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What Small Firms Want to Buy

American entrepreneurship is alive and well and growing! There are countless rags-to-riches stories of how people with a good idea, boundless energy and infectious optimism have made it big, or simply made a rewarding livelihood and legacy for themselves and their families. Today’s fintech and insurtech movements are testament to this in spades! And while most national news stories focus on big business, and national cultural events like Black Friday tend to overshadow small businesses, there’s a growing movement embracing these vital contributors to our communities and economy.

Insurance and other services are vital components for the vitality, risk protection and longevity of small businesses, and suppliers that are easy to do business with can capture a larger percentage of the market. Unfortunately, new research by Majesco, The Rise of the Small-Medium Business Insurance Customer: Shifting Views and Expectations…Is Your Business Ready for Them?, reveals that the insurance industry (as compared with other industries with which small businesses work) is “not easy to do business with.” The problem creates an opening for insurance startups.

The Rise of Small Businesses and the Shop Small Movement

On Nov. 26, 2016, the 7th annual Small Business Saturday event sponsored by American Express and the National Federation of Independent Businesses (NFIB) was held to encourage shopping and patronage of local small business merchants – in the wake of the preceding day’s big box store Black Friday shopping hysteria.  According to research done by these organizations after last year’s Small Business Saturday, more than 95 million consumers shopped at small retailer businesses, spending $16.2 billion, up 8% from 2014. Interestingly, the event garnered support from many corporate sponsors – many of which count small businesses as their customers.

Millennials show strong support for local small businesses, indicating they want to be “connected” to the products and businesses they buy from. A study by Edelman Digital showed that 40% of millennials preferred to buy goods and services from local small business retailers, even if doing so cost more.

See also: Why Start-Ups Win on Small Business  

While Small Business Saturday and Buy Local have a decidedly retail focus to them, the importance of all types of small businesses cannot be overlooked. U.S. Census Bureau figures from 2014 showed that businesses with fewer than 10 employees make up nearly 80% of all firms in the U.S. This is a huge market with enormous needs for products and services, including insurance to keep them running, protected and competitive.

Where’s the Love?

The Rise of the Small-Medium Business Customer research sought to understand small-medium business decision makers’ perceptions and views of those who support and supply them, including insurance. Four hundred business owners were surveyed using the Census Bureau’s definitions of very small to medium-sized businesses (SMBs), which we grouped into three segments (1-9 employees, 10-99 employees and 100-499 employees). The survey provided insights to evaluate perceptions on SMB customer views of insurance as compared with other businesses

The results were enlightening. Interestingly, fair price was more important than lowest price across all of the business segments. However, the ability to create a custom product from a range of options is more important than both lowest price and the ability to pick from a set of “pre-packaged” options. This finding reflects the increasing demand for personalization rather than price-driven mass production of insurance products.

Even more revealing were the results among the smallest (1-9 employees) businesses. The survey highlights that the traditional insurance business model has not been built with the capability to adequately meet the unique needs and expectations of SMBs. The industry has, instead, pursued a “one size fits all” approach. The consequences are that this segment of smallest SMBs (though with the largest number of such businesses) is uninterested in insurance, sees little value in insurance and considers insurance a necessary commodity or “necessary evil” required for their businesses.

All three segments of SMBs, regardless of size, did not rate insurance as being particularly easy to do business with, in terms of researching, buying and servicing products, compared with the other types of businesses we asked about in the survey. Among the 1-9-employee segment, P&C, life and employee benefits ranked in the bottom half on all three of these aspects.

Much more telling, however, this segment gave the lowest Net Promoter Scores (NPS) to insurance, showing a gap of as much as 60 points between insurance and the top business. (Net Promoter Scores measure the likelihood that a customer will make a recommendation to a prospective customer.)

Adding fuel to the fire, these small businesses were the least likely to say insurance was responsive, innovative, had easy to understand products and provided good value for the money. This is not a pretty picture for traditional insurance — but a great opportunity for innovative “greenfields” and startups.

Going Small Requires Big Thinking

Increasingly, small business customers are demanding a personalized and digital experience, representing the shift from mass standardiza­tion of insurance to the micro-personalization of insurance, requiring broader data and sophisticated analytics to truly understand and respond to small businesses as well as a digital experience via a multi-channel approach.

The rapid emergence of digital direct-to-SMB insurers and MGAs such as Assurestart (now part of Homesite/American Family), Cover Your Business.Com (a Berkshire Hathaway company), Hiscox, Insureon, Bolt, Slice and others are leveraging these ideas to reach the small business market. They are providing innovative products, streamlined and simple processes and digitally engaging capabilities that are extending the direct business model to SMB customers. In addition, aggregators, comparison sites or new distribution channels like Ask Kodiak help small businesses find the insurance products they need more easily.

