"Small But Mighty" illustration by Shaw Nielson is from the September 2021 issue of NU Property & Casualty magazine.

Small and medium-sized businesses (SMBs) tend to be reluctant purchasers of business insurance. But the pandemic highlighted the importance of business protection and may prompt smaller businesses to re-evaluate their insurance needs. This creates an opportunity for the insurance ecosystem to serve this market. According to a KPMG International report titled "The Future of Small and Medium Business Commercial Insurance," COVID-19 has intensified the need for targeted and tailored coverage in the SMB market. "Many small and medium businesses have come under intense strain through COVID-19, facing disruption to business, reduced sales and cash-flow squeezes," the report says. "Historically, SMBs have been reluctant insurance customers, only taking out cover through necessity. They are skeptical of insurance, price-sensitive and time-poor. But COVID-19 has underlined to many small businesses just how essential insurance cover is. This shift opens up new opportunities for insurers who can bring the right offerings, at the right price-points, through the right channels." |

COVID-19's lasting impact

Small and medium-sized businesses have been hit particularly hard by the COVID-19 pandemic, although quantifying the impact is challenging. Many of the small businesses in the hardest-hit sectors, including restaurants, were forced to close their doors during the pandemic. According to data collected by Alignable, an online network of small business owners that has been tracking the impact of COVID-19 on small businesses, nearly two-thirds of small businesses were still feeling the impact of the crisis on their busi­ness as of May. But as vaccines began widespread rollout this spring, there were signs of recovery for the sector. Nearly 70% of small businesses reported that they were fully open at the end of May, up from 40% one year earlier, while 10% remained fully closed, says Alignable. The firm noted there are still several factors that are hampering the SMB market, including a disrupted supply chain and rising costs. Fifty-five percent of small businesses say their costs are higher by at least 11%, and one-quarter reported having trouble accessing supplies and inventory they need to run their business. In addition, two out of three small business owners are concerned about inflation and how it will impact their ability to recover. Also hampering the recovery of the SMB market is a slow return of workers. The survey found 55% of small businesses were having difficulty finding new employees or convinc­ing previous employees to return to work. This scenario is pushing labor costs higher and potentially slowing the recovery for some small businesses. |

Insurance implications

In addition to the obvious stressors the pandemic created for small businesses in terms of closures and lost revenues, this "black swan event" also has had far-reaching insurance implications. Notably, many small businesses that purchased business interruption policies and expected them to cover pandemic-related disruptions found that wasn't necessarily the case. "In many, if not most of those policies, infectious diseases and pan­demics were specifically excluded," says Michael Giusti, an analyst with InsuranceQuotes.com. "On top of that, business interruption insurance is part of your property coverage, and for it to kick in, your property typical­ly has to be physically damaged, like with a flood or fire. No damage meant no interruption insurance." Some disputes about business interruption coverage have ended up in court and are working their way through the legal system. "Many people are upset with this outcome, and because business own­ers were mandated to close, right now there are over 1,900 lawsuits that have been filed," says Samantha Tucci, busi­ness development specialist at Mackoul Risk Solutions. "We will see how the courts proceed, but so far, the result is not great for business owners." Many COVID-19 business interruption lawsuits are now going through the appeals process, she adds. In some cases, regulators are stepping in and considering bills that would force insurers to pay out for pandemic losses. Moving forward, businesses should expect specific language regarding pandemics clearly laying out who is on the hook for what and in what circumstances, Giusti says. The small business insurance market also is experiencing impacts on premiums, underwriting and coverage due to the pandemic and other events. "With certain industries — hotel/motel, restaurant/bar/banquet facilities and travel/tourism-related business — we are seeing some insurance policy cancellations and some reduced sales and payrolls. So the exposure and the premiums, therefore, are reduced in many instances for these types of opera­tions," says Greg Leifer, an independent agent at West Coast Insurance Group, a World Insurance agency in St. Petersburg, Fla. Underwriting has experienced some tightening to include COVID-19 protocols within business insurance policies, says longtime insurance pro Ken Branch, president of KB Consult­ing and a member of the NU Property & Casualty Editorial Advisory Board. In some cases, that led to difficulty placing policies or longer lead times on renewals as insurers are more cautious about safety rules, increased inspections and other COVID-related processes. "They're being a little more cau­tious about what they're approving," says Branch. "Companies are still say­ing they are interested in the risk, but then when you go through underwriting, maybe not." Sean O'Hare, vice president, enterprise core/property casualty with Holmes Murphy, says his firm is seeing average premium increases of 6% through the first half of the year in the small commercial market, mainly due to catastrophic claims associated with the California wildfires and the Midwest Derecho. "In addition, we are seeing carriers adding a communicable disease exclusion on most liability policies because of the pandemic." Evan Chambers with the independent insurance agency Byars|Wright says the pandemic accelerated what the market was already experiencing, notably increasing rates in property, umbrella and auto lines. "One example of the pandemic's impact on the markets is the language around business income (or business interruption) policies, which is often part of a business owner's policy (BOP) for small-midsize businesses," Chambers says. "As with any policy, cover-age depends on the policy terms and how they're interpreted. At the beginning of the pandemic, questions were raised about whether or not BI covers pandemic-related losses because this coverage is triggered by physical/property damage. Now, as a result of the pandemic, insurance policies are specifically spelling out virus exclusions." |

