2023 Small business insurance market update
One size does not fit all when it comes to today's small-business insurance needs.
Economic uncertainty is top of mind for all businesses but especially for small business owners, many of whom are taking a close look at all of their expenses, including insurance. Emerging from the pandemic, the economic climate remains volatile, with near double-digit inflation and rising interest rates hitting small businesses particularly hard.
According to Nationwide’s recent Agency Forward survey of business owners, most small business owners have a pessimistic outlook on the direction of the overall U.S. economy. But 72% expect conditions for their own business to be favorable in 2023, says J.J. Perez, president of Nationwide Corporate Solutions. More than half of small businesses (58%) indicated they struggle with managing the impacts of inflation on their business, and about two-thirds (68%) believe inflation will have an even greater impact on their business in 2023.
With a potential recession looming, businesses need to consider how a stock market crash, long-term inflation or interruptions to their cash flow would impact their ability to meet customer needs, Perez says. Many economists, including those at Nationwide, are predicting a short or shallow recession, he adds. So it’s important for business owners to think about how they might position their company to be ready to accelerate out of a downturn when it passes and take advantage of opportunities to gain market share created when competitors are slower to recover.
“Now, more than ever, trusted partners like financial advisors and insurance agents have a critical role to play in helping their business owner clients navigate today’s volatile economic environment, plan for a potential recession and develop a risk management strategy to prepare for the unexpected,” Perez says.
Small business, big challenges
In addition to economic challenges and the lingering impacts of the pandemic, small businesses are grappling with shifting consumer expectations, labor shortages, supply chain disruptions and increased catastrophe activity, especially along the coasts, says Victor dos Santos, president of commercial insurance at SageSure, which specializes in managing catastrophe-exposed property risk. “The future’s uncertainty is both a reminder and an opportunity to control what can be controlled,” says dos Santos. “Small business owners can’t change the economy or the weather, but they can leverage risk management tools — from mitigation technologies to small business insurance — to ensure they can recover quickly when disaster does strike.”
Cyber risks also continue to affect small businesses. The median cost of a cyberattack has increased 80% in recent years, from $10,000 to $18,000, according to the 2022 Hiscox Cyber Readiness Report. “Hackers are becoming bolder and more sophisticated, and small businesses don’t have the bandwidth to keep up,” says Steven Wilkins, senior vice president and head of Casualty at Hiscox USA.
The increased cost of capital presents unique challenges for small business owners as they look to invest in and scale their businesses, requiring them to make the difficult decision to either invest for growth at a significantly higher overall cost or slow growth and wait for a more concrete outlook, says Jen Tadin, managing director for Gallagher’s Global Small Business practice.
Protection challenges from natural events, including hurricanes, wildfires and flooding, also impact small businesses, and losses from crime are on the rise, says Richard Clarke, chief insurance officer at Colonial Surety Company, which sells and writes surety bonds, fidelity bonds and insurance products focused on supporting small and midsize businesses (SMBs).
Despite such headwinds, 2023 may be one of the best times ever to start or grow a small business, says Joel Katsma, general manager of sales at Acuity Insurance. “Online marketing is evolving away from the major players, and opportunity abounds with shoppers looking for alternatives as prices rise and service declines in many areas due to lack of staff,” Katsma says. “If a small business can weather the challenges and differentiate themselves through this difficult time, they can win customers and set themselves up for future growth. Economic disruption often creates big opportunities.”
Talent shortages persist
“Recruiting and retaining talent remains one of the biggest challenges for small businesses,” says Jen Tadin, managing director for Gallagher’s Global Small Business practice. “Rising wages and a competitive marketplace for talent leads to a real challenge for small business owners in remaining consistently fully staffed. Small businesses run lean and oftentimes have only a small number of employees executing on each function of the business. Losing one person puts a real strain on the ecosystem within the business, funnels more work to the remaining workers and ultimately a fragile staffing environment.”
The most recent NFIB Small Business Optimism Index found that out of the 55% of owners who reported hiring or trying to hire in December, 93% reported few or no qualified applicants for the positions they were trying to fill. Similar to last year, this means small business owners are challenged to grow their businesses with fewer resources.
“From an insurance perspective, small business owners who are struggling with finding and retaining talent, have an opportunity to create incredibly safe workplaces, says Dax Craig, co-founder and president of Pie Insurance. “It’s important their business insurance is up to date and accurate, and that employees are trained on all workplace safety measures. By doing so, they will protect their existing and prospective employees while ensuring no expensive and avoidable injuries occur at work.”
Insurance market trends
Small business insurance market capacity remains strong, with the majority of carriers keeping their appetite unchanged, says Wilkins.
“There have been some carriers reducing appetite in higher hazard or specialty classes, but this has mostly been newer insurtech offerings with smaller market share,” he says. “Rates are a different story though, with many carriers reflecting the higher inflation environment and increasing social inflation factors into the rates that small businesses pay for their policies.”
Katsma says small business has remained somewhat insulated from larger commercial market trends. Carriers continue to go after small business and are competing on price, ease and coverage. However, he notes a looming hardening of the overall commercial market, thanks to high inflation and lack of reinsurance capacity, which may change the landscape going forward.
“There is bifurcation on property- vs. casualty-driven accounts,” says Katsma. “Expect property-driven accounts to be far more difficult. The commercial property market is in unprecedented times, and a push for more rate is not going to slow down in 2023, while casualty lines have maintained profitability and are still looked at competitively.”
Eric Coleman, senior vice president of Nationwide Small Business Insurance, also notes prices are rising more in catastrophe-prone areas and on property coverages in general, due to a combination of inflationary pressures, increased and more widely occurring weather losses, and reinsurance rate increases.
“There are also additional challenges on casualty lines in certain legal jurisdictions with verdicts exceeding historic expectations as courts resume a more traditional pace following COVID-19 delays in the system,” Coleman says. “All of these factors are putting pressure on insurance carrier results, leading to industry-wide profit challenges. Capacity is following the direction of pricing, with property-driven accounts, and higher catastrophe-prone geographies, experiencing a tightening of capacity. Carriers are both increasing rates, and reducing capacity to counter the challenging conditions in the market. However, as is nearly always the case, risks with the best loss prevention and mitigation plans, and favorable protective characteristics, continue to be desirable to carriers in the marketplace.
J.D. Power recently surveyed small businesses about their experiences with their commercial insurer and found that about one-third of small businesses said they had experienced a rate increase in 2022, up from 20% the year before. However, the study also revealed a positive twist; customer satisfaction also increased.
Stephen Crewdson, senior director of Global Business Intelligence, Insurance at J.D. Power, says customer satisfaction went up 13 points year over year, a statistically significant increase in satisfaction. He adds that client interactions are the biggest driver of customer satisfaction and notes it is important for agents and insurers to notify small business customers in advance of rate increases rather than making them wait to see it on a renewal statement, help them understand the underlying reasons for the increase, and proactively look for ways to mitigate increases through appropriate changes to deductibles and coverage.
Finding solutions
Appropriate insurance coverage is essential for the longevity of a small business. It can determine whether a loss will be a manageable, a temporary setback or an expensive, enduring hardship, says dos Santos. “Insurance not only provides financial protection for common and costly risks, such as severe weather damage, theft, and liability, but it also lends credibility to the business. Many clients and customers may require proof of coverage before engaging a small business, which is why business insurance goes beyond indemnity. It can be a tool that supports continued growth.”
Insurers should be aware of the wide variety of small business customers and their unique challenges and needs, says Charlie Mihaliak, EY Americas Insurance Business Transformation Leader and Principal, Strategy and Business Transformation, and Laura Hollerich, EY Americas Insurance Distribution and Sales Optimization leader. For example, gig workers, who represent approximately 15-25% of the global workforce today, and are expected to represent 35-40% of the workforce by 2025. These workers are looking for flexible policies for their business pursuits and personal lives, according to EY’s 2021 survey of small businesses. A growing percentage of business owners prioritize ESG and are interested in promoting better societal outcomes. EY’s survey found 63% of small business owners list running a sustainable business as a priority, and these types of small business owners will seek insurers who understand ESG and associated risks and have sector-specific expertise.
Coming out of the pandemic, business interruption coverage remains a must-have for small business owners, even if almost all policies continue to exclude airborne illness/virus,” says Tadin.
“When it comes to cybersecurity, small business owners can’t be naïve and think attacks won’t happen to them,” says Tadin. “The average cost of cyberattacks would put many small businesses out of business. Solutions include a cyber-liability endorsement to a business owner’s policy or a stand-alone cyber policy. Errors and omissions insurance, or professional liability, ensures owners they have coverage for the work or service they provide within their business. It’s essential to ensure the work and expected outcomes of that work are covered.”
How you can help
Insurance carriers and agents should work to be seen not as a necessary evil but as partners in their customers’ businesses, says Katsma. Finding a carrier and agent who understand their business and have expertise in what they are doing can give small businesses an advantage in the market.
“Carriers and agents alike are pushing toward value-added services,” Katsma says. “As small commercial has become more competitive, there is a push toward differentiation by helping those customers with profitability, marketing and overall operations in addition to providing a strong base of insurance protection.”
Servicing small business accounts is one way carriers can differentiate themselves from others, Katsma says. Most carriers now offer service centers for small commercial customers. The key to doing this well is providing solutions for all customers, so you can meet them where they want to be met.
“You need to have a live human for customers who want interaction, chat for those who prefer to do it online, an easy mobile experience for those who need a quick certificate or policy change, and full self-service capabilities for those who want to do it themselves,” Katsma adds. “A one-size-fits-all approach is no longer acceptable. Carriers and agents need to develop multiple channels and areas of expertise to set themselves apart from competition.”
Insurance professionals who insure small businesses need to be available when, where and how their clients want them to be, including being available during hours outside of the traditional 9-5, investing in technology to provide tools and service capabilities that enable clients to self-serve, implementing texting capabilities to align with the on-the-go lives of small business owners and most importantly staying close to the changing exposures within the business to ensure there are no surprises when the unexpected happens, Tadin says.
“During the pandemic, one thing that became clear is how agile small businesses are, quickly altering their product or services to adjust to a changing environment. Now insurance professionals must ensure they understand that the business they insured pre-pandemic may look a lot different than it does post-pandemic,” she says.
Too often small business owners see insurance as a box they need to check but do not spend time actually thinking critically about the coverage they have and need, says Alex Roje, an Insurance Recovery attorney at Lathrop GPM. They tend to focus on pricing as the determinative factor, often assuming all policies are the same.
“With so many issues, costs and expenses facing a small business, no one could fault them for taking that approach,” Roje says. “However, if insurance policies were cars, one might think of buying insurance this way: You may not need a Ferrari but you don’t necessarily want a Pinto either.”
Brokers and risk management professionals should work closely with their small business clients so that the focus shifts from pricing to risk mitigation, says Roje. Each small business policyholder should sit down with their broker to talk through the risks that keep them up at night, and what it would take for each to sleep well knowing that they are getting what they paid for. This should be an interactive process where the policyholder asks questions of the broker as well, particularly pertaining to the risk and coverages that other similarly situated businesses are purchasing and why, she says.
Small business owners haven’t had much of a chance to come up for air since the pandemic, says Wilkins. “They’ve been faced with an onslaught of challenges, including inflation, the economic outlook, cyberattacks and supply chain issues. Despite these challenges, there’s an unshakable optimism and determination amongst small business owners, with 88% having a positive outlook for 2023. From the businesses that started during and survived the pandemic, there’s a well-developed aptitude for resilience that may power the economy for years to come.”
Kristen Beckman is a Colorado freelance journalist.
ALM’s Small Business Adviser is a LinkedIn group where small business owners can gather to network, have discussions and keep up with the trends and issues affecting their industries.
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