Our research identified gaps between many industry-held perceptions and customer-defined realities, which expose an insurance industry steeped in tradition — its business models, business processes, channels and products that are difficult to find, buy and service — and opens the door to new competitors. We have seen this play out before with personal lines over the last 10 to 15 years. The difference is that the pace of change and adoption of a digital play is unfolding more rapidly this time in commercial insurance, demanding that insurers respond, because the window of opportunity is smaller.

Each company serving the SMB market must itself strategic questions, such as: “How do we bridge between the past, today and the future? How do we keep current customers loyal and engaged as we redefine our business to meet the needs of the vastly underserved and growing small business market? How do we get on par with other digital businesses that are setting new expectations for the SMB market?” If traditional insurers don’t ask these questions and respond, others will – taking current and future market share.

See also: Secret Sauce for New Business Models?  

Small businesses today are at the forefront of building new, technology-enabled, digitally first, innovative businesses that operate in a multi-channel world … like what we are seeing in insurtech. These businesses are increasingly led by millennials who have “grown up” digital and, as a result, seek fresh alternatives to age-old formulas … especially for insurance needs and offerings, helping them effectively meet their unique needs and expectations.  It’s time for the insurance industry to translate the good will from the Buy Local and Shop Small movements into big thinking and innovative solutions.

A new generation of small business insurance buyers with new needs and expectations create both a challenge and an opportunity. There is no clear path or destination. The time for plans, preparation, and execution is now — recognizing that the SMB customer is in control. Those who recognize and rapidly respond to this shift will thrive in an increasingly competitive industry to become the new leaders of a re-imagined insurance business that aligns to a rapidly growing, millennial-owned, innovative SMB marketplace.  Insurance companies must stop talking about the opportunities and being digital, and start doing something about it by using the disruption and change as a catalyst for “real change.”

Solution to High-Cost Indemnity Payments?

We’ve all experienced it – the jigsaw puzzle scattered across the kitchen table. Each time we walk by, we’re tempted by the loose pieces. The family rivalry of who will solve the puzzle continues, as weeks go by trying to complete the 1,000-piece brain buster.

For payers, solving the indemnity payment puzzle in the quickly changing landscape of workers’ compensation has become the ultimate brain buster.

Today, indemnity payments represent a significant portion of workers’ compensation spending – anywhere from 40% to 60% of claim costs. While they don’t receive much attention, increasing administrative burdens and processing fees associated with traditional payment methods are thwarting payers’ abilities to manage total claim costs.

So, what are these changing pieces? How can payers find the most appropriate payment solution to solve the indemnity payment puzzle and reduce their total costs per claim?

New Workforce Dynamics Means Added Complexity to Payment Processing

While most of us still head to the office, factory or job site daily, this number continues to decline, as an increasing number of employees opt to work from their homes, on the road or in a remote location.

In fact, the Census Bureau states from 2005 to 2012, the number of remote workers increased by 79%. Further, 25 million Americans are currently unbanked or underbanked, according to the FDIC.

Should these individuals become injured on the job and eligible to receive indemnity payments, sending a check may prove to be a challenge. No convenient or stable access to a bank or lack of a permanent address could result in escheatment issues or lost and stolen payments.

Claim Severity and Duration Equals Harder-to-Manage Payments

Claim severity is on the rise. Thus, the more severe the injury, the more likely that an injured worker will receive indemnity and for a longer duration. For example, an Aon study found that in the healthcare industry alone, indemnity payments average more than $18,000 per worker each year.

This increase in total indemnity payments results in a greater threat of missed, duplicate or incorrect payments.

Changing Business Climate Drives Additional Look at Revenue Cycle Processes

Traditionally, indemnity payments have been issued via checks. However, as the cost of writing and managing checks continues to rise in tandem with data breaches and corporate fraud making daily headlines, it’s imperative to place more stringent controls on workers’ compensation payments. As businesses look to streamline costs, it’s safe to say these traditional processes are no longer our answer.

While EFT is increasing in popularity as a viable option, streamlining difficulties still occur as this error-prone solution requires a bank account number and can create delays in reaching bank accounts in a timely manner.

So how does the payer solve the indemnity payment puzzle?

Just as workers’ compensation claims have increased in complexity since the first lost wages legislation was passed in 1911, transaction methods have also changed. According to a Federal Reserve study, card payments increased by $17.8 billion while non-card payments decreased by as much as $3.1 billion between 2009 and 2012.

