Mckinsey Small Commercial Insurnace 2016

8/19/2019 Mckinsey Small Commercial Insurnace 2016

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Small Commercial

Insurance: A Bright SpotIn the U.S. Property-Casualty Market

Financial Services Practice


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Small CommercialInsurance: A Bright SpotIn the U.S. Property-Casualty Market

Introduction

A Dynamic, Growing Market

Disruption in SmallCommercial Insurance

Success in the New Small CommercialInsurance Market

2

4

7

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2 Small Commercial Insurance: A Bright Spot in the U.S. Property-Casualty Market

Introduction The U.S. small commercial insurance market is one of thefew bright spots in the U.S. property-casualty insurance

(P&C) sector and is thus the focus of intense competitionthat is likely to ramp up over the next few years. Themarket is both fragmented and profitable, a scenario thatis drawing attention from carriers whose primary businesslines are saturated and commoditized, as well as fromattackers seeking fields that are open for innovation. Smallcommercial insurance is also one of the few U.S. P&Cmarkets that has been growing in recent years.

The focus on the small commercial opportunity makesstrong business sense, but there is a complication. Smallbusiness owners are increasingly using—or open tousing—direct channels to shop for and purchase insurancecoverage, which is altering the fundamentals that oncedefined success for carriers. So while the small commercial


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market is a ripe opportunity, few traditionalcarriers are positioned to capitalize on it.

To stay ahead of agile attackers, carri-ers will need new capabilities. McKinseyresearch shows that small commercialcustomers can be grouped into need-and behavior-based segments that arefar more accurate predictors of shoppingand buying preferences than traditionalbusiness size and industry segmentation.

As in personal lines, carriers wi ll succeedby using these deeper insights to deliver

tailored value propositions and mes-sages, at the right moments, to satisfythe unique preferences of customers ineach segment.

To illus trate the potential impact of thistargeted approach, consider that whenthe direct revolution hit the personal autoinsurance market, incumbent carriersspent hundreds of millions of dollars try-ing to hold onto customers that were notinterested in what they had to offer. Bysharpening their focus on the customersthey know will be profitable, small com-mercial insurers can avoid this wastefuland scattershot approach.

The “consumerization” of small commer-cial insurance is likely to shift the balanceof power in the sector. Carriers with

customer-facing capabilities—particu-larly exclusive agent carriers with strongpersonal lines businesses and somesmall commercial presence—will havean advantage over those that distributethrough independent agents. Independ-ent agency carriers have deep industryexperience and operational strengths,but will need to move quickly to developmarketing and customer-facing capabil-ities. And a third group is likely to makeinroads: digital attackers unencumberedby legacy issues that can launch nimblerdirect models.

This paper is based on proprietaryMcKinsey research that includes dozensof qualitative interviews with consumersand distributors, and a survey of a rep-resentative sample of over 1,500 smallbusinesses in the U.S. ranging in sizefrom one to 100 full-time employees,across a range of industries.

This repor t addresses a number of emer-ging issues in small commercial insur-ance, including how customer behavior ischanging, what those changes mean forcarriers already serving the market andfor others considering a market entry,and how carriers can translate new in-sights regarding customer behavior andsegmentation into superior performance.


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A Dynamic, GrowingMarketFor P&C carriers, the U.S. small commercial insurancemarket has quietly become a sweet spot in a challengingindustry landscape. On the one hand, the personal autoinsurance market has become increasingly commoditized.In the mid-commercial segment, carriers are struggling todeliver the level of service clients demand at premiums theyare willing to pay. And in large commercial lines, competitionfor a limited client base is erce, with large brokers controlling

access and taking the lion’s share of revenue.

By contrast, the small commercial market, which servesbusinesses with up to 100 employees and $100,000 inannual premiums, 1 is more dynamic, with growth similarto personal lines auto and a fragmented competitive andgeographic landscape.

1 Median annual premium is$1,000 to $5,000.


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Direct written premiums were between$99 billion and $103 billion for 2013,

up from $91 billion in 2011. This repre-sents just over one-third of the broadercommercial lines market (Exhibit 1) andincludes about $6 billion in non-stan-dard specialty lines premiums that arefairly evenly distributed across the U.S.(Exhibit 2, page 6).

Strikingly, almost 40 percent of sole pro-prietorships in the U.S. do not carry smallcommercial coverage and therefore didnot qualify for McKinsey’s survey. Somemay be covered under home-basedbusiness owner policies or endorsementson their personal lines policies, but thisnding still raises the possibility of un-expected room for growth in the smallerbusiness market. (It may also indicate

that some of the ndings pertaining tosmaller enterprises, such as propensity to

buy direct, are even more signicant thanillustrated in this paper.)

