(Image credit: Zahari M.)
Selling small commercial insurance directly online to customers has gone from an outlandish idea to a reality over the past decade. Since 2013, conditions for growth in the direct small commercial segment have been favorable. Business owners are more online-oriented, agent channel conflict is no longer a dealbreaker, and ad spending from large personal lines insurers has normalized buying insurance online. Despite modest sales activity to date, the direct online small commercial market remains poised for growth.
Market Participants and Recent Activity
The industry is still waiting for a major advertising push to drive the widespread adoption of direct online small commercial sales, but 2019 still saw substantial activity. Novarica estimates that the $3B direct small commercial market could grow to as large as $12B by 2025.
Specialty insurers were among the first to offer small commercial directly online. This sector saw little activity in the headlines in 2019, but insurers have quietly expanded their footholds through new products or diversifying the types of businesses they cover. Several large commercial and regional insurers are also rolling out online sales platforms or have made acquisitions to gain access to the market. InsureTech activity in digital distribution remains robust; funding rounds have gotten larger, and many startups are entering partnerships with insurers.
Market Opportunity: The Middle 60%
Novarica estimates that 35 percent of small businesses represent 90 percent of total premium. Insurers will likely find the most market opportunity with the middle 60 percent of small businesses. Microbusinesses are unlikely to be a source of substantial premium as many won’t ever seek coverage, but insurers may capture some of this volume as online purchasing becomes widespread. However, profitability will depend on keeping customer acquisition costs down via low-touch transactions and straight-through processing. Large businesses could represent valuable policies, but they may be more likely to buy through agents and traditional distribution channels.
Key Issues for Insurers: Alignment and Simplification
Alignment between product and target marketing is critical in direct commercial. Several years ago, Novarica put forth the notion that “all business is program business”—that is, all insurance offerings need to align product design, target market segment, distribution channel, and supporting processes and technology. Many insurers are familiar with marketing products to distribution channels, but direct selling requires additional knowledge of digital marketing to consumers.
Selling directly also relies on simple communication and easy-to-buy products. Traditional insurers entering the direct space will need to consider eliminating underwriting questions via pre-fill data, simplifying coverage language, creating easy-to-understand applications, and offering base-level products that meet core customer needs. The simplification of products and intake on the front-end means complexity on the back-end. Many insurers will need to invest in their core systems, analytics, and internal and third-party data to support new product types and speed up underwriting.
Insurers don’t need to go all-in on the direct online small commercial segment, but those that do will need to bring a streamlined product to market as quickly as possible. Partnering with digital distributors may also be advantageous, though this approach often requires some technology investment to take advantage of true STP capabilities. A third option is continuing to invest in digital agent self-service. Many of the capabilities that make insurers competitive in the agent marketplace may translate to the direct market, including simplified buying, STP, and ease of doing business. Of course, insurers also have the option to strategically do nothing, which can be successful if insurers understand how traditional markets are evolving in response to direct coverage.
More information on trends and projections for the direct online small commercial market is available in Novarica’s report Direct Online Small Commercial Insurance: 2020 Update.