conflict with the existing agency force. Generally, entering small commercial requires expanding the agency network. In addition to committing the time and resources necessary for expansion, carriers also need to be extremely careful and subtle in how they assuage the concerns of their existing agency force, many of whom may view the shift downmarket as a “decommitment” by the carrier to its existing larger accounts and loyal agents. Because smaller risks can be costly for agents to acquire and service relative to commission, many carriers going after small commercial have to regularly emphasize to their top producers that they are pursuing business that producers don’t want. Others look to collaborate with their mid-market agents by providing incentive compensation for referring micro accounts.

See also: The 5 Big Initiatives in Commercial Lines  

Operational efficiency. Another key challenge is operational efficiency. Given the risks these carriers traditionally underwrite and process, many of them have grown comfortable with manually intensive processes. Succeeding in small commercial requires low-to-no touch processes that support the speed and scalability required to handle a high transaction volume. Straight-through processing has become table stakes to acquire and service a greater number of customers at a lower cost, as has using tools to monitor the performance of the book in real time to avoid adverse selection.

B) Personal lines carriers

For predominantly personal lines carriers, diversifying away from increasingly commoditized business and moving upmarket can also constitute the next logical growth opportunity. In fact, several leading personal lines players, including Allstate, Berkshire Hathaway through biBERK and Progressive, have clearly announced or demonstrated over the last few years that they are making small commercial a higher priority.

Advertising. A key challenge for these carriers as they move upmarket is generating awareness of their offerings. While spending billions of dollars annually on mass advertising may work in personal lines, small commercial requires a different marketing approach. They need to consider alternative means of getting small business owners’ attention, such as building affinity partnerships that can help funnel traffic in preferred customer segments, or deploying targeted advertisements on social media.

Distribution. Another top challenge is picking the right distribution channel(s). Building a brand new network of small commercial agents can be an expensive enough proposition for middle market carriers, but with personal lines carriers that rely on independent agents the cost can be even higher as there is usually less overlap with their current agency force. As such, sticking with an agency distribution channel may be a significant barrier to entry for some players. Building strong digital customer-facing quote, bind and service capabilities can be a way around that. In addition to aligning with trends in small business owner expectations, personal lines carriers that choose to go direct can potentially take advantage of a lower expense base from not having to pay commission and redirect that to price savings. But it makes the advertising challenge even more significant.

C) Startups

Even though a non-traditional player has yet to make a significant dent into the market, a variety of tailored solutions continue to emerge. Newer entrants like Bunker and Founder Shield have focused on specific underserved customer segments. Others have attempted to innovate by providing purely direct-to-customer offerings for commercial lines (e.g., Pie Insurance for workers’ compensation).

Insurance knowledge. Many insurance startups owe more to their marketing ideas and technology-savvy staff than to their founders’ understanding of the industry, which can leave some significant blind spots. Incumbents often are able to rely on extensive, high-quality experience datasets to distinguish good risks from bad ones and appropriately price them. Startups usually lack this fundamental information.

Foundational insurance infrastructure. A slick front-end website has limited benefits if it’s not backed by essential middle- and back-office functions like risk management, policy endorsements processing and other post-bind servicing (e.g., annual premium audits). Many startups have to stand up these functions and don’t have the expertise to effectively navigate and operate in different state regulatory environments. For startups looking to grow fast, building these capabilities from scratch can seem prohibitively expensive and time-consuming. However, there are plenty of partnership opportunities that can expedite this process, as well as options for renting solutions as opposed to buying them (e.g., licensed producers, cloud-based platforms).

The digital opportunity

Small commercial outsiders need to consider how they are going to provide a digital end-to-end experience along the entire customer journey to meet small business owner needs. This requires a clearly defined digital small commercial go-to-market strategy that addresses customers, products and services, pricing, channels and brand. Indeed, many current small commercial players have already recognized this shift and are investing in enhancing their existing digital capabilities, including via strategic partnerships (e.g., with fintechs). These players are looking to create true omni-channel offerings and increase the loyalty of their existing customers.

Other players are pursuing small commercial opportunities by building differentiating business models. These “digital attackers” are creating purely digital offerings that emphasize speed and ease-of-use while avoiding the constraints of legacy systems. New aggregators are occupying the client interface and consolidating different product providers (e.g., Simply Business). Other integrators are starting to build new business models for the customer journey (e.g., Flock). And various segment-specific digital direct-to-customer and B2B2C models are emerging (e.g., Cake). Given the relatively large opportunity in the space (particularly the micro space), these options are worth considering for small commercial outsiders.

See also: 3 C’s for Commercial Brokers in 2018  

The outsiders that will be best set up for success in small commercial are those that can both strategically plan for the risks that have tripped up similar players in the past while finding opportunities to inject digital capabilities into their operations. They will be able to hit the ground running and differentiate themselves from both incumbents and other new entrants. Furthermore, they will be better positioned to meet the changing and currently unmet preferences of small business owners.


  • Small commercial has changed very little over the years. We believe the market is ripe for disruption although there have been no major changes to date.
  • Small commercial generally has been a profitable line that has weathered underwriting cycles well, but it does suffer from inefficient operations and bloated cost structures. Lowering costs of entry into the market are putting pressure on incumbents to improve their business operations.
  • As in personal lines, there is increasing desire among small commercial customers for a digital purchasing process. As of yet, customer expectations have gone largely unfulfilled, which provides a real opportunity for whoever can meet them.
  • Digital solutions – often from insurtechs – offer promise to improve not just the customer experience but also operational efficiencies and cost structures.
  • Though nascent, aggregators are consolidating different product providers, integrators are starting to build new business models for the customer journey and various segment-specific digital direct-to-customer and B2B2C models are emerging.

You can find the report here.

This article was written by Jamie Yoder, Jon Blough, Francois Ramette, and Marie Carr.


About the Author

Marie Carr has 20 years of experience in financial services. While her management consulting experience spans healthcare, real estate and the public sector, her primary focus is in insurance (group, P&C and life).

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About the Author

Jon Blough is a manager in PwC’s insurance advisory practice. Over the last six-plus years, Blough has focused on solving strategic and operational issues with P&C carriers across personal lines and commercial lines.

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About the Author

Jamie Yoder is a global executive who has been at the forefront of insurance and technology for nearly three decades. As president of Snapsheet, Yoder leads the company’s go-to-market activities across all business lines, including claims management software, virtual appraisals and payments technology.

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About the Author

Francois Ramette is a partner in PwC’s Advisory Insurance practice, with more than 15 years of strategy and management consulting experience with Fortune 100 insurance, telecommunications and high-tech companies.

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