Ongoing risks

The pandemic is likely to continue to impact small businesses in terms of operations and insurance policies. Branch cautioned that requirements around things like social distancing, cleaning protocols and outdoor services could create additional general liability exposure for small businesses. Meanwhile, businesses of all sizes continue to grapple with existing and emerging risks that aren't specifically related to COVID-19, including cyber-security concerns. "Small businesses often naively perceive themselves as low risk due to limited revenue. But they may actually be more attractive targets for cyberattacks than larger enterprises because they've often invested less time in developing good data handling procedures and employee awareness," says Terra Gross, founder of Attuned Legal, LLC, an Illinois law firm that advises entrepreneurs. "Brick-and-mortar locations that entered the pandemic with limited re-serves to address physical property conditions are also experiencing significant financial challenges related to upkeep as the costs of raw materials rise." Gross continues: "At the same time, many small businesses are nimble by nature and can relatively easily tamp down on social engineering vulnerabilities and implement risk management recommendations." COVID-19 taught everyone an interesting lesson about the state of business in the modern-day — namely that most business operations can be performed remotely, says Andrew Lipton, vice president and head of cyber claims for small business insurer AmTrust. Although this new operational dynamic creates opportunities for innovation and efficiencies, it also creates challenges, including increased cyber risk, he says. "Whether it's a pizza shop outside of Kansas City or a salon in Missoula, folks everywhere rely on digital and connected networks to do things such as make appointments, make sales, advertise, interact with vendors and suppliers, and issue/accept pay­ments," Lipton says. "A cyber incident can take those systems down. Even if that system is down for just a couple hours, it can make a big difference to a small business's bottom line, espe­cially if it happens during a typically busy time for sales. When you add lost income to the potentially significant costs, expense and time of engaging experts that are necessary to help a small business recover from cyberattacks, it can have a huge impact on a company's profitability and, in some cases, its existence." Lipton adds that it's important for small businesses to have a strategy to deal with cyber risk, and that includes cyber insurance, which provides financial protection against loss of income and the costs associated with cyber incidents. A good cyber insurer will help a small business navigate and respond to a cybersecurity incident and work to protect the company's balance sheet and reputation. Transmosis CEO Chase Norlin noted that larger companies (not to mention the government) are requir­ing stronger cybersecurity standards from the small businesses they work with along with cyber liability cover­age from their small business part­ners. He noted that consumer-level antivirus products that many small businesses use might not comply with policy requirements, and insurance brokers and agents aren't always fully informed about those requirements, leaving small businesses potentially uncovered in the event of a breach. Workers' compensation is another area in which new risks are emerging that small businesses should be aware of, says Matt Zender, senior vice presi­dent, workers' compensation product manager at AmTrust. Of note, the current difficulty finding employees will put additional pressure on exist­ing employees. "These employees will work longer hours and find themselves at risk of injury due to fatigue," Zender says. "The employers will find themselves having to draw deeper into the employ­ment pool to find staff, and these new employees will likely suffer claims at a greater ratio as they lack training, skills, and familiarity." In addition, employers, especially smaller businesses, have had to re-think their existing business models as a result of the pandemic. Some of the changes they are making could lead to greater exposures and increased claims, Zender says. |

Small business clients

"One of the biggest trends we saw in 2020 was that as mass layoffs oc­curred due to the pandemic while new business formation surged," says Jay Bregman, founder and CEO of Thimble. "Budding entrepreneurs set out to es­tablish their own independent sources of revenue. Additionally, as millions of folks were stuck at home during quarantine, we noticed a surge in side hustles. Professionals turned a variety of unique hobbies into businesses, in­cluding candle makers, jewelry makers, clothing designers and much more." That shift, Bregman adds, means greater demand for small business insurance and a need for customized products that meet specific needs. Thimble, for instance, offers insurance for as little as one hour or cover-age on a rolling monthly basis, giving business owners flexibility to scale without having to buy long-term binding policies. To capture new business and work with existing small businesses that may be wary of insurance offerings in the wake of the pandemic, the insurance ecosystem may need to innovate and focus on basics. The pandemic has accelerated demand for adoption of digital channels across retail, banking and other commercial sectors, and insurance must follow suit. "With a growing influx of InsurTechs offering highly personalized and flexible products, the pressure is only increased on insurers to provide more connected, digital offerings to SMBs that keep pace with technological disruption," KPMG reports. The KPMG study encourages the insurance industry to highlight the ability of insurance cover to provide resilience and stability that can help businesses navigate volatility with greater confidence. Helping small business owners overcome the perception that business insurance is too broad, too hard to understand, and cannot be trusted to cover them when they need it, is both a challenge and an opportunity. In particular, business interruption insurance could be crucial for a large portion of small businesses, many of which have indicated they would have to rely on personal funds to survive a two-month revenue loss. However, with commercial insurance premiums on the rise, SMBs may be deterred from taking out coverage, the report says. In addition, agents should work to understand exactly what type of business operations a small business has so they can offer appropriate insurance coverage, says Adrian Mak, CEO of AdvisorSmith. "For example, business interruption insurance is a common coverage for small businesses that protects a business against lost income if it is forced to shut down due to a covered cause of loss, such as a fire, riot, vandalism, or other damage," he says. "This is an important coverage for physical businesses, such as retail, wholesale, or manufacturing businesses. However, for a small service business such as an accountant, this coverage might not be appropriate because all their work can be performed remotely. So even if their office were to burn down, it might not have any impact on their sales or income. Therefore, it's key for agents to spend the time to understand what the nature of the small business is so that the business can receive appropriate coverage." Communication is crucial to building successful relationships with small businesses, Giusti says. "If the only time agents are talking to their policyholders is when their policy is up for renewal, they are leaving a lot of opportunity on the table," he says. "The more of a consulting partner the agent can be, the more valuable that relationship becomes. Building a relationship that isn't just about cashing a premium check will help the business grow stronger, and the agent be a more valuable long-term partner." See also: |

• J.D. Power: Top small commercial insurers for customer satisfaction
• Agents: Your business clients look a little different now
• 5 reasons for small-business insureds' drooping satisfaction