The small commercial insurance marketis divided among many carriers, with thelargest accounting for only 6 percentof total premiums (Exhibit 3, page 6).Market share is particularly fragmentedat the smaller end of the market (busi-nesses with one to 29 employees).However, the largest carriers are movingquickly to secure their positions. In thepast six years, the market share of carri-ers with over $2.5 billion in direct writtenpremiums has increased by 12 percent-age points, suggesting that scale is animportant driver of growth.

Small commercialMiddle marketLargeSmall

commercial1 drovemost of thegrowth duringeconomic boom

Small commercialsuffered the mostin recession, butbeneted mostfrom the recovery

201320082003

2%

-1%

0%

2%

1%

2%

Direct written premium$ billion

276256249

1039585

888487

857777

Smallcommercialaccounts formore thanone-third of theU.S. commerciallines market,and is the

fastest-growingcommercialsegment whenthe economyis expanding

Exhibit 1

1 Dened as employers with 1 to 50 FTEs.

Source: AM Best; Conning


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251K-500K 100K 100K-250K

>1 million501K-1 million

SME density, 2014Number of establishmentsU.S. smallbusinesses aregeographicallydispersed,creating a wideeld forcompetition

Exhibit 2

Source: Market Insights

Small commercial 1 market share, as of 2013$ billion, pecent of total commercial market premium

Large2 carriers now represent 51%of premiums in 1-29 FTE segment,up 12 points from 2009.

Carrier sharein U.S. smallcommercialinsurance isfragmented

Exhibit 3

1 Presents the share for small commercial premiums for employers with 1-29 employees only

2 Carriers with more than $2.5 billion in direct written premiums

Source: Insurer statutory and GAAP lings; public statements and presentations; Conning Research & Consulting analysis; McKinsey Small Commercial Insurance Buyer Survey, 2015

AIG3

Travelers5

Liberty Mutual5

Farmers3

Auto-Owners3

Cincinnati3

38

18 ACE USA

3 AmTrust3

Next 14

Other

The Hartford5

6 State Farm

Nationwide

5


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The universe of potential shoppersand switchers far exceeds the6 percent who actually switch

The small commercial insurance cus-tomer decision journey (Exhibit 4)parallels the personal auto insurance

journey in striking ways. Shopping andretention dynamics are roughly thesame, and 6 percent of the customerssurveyed switched carriers during their

most recent purchase or renewal per-iod, compared to 9 percent in our mostrecent personal auto research. Of the94 percent who renewed with their ex-isting carriers, 53 percent are “activelyloyal,” meaning they are willing to recom-mend their current carrier (Exhibit 5), inline with the 55 percent in personal auto.

The potential far exceeds the6 percent who actually switched in themost recent annual shopping cycle,however. Considering the 17 percentwho shopped around but renewed andthe 24 percent who stuck with theircarriers more out of inertia than trueloyalty, the pool of potential switchersin any given renewal cycle representsalmost 50 percent of the market. The

challenge for carriers is to identify andreach those on-the-fence consumersand convince them to switch. Shoppingand switching rates will also likely in-crease as innovators lower barriers topurchase, such as lack of transparency,cumbersome processes for comparingcoverages and rates, complex forms,and multiple agent interactions.

Bind/renew

Loyalty loop

Informationgathering

Triggers

Quote

Bind/renew

6% of consumers switchcarriers; 94%repurchase from theircurrent carrier

Average of 10 weeksbetween obtainingquotes and bind

Information gathering

Consumers who shopconsider 3.4 brands onaverage

QuoteOf brands considered, 2.6 brands quoted on average

Average of 10 weeks between trigger to shop andobtaining quotes

Loyalty loop

77% of consumers are in the loyalty loop (did not shop)

94% of consumers renewed with their current carrier (6% switched)

53% of customers are active loyalists while 24% are passive loyalists

Shopping triggers

Of the 25% of consumers whoshop,1 primary triggers wereregular policy reviews/renewal orgradual price increases

The decision journey insmallcommercialinsurance

Exhibit 4

1 “Shopping” is dened as consideration of carriers other than the current one

Source: McKinsey Small Commercial Insurance Buyer Survey, 2015


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Customer needs and behaviors arenuanced and present untappedmarketing potential

To reach the nearly 50 percent of smallcommercial consumers who are opento switching in every renewal cycle,carriers must harness new and moregranular insights into customer behavior.Shoppers can be segmented based ontheir needs and behaviors, as we have

seen in personal lines. There are sevendistinct customer segments: independ-ent agent loyalists; self-servicers; priceseekers; local relationship/brand loyalists;high-touch, tailored protection seek-ers; uninvolved, reputation-centric; andindustry-expertise shoppers (Exhibit 6,page 10). To get a sense of the shift thatcarriers will need to make to meet the

demands of their customers, considerthat small commercial carriers tradition-ally segmented clients by size or industry.Our research shows, however, that thetwo factors with the most polarizing im-pact on segmentation are price sensi tivi ty and the extent and nature of customers’

reliance on agents .