Consumers are increasingly more comfortable using a card-based solution, thanks to its bank neutrality, no need for a permanent address and convenience in receiving faster and more efficient payments.

In addition, card-based solutions help payers navigate today’s complex landscape by lowering operational expenses, reducing errors, decreasing escheatment, ensuring accurate and timely payments for all workers, mitigating internal and external fraud, letting adjusters focus on critical priorities and protecting the payer from payment liabilities.

As you explore a card-based solution look for a bank neutral partner that will manage injured worker calls about lost or stolen payments, offers protection through a card issuer like MasterCard and maintains its technology and processes in-house.

Outsourcing indemnity payments will enable you to focus on more important priorities, such as helping the injured workers get the care they need while reducing total claim costs. After all, there’s no better feeling than putting the final piece of the puzzle into place.

How to Reach Small Firms on Work Comp?

We had just finished the national bloggers’ panel at the National Workers’ Compensation Conference, where one of the things we discussed was how employers can improve outcomes by being more engaged, concerned and communicative with their injured workers, especially early in the claim cycle. I was approached by an attendee who happens to be one of our customers, managing about 150 accounts in our WorkCompResearch Compliance system for his company, a well-known national carrier. He asked a simple, yet critical question.

He said, roughly, “All of the people here are big employers, carriers or TPAs. But most of our customers are small employers. How do we reach them with information like this?”

Last July, in a similar bloggers panel at an employers association conference, I put that very question to the panel and the audience. It had dawned on me that we were speaking to a very small segment of the overall market, and that most employers simply do not have access to the type of information we were discussing.

It is a big concern. According to U.S. Census Bureau data, businesses with fewer than 500 workers accounted for 49% of private sector payrolls in 2011, and those with fewer than 100 workers employed 35%. Businesses with fewer than 20 workers employed 18%. I would suggest that not a single one of the “fewer than 100” employers attends any workers’ compensation conference. Ever.

And, as difficult as it is to fathom, they probably do not read my blog, either.

While I do not have immediate access to supporting statistics, I would lay a week’s wages that these employers have a reduced focus on safety, prevention and training, as well as a disproportionate number of workers’ compensation claims. And the concept of “return to work” with accommodations is likely nowhere near their radar screens.

For small employers, workers’ compensation is generally merely a required expense line on their operating statement. They are largely reactive to issues related to the topic.

My brother-in-law, a vice president of operations for a small medical equipment start-up in Silicon Valley, called me a couple years back with palpable exasperation in his voice. He asked, “What the hell is an experience mod, and how is it calculated?” I told him that, if he had to ask, it was probably too late, at least for the foreseeable future.

Reaching people in small businesses with culture-changing advice and training is difficult, if not impossible.

Who in our system could do this? Insurance agents? Doubtful. There is simply not enough incentive currently. I have an agent friend who told me once he won’t even sell comp to any company with fewer than four or five employees because there is little money in it and such companies are a pain to deal with because they mostly have no internal support structures and lean heavily on the agent for HR-style support and information.

Brokers? Maybe. These folks deal with the larger side of small and medium-level employers and have a bit more skin in the game. Still, driving useful, method-altering information through that channel will require a paradigm shift.

Of course, that is the key. A paradigm shift is needed not just for brokers and agents but for the industry in its entirety.  And, like it or not, the shift probably should start with state regulators, followed closely by carriers.

Regulators are the key to driving process and affecting culture, but efforts can start without their immediate intervention. Carriers probably have the best ability to influence small employers across the country. They can do it through dedicated training and education materials, as well as establishing a culture of communication through their supply chains. They can do it by reinforcing positive methods and procedures for safety and, most importantly, can affect the process when a newly injured worker enters the system.

I’ve written extensively about what I believe needs to occur within the claims-handling process to improve outcomes for these employers and their injured workers. My ideal culture change involves streamlining processes, empowering claims professionals and improving medical care by rewarding performance — but mostly relies on vastly improved lines of communications between employers, employees and the professionals who are serving them. Communication that creates a “picture of success” for recovering workers. Much of what I envision cannot occur without regulatory changes, but the idea of a culture of recovery can start with those of us within the industry today.

Comprehensive culture change will not be an easy task (if only those small employers read my blog), but it can trickle through the system if the right people and organizations pick up the torch and run with it. Truth be told, via all the blogs and conferences across the country, we are really only reaching a small percentage of large employers, let alone small. Improved process and communication can drive change from the top down and ultimately reach employers, large and small, that unfortunately feed our system all too well.

Until employers recognize the critical nature of the topic, they will continue to ignore it. It is up to us to start that change.

I’ll be damned. It turns out we are the people we’ve been waiting for after all.

How to Win in Commercial Lines

Commercial lines insurance is tricky. On the one hand, it’s one of the last bastions of niche underwriting expertise — there are specialist writers who know their markets better than anyone else and enjoy customer loyalty and consistently superior profits as a result. On the other hand, it’s still simply insurance — and it’s experiencing many of the same symptoms that the rest of the P&C insurance industry is facing:

  • Increasingly sophisticated underwriting and pricing models, opening the door to adverse selection
  • An ever-shrinking number of market-dominating insurers
  • An evolving marketplace, with technology companies entering insurance and a customer base increasingly made up of Millennials

These three issues are forcing fundamental changes in the way insurers operate, creating a dynamic in which there will be clear winners and losers. It’s important to recognize the changing conditions to be successful both today and in the future.

New players entering insurance
A look at recent headlines reveals some well-recognized brands that are now turning an eye toward insurance. Tech companies like Google and Facebook, e-commerce giants like Amazon and Overstock and retailers such as Walmart and IKEA are all making waves. It’s also not just personal lines that’s being affected; Overstock’s new insurance agency offers business insurance, including workers’ compensation. Why is there a sudden interest from new players? These companies oftentimes see opportunities for profit and growth in industries when there are fundamental inefficiencies that can be exploited, and generally start by employing data-driven strategies to compete on customer acquisition. Insurance executives understand this threat, as evidenced in a recent survey by the Economist that identified distribution (i.e., acquisition of customers) as the No. 1 vulnerability for disruption.

What’s particularly troubling is that half the respondents in the survey were unsure of how well prepared the industry is for the changes coming in the next five years. With competition from non-traditional companies that are technologically savvy, are trusted by consumers and have money to burn, insurers simply cannot afford to be uncertain about their future.

Catering to a new generation
Numbering 76.6 million in the U.S., Millennials are the largest population in the country. Unfortunately for the industry, this group also happens to be the demographic most dissatisfied with insurance products and services. The U.S. Census Bureau notes that Millennials represent $1.68 trillion in annual purchasing power, which means insurance has no choice but to adapt to the needs of their future customers, business owners and employees. The industry tends to categorize Millennials as a personal lines concern (homeowners and personal auto, specifically), but commercial lines will fall behind and be caught off guard without a new mindset.

Although insurance doesn’t carry the best reputation among Millennials, there is an opportunity to educate them and win their loyalty. According to a poll by the Griffith Insurance Education Foundation, Millennials know very little about the insurance industry — 80% of students answered that they didn’t know anything about the industry at all (and only 5% claimed to be very knowledgeable. This is likely why Millennials tend to purchase insurance from companies with easy-to-navigate websites and don’t always base decisions based on price alone, according to a 2014 J.D. Power survey. If insurers don’t make the Millennial generation a priority, the likelihood of them buying insurance from other companies with better name recognition grows more and more likely, even if that company isn’t a traditional insurer.

The risk of adverse selection grows as insurers get smarter
The increased use of advanced technologies among insurers spells trouble for those that are still playing catch up — the risk of adverse selection grows as competitors leverage predictive modeling techniques and gain access to new data sources that provide a broader view of the market.

As analytics becomes more pervasive in commercial lines underwriting, leading insurers will become more adept at increasing their market share. Insurers without advanced analytical tools are more likely to bind higher-risk policyholders at inadequate rates and less likely to bind lower-risk policies by failing to match their competitor’s lower-price offering.

Adverse selection is an insidious threat, because it’s completely invisible until well after it has infected a portfolio. Accurate pricing and superior risk selection are key, and predictive techniques have served as an important competitive advantage, going beyond traditional heuristics alone.

How winners gain their advantage
Workers’ compensation is, in many ways, a leading example for the rest of commercial lines. Combined ratios continue to decrease, making it more attractive for companies (both traditional and non-traditional) to come in. This crowds the market, forcing the industry to adopt more sophisticated competitive strategies.

When properly developed and implemented, the use of predictive models is a recipe for success. It helps to achieve the pricing precision needed to stay ahead of the competition while avoiding adverse selection in the marketplace. Insurers without the ability to identify and react to adverse selection will lose their competitive advantage and simply not survive.

As we’ll share in Valen’s annual outlook report for commercial lines this week, the benefit to using the latest analytical tools are huge, and the cost of doing nothing is equally as significant. Working the hard and soft market cycles no longer brings competitive differentiation — the competition is fierce in target market segments ,where superior risk selection and pricing clearly determines who the winners and losers are.

This article first appeared on WorkCompWire.