The most successful small commercial carriers have been able to establish highly profitable books of business by cherry picking low-complexity risks that can be efficiently underwritten and processed. These carriers monitor and adjust underwriting decisions at a portfolio level to ensure underwriting discipline and profitability.
There has been a focus on building advanced, agent-facing technology, primarily through proprietary portals. This technology streamlines the acquisition and, in some cases, servicing of this highly profitable business to provide incentives to agents to increase their submission flow.
However, this strategy has not led to any single dominant carrier in the $60 billion to $90 billion U.S. small commercial insurance market, and increasing competition is threatening the historically comfortable position of market leaders.
Several fundamental characteristics of the U.S. small commercial insurance market (e.g., higher retention, lower price volatility, large number of uninsured and underinsured business owners) and renewed optimism in small-business growth have led existing carriers to sharpen their focus on small commercial. In addition, several insurtech startups have entered the market with solutions for underserved customer segments. And, the relatively benign Cat environment has fueled further competition from various types of capital providers (e.g., hedge funds, pension funds, foreign investors, capital markets) looking to diversify their investment portfolio with uncorrelated insurance assets.
See also: A Tipping Point for Commercial Lines
At the same time, recent pricing pressures and slow organic growth have led many distributors to leverage their positions to improve their placement yield through higher compensation. Limited organic growth opportunities also have led to a broad consolidation of distributors, with an increasingly large number of private equity-backed brokers looking for short-term gains and opportunities to reduce systemic inefficiency. Moreover, mid-market, publicly traded and bank-owned players have effected similar consolidation and focus on operational efficiency.
Serial acquirers have sometimes inherited some large books of small commercial business that are expensive to service. To lower costs and simplify operations, these intermediaries have reduced the number of carriers they do business with and abandoned servicing. Distributors increasingly favor markets with broad risk appetite, easy processes for placing new business and minimal servicing requirements.
The carriers that will succeed in this rapidly changing landscape will approach the market with an agency perspective and focus on agency economics in addition to their own performance goals. This requires evaluating opportunities to drive economic value across the whole value chain. By shifting their focus from maximizing profitable growth in terms of direct premiums written on their books to maximizing profitable premium under management (both theirs and their distributors), leading carriers can avoid the race to the bottom on price and to the ceiling on commissions.
Stretching the limits of automation
The obvious starting point is to extend the limits of what can be acquired, underwritten and serviced through a relatively automated model. The “Main Street” small commercial segment, which consists of small, low-complexity businesses with straightforward insurance needs was the first segment that carriers automated. Today, distributors can request, quote and bind “Main Street” business policies in near real time from several carriers that have successfully identified classes of business that have a lower loss ratio and require limited to no underwriting ”touch.” These carriers have established strict guidelines and knock-out criteria for the types of businesses that can pass through, leaving tougher classes to second-tier carriers or non-admitted markets. As access to information currently not captured in traditional apps and artificial intelligence becomes more prevalent, carriers can judiciously loosen restrictions on the risks that need manual review and accordingly increase automation.
Confirming underwriting classification and fit with appetite is a common reason for manual underwriting review, and is especially likely for more complex or hazardous classes. Most carriers don’t want to insure general stores that sell firearms or landscapers who climb trees. Referral underwriters must verify the classification and gather additional information by reviewing company websites, or even reaching back out to the agent or customer. Fortunately, third-party data and analytics now can provide this information. This is leading to new risk segmentations and redefining where money can be made.
Historically, distributors have (potentially unknowingly) placed the majority of their simple, easy-to-place risks with a few large carriers that can digitally “set and forget” this book. Distributors have struggled to place more complex risks across myriad markets. Classes that are not within the appetite of standard carriers are much more expensive for distributors to place and service. This is especially problematic on smaller accounts. As distributors reassess their portfolios and look to streamline their markets, they will increasingly start using their “Main Street” small commercial book as a lever for carriers to also write their complex small book. Accordingly, carriers must offer solutions for tougher classes, both to meet distributor and customer needs and to increase their own revenue opportunities.
Eliminating unnecessary hand-offs
There are many hand-offs between the customer, agent and carrier throughout the lifetime of a policy. This creates operational friction that increases costs and compromises the customer and agent experience. In many cases, carriers are in a better position to efficiently and effectively handle the transactions that distributors currently perform or initiate.
When it comes to acquisition, real-time quote and bind for low-complexity risks is already table stakes. However, carriers usually require a significant amount of information from the customer and agent to facilitate this process. Current apps are extremely cumbersome to populate, and a new streamlined application process will constitute a fundamental change to the economics of acquiring new business. Imagine being able to enter just four pieces of information about a business (e.g., business name, business address and owner’s name and DOB) and receiving a real-time quote with the option to immediately purchase and electronically receive policy documents. The transaction can even be facilitated via direct integration between the distributor’s agency management system and carrier systems to avoid redundant data entry. Furthermore, imagine this approach being implemented with no impact on underwriting quality or manual back-end processing requirements for the carrier.
See also: Commercial Insurers and Super Delegates
Leveraging internal data from prior quotes and policies, integrating external structured data feeds and mining a business’ website and social media presence can provide carriers with enough information to determine a business’ operations, applicable class codes, property details, employment, payroll and other key risk characteristics to underwrite and price low-complexity risks. In cases where more information is needed, dynamic question sets with user-friendly inputs can augment the application process without sacrificing underwriting quality. And if the agent wants to negotiate on coverage, terms and conditions or pricing, there can be options for requesting underwriting review, supported on the carrier side by advanced routing that passes the request to the appropriate underwriter based on expertise and agency relationship. These investments are an obvious way for carriers to improve data accessibility, consistency and quality for underwriting analysis, and also increase underwriter productivity. Distributors also benefit from these carriers’ increased efficiency and ease-of-doing business and are more likely to send business their way.
Servicing can be another drain on agency resources. The amount of paperwork and transaction flow for small commercial accounts (e.g., requests for certificates, new employees or drivers) is often disproportionate to the amount of premium that they generate. As a result, it is common for carriers to offer service center capabilities. Larger agencies that are looking to streamline their operations most often use these services; in fact, they are often a key factor when agencies look to transfer their book to a new carrier. These capabilities are also appealing to smaller agency owners who may not want to hire an additional customer service representative (CSR) to manage the renewal book.
Carriers are typically in a better position to service the book on behalf of the agent because they own the master policy, billing and claims information, have the authority to process changes and have the expertise to address any customer questions or concerns. They also have the scale needed to optimize the process and manage capacity, which they can even leverage to offer servicing and other back-office capabilities for an agent’s entire portfolio (even that written with other carriers), completely eliminating the need for a CSR. Furthermore, seamlessly servicing the business that transfers to another player’s balance sheet can enable another important strategic aspiration: helping new capital providers enter the small commercial insurance game.
Renting underwriting acumen
As we mentioned, alternative risk-bearing capacity is proliferating. Various categories of capital providers may have an appetite for different risk profiles (e.g., high-volatility, long-tail risks). Some of them may enjoy a higher net investment income ROE and therefore can afford lower underwriting profitability thresholds. However, they still need an underwriter and “A”-rated paper. Currently active fronting arrangements are already providing a more direct link between capital and (currently mostly short-tail) primary risk. Small commercial carriers could “rent” their underwriting expertise via similar fronting ventures and significantly “write” more, including classes of business with a higher loss ratio that may still be attractive to certain capital providers. This would be an effective way to artificially broaden underwriting appetite, leading to improved ease of doing business for distributors. Risk placement of small, complex risks can pose challenges for agents who have to procure and maintain a significant number of appointments, each of which may require distinct and inefficient acquisition and servicing processes. By underwriting risks on behalf of another party, a carrier could earn additional revenue for fronting the business while offering a valuable service to their distribution partners.
A carrier that offers services in these three areas could become the one-stop shop for placing small to mid-sized risks for distributors. And if that carrier could continue to offer a competitive compensation package, it would have an outstanding value proposition. Value-added offerings could be part of a strategic compensation package that drives desired agency behavior – for example free servicing on year 1 business if they meet new-business growth goals, or broadened appetite and placement services if they maintain profitability standards. Ultimately, it may be able to fundamentally restructure the economics of providing insurance and ancillary protection services, with tangible benefits to all constituents.
See also: How to Win in Commercial Lines
By thinking like a distributor and identifying opportunities across the insurance ecosystem to drive value, a carrier can compete on ease of doing business rather than price – changing the playing field to protect margins and drive profitable growth. This goal would have been difficult to achieve a few years ago, but recent technology advances have made it possible.