This insight opens new avenues fortargeted approaches to marketing and

acquisition, but also raises the bar forthe kinds of capabilities that carriers willneed to develop. Other preferences thatvary widely by segment include bindingchannel, loyalty, service preferences, andthe propensity to buy direct and to con-solidate personal and commercial lines(Exhibit 7, page 11). For example, while

most price-sensitive businesses, such

Decision pointPercentage of customers

Switched carriers during lastpurchase or renewal

(Switcher: 6%)

Shopped then renewed duringlast purchase or renewal

(At-risk: 17%)

Renewed due to inconvenienceof shopping and switching

(Passive loyalist: 24%)

Small commercialinsuranceconsumers

Shopped for new carrier inpast year

(Shopper: 23%)

Renewed with existing carrier inthe past year without shopping

(Loyalist: 77%)Renewed due to satisfactionwith current carrier

(Active loyalist: 53%)

94 percent ofsmallcommercialinsuredsrenew, butonly half areactively loyal

Exhibit 5



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as service and retail companies, havesimple, basic coverage needs and skewsmaller (less than $250,000 in annualrevenues), there are larger businessesacross a broad range of industriesthat are highly price sensitive. Perhapscounterintuitively, insurance buyers atsome larger, more complex small busi-nesses (industry expertise shoppers)prefer to control decision-making and

would do everything direct if they could;the same is true in some segments at thesmaller end of the market (uninvolved,reputation-centric).

Segments that rely heavily on agentsand brokers to help them navigate com-plex insurance needs do so for varyingreasons. “Independent agent loyalists”and “self-servicers” value agents forconvenience, for example, while “local

relationship/brand loyalists” and “high-touch, tailored protection-seekers” relyon agents for peace of mind.

Claims needs also vary by segment,with some ranking speed over paymentamount and others preferring high-touch,concierge-like service. The more granularcarriers can get in recognizing distinctcustomer needs, the more success theywill have at each step of the decision

journey. Furthermore, this abili ty will servesmall commercial insurers well in the eventthat direct models spark a war for marketshare like the one that took place in per-sonal lines auto. The more information andinsight that small commercial insurers canbring to segmenting their potential cus-tomers, the less they will need to spendon maintaining and gaining share.

1: Independent agent loyalists

Rely heavily on agents (93% useagent)

Tend to stay loyal with the chosencarrier

Do not want to spend timeresearching on their own

Relationship is important;cares about convenience

Price-sensitive

Relationship is paramount forprotection and peace of mind

Indifferent to price andrelationship; focused onreputation and expertise

2: Self-servicers

Ability to manage policy online ontheir own is a must

Need to be able to make the purchasequickly and easily

Prefer purchasing online/on phoneover customized

3: Price seekers

Price is the most important factor

Do not require much extrainsurance coverage

Do not require customizedproducts or services

4: Local relationship/brandloyalists

Access to local representatives isvery important

Prefers agents dedicated to onecompany (58% use exclusive agents)

Tend to stay loyal with the chosencarrier

5: High-touch, tailoredprotection seekers

Carrier must understand customer’sindustry

Important to work with a localcommercial agent

Willing to pay more for extensivecoverage

6: Uninvolved, reputation-centric

Carrier reputation more importantthan that of the agent

Least likely to work with an agent(53% direct from carrier)

Basic coverage needs

Lowest average premium ~$6,600

7: Industry-expertise shoppers

Carrier must understand industry

Willing to pay more for extensivecoverage (avg. premium $26,200)

Carrier reputation more importantthan that of the agent

Most likely to shop

The sevensmallcommercialinsurancesegments

Exhibit 6



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Carrier performance also varies widelyin the shopping (Exhibit 8, page 12) and

loyalty (Exhibit 9, page 12) phases of

the decision journey. Carriers must learnmore about the messages and marketingtouch-points that influence customers’decisions and apply these insights to im-prove conversion rates along the journey.

In the consideration phase, for example,42 percent of customers named the lead-ing carrier while only 25 percent namedthe seventh-ranked carrier. This perform-

ance gap persists at the quote and bind phases. Comparing initial considerationrates with personal lines carriers is in-

structive. The highest-performing smallcommercial carrier scores 42 percentversus 60 percent for the top personallines carrier. Among multiline carriers,there was a surprising correlation betweenthe amount of spending on personal linesmarketing and ranking in small commercialconsideration; this implies that exclu-sive agency carriers in particular may beunderinvesting in traditional marketing.

Switchers

Shoppers

Passive loyalists

Active loyalis ts

Total

Total

Not interested(bottom 2 box)

Interested(top 3 box)

Localrelationship

Localrelationship

Localrelationship

Self-servicers

Self-servicers

Self-servicers

Priceseekers

Priceseekers

Priceseekers

Overall Uninvolved

Uninvolved

Uninvolved

Exclusive agent

Direct

Independent agent

IA loyalists

IA loyalists

IA loyalists

High-touch

High-touch

High-touch

Industry-expertiseshoppers



Highest directchannel use

Highestagent use

Most activeloyalists

Least activeloyalists

56

34

91

26

20

54

36

54

10

58

23

19

42

23

35

58

11

31

76

47

53

66

34

20

80

43

57

41

59 77

23 24

76

44

43

26

22

45

34

15

62

1123

51

2318

53

2416

59

2314

56

2315

57

2613

56

14

7 7 8 4 10 75 5

10 10 6 3

Channel distribution by segmentPercent

Interest in buying direct (phone, online) from an insurance carrierPercent

Active and passive loyalists, by segmentPercent

Smallcommercialinsurancesegmentsdisplay distinctbinding behavior,proclivity fordirect, and

levels of loyalty

Exhibit 7

1 Excludes all respondents who selected “Other” or “I don’t know”

Source:McKinsey Small Commercial Insurance Buyer Survey, 2015


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Percent of those who renewed andshopped who obtained a quote

Percent of those who renewedwho shopped

Percent who renewed

Carrier 5

Carrier 6

Carrier 4

Carrier 1

Carrier 2

Carrier 3

Carrier 7

93

94

94

94

92

87

91

Carrier 4

Carrier 7

Carrier 1

Carrier 6

Carrier 3

Carrier 5

Carrier 2

25

22

19

22

31

30

27

Carrier 4

Carrier 5

Carrier 3

Carrier 2

Carrier 1

Carrier 7

Carrier 6

49

50

43

50

48

49

50

QuoteShoppingLoyaltySmallcommercialinsurancecarriers performvery well in theloyalty loop,although20-30% of any

top carrier’sloyal customersare shopping

Exhibit 9


Percent who purchaseafter quote

PercentPercent who get a quotePercent who considerthe brand

31

32

37

42

29

25

26

76

81

84

85

71

68

71

32

36

39

39

30

26

28

8

12

5

8

6

10

10

Carrier 7

Carrier 3

Carrier 2

Carrier 1

Carrier 6

Carrier 5

Carrier 4

Carrier 6

Carrier 1

Carrier 2

Carrier 5

Carrier 7

Carrier 4

Carrier 3 Carrier 4

Carrier 6

Carrier 1

Carrier 5

Carrier 3

Carrier 2

Carrier 7

Moment of purchase Acquisitionrate

Drive to quoteInfo-gatheringSmallcommercialinsurancecarrierperformance isinconsistentacross theshopping

journey

Exhibit 8



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No single carrier outperforms alongthe full shopping journey; the rankingschange at each stage. For instance,one carrier that underperforms ininformation-gathering excels in quote andpurchase. While it is unlikely that a sin-gle carrier could win at every step of the

journey, a large carrier could gain shareby improving performance in areas whereit is lagging.

Small differences in performance at eachstage of the decision journey lead to

large gaps in overall acquisition rates.2

The largest small commercial insurer hasthe lowest acquisition rate among thelarge carriers, whereas the large carrierwith the highest acquisition rate does notrank among the top 10 in terms of pre-miums; the likely medium-term outcomeof this disparity is, of course, a shift inmarket share.

A fresh look at the factors that determinewhich carriers become part of the cus-tomer consideration set undercuts thetraditional “everything through the agent”strategy that most carriers employ.

Agents represent about 30 percent ofthe influence on small commercial con-sumers’ consideration and selection of acarrier; the remaining 70 percent is com-prised of a combination of experience,word-of-mouth and marketing, includ-ing print, direct mail and sponsorships.Carriers will need to develop a broadertoolkit of marketing tactics to raise theirprofiles with insurance buyers in a mean-ingful way. The carriers with the bestperformance at initial consideration arealso among the top personal lines adver-tisers. Particularly at the small end of themarket, this may argue for an increase inmass media advertising.

Retention is a powerfulhidden lever

In their efforts to grow, carriers focusprimarily on acquisition, but the vastmajority of small companies make theirdecisions in the “loyalty loop”: of the 94percent who renew with their incumbentcarriers, 82 percent (77 percent of allcustomers) do so without shopping. