How commercial insurers can nurture a new generation of small businesses

By Patrick Foy

Small business creation went into overdrive during the pandemic, creating enormous opportunity for commercial insurers. However, this crop of new businesses poses significant challenges.

A recent TransUnion analysis examined the status of small businesses through the lens of commercial insurance risk, assessing coverage levels, business practices and credit-based insurance scores. They surveyed 500 small business owners, with 10 or fewer employees, and found some alarming tends in the small business landscape.

More than half of surveyed small-businesses owners indicated that they do not have basic insurance protection for their small business. Among that group of uninsured, six out of 10 respondents thought they don’t need insurance, while a quarter said it is too expensive.

This finding indicates there are 17 million potential new customers for commercial insurers who can effectively price and underwrite policies. However, small-business owners’ reluctance to get coverage may indicate a need for education. No matter the size, all business owners have risk exposure to lawsuits over their products and services. For sole proprietors, the impact of a lawsuit could be financially ruinous to an individual. The truth is these small-business owners cannot afford to operate without commercial insurance.

All businesses evolve over time; however, the pandemic pushed 41% of insured business owners to change the scope of their products or services over the last two years. Nearly 80% of them did so without notifying their insurers.

This has implications for both small-business owners and insurers. Unreported changes could mean that a business owner has risk exposures not covered by their existing policy, which could result in disastrous personal financial consequences. For insurers, changing exposures can lead to policy mispricing across their portfolio, meaning they aren’t collecting enough premium for the risks they are covering. Even if they don’t cover expenses that exceed the scope of existing policies, customers may feel cheated, which can lead to negative reviews and a damaged reputation. It is imperative that insurers stay in touch with their existing customers to ensure policies remain aligned with the businesses scope of products and services.

Less tenured small-business owners (those who have been in business two years or less) who already had lower than average credit-based insurance scores, saw their scores drop significantly in 2021.

TransUnion’s analysis found those whose credit-based insurance scores fell into the bottom quintile were more than twice as likely to file an auto insurance claim, compared with the average consumer. These individuals and their businesses are also more susceptible to economic volatility, making them riskier. Insurers should leverage all available data ensure pricing is set appropriately.

More than half of business owners have been in business fewer than five years said they believe they need additional financial support post-pandemic.

This underscores the precarious nature of small businesses, exacerbated by current inflation and a possible recession. In addition, many of these business owners have only known how to operate through the help of pandemic-era government stimulus payments, grants and Paycheck Protection Program loans. Moving toward self-sustaining profitability may prove very difficult.

An unprecedented opportunity

These issues are compounded by the sheer volume of small businesses. More than 5 million new businesses were created in the past 12 months alone — part of a trend that began in 2020. In July of that year, the U.S. set a record for small business creation, with 552,748 Employee Identification Number applications. Momentum from the Great Resignation has helped maintain that pace through 2022, with more than 400,000 monthly EIN applications — a 42% increase over pre-pandemic levels in 2019.

Commercial insurers have both an opportunity and a responsibility in this environment. With 17 million potential customers among uninsured small businesses, insurers stand to reap extraordinary profits. Doing so responsibly will require the right small business insights to price and underwrite new policies, including firmographic data and credit-based insurance score of business owner. Beyond that, insurers should focus on managing their portfolios by leveraging data to identify risks that no longer meet their eligibility criteria. In addition, commercial insurers should have regular conversations with their customers to understand if their businesses and associated risks have evolved.

Patrick Foy is responsible for TransUnion’s insurance market strategy for the commercial property and casualty markets. He may be contacted at [email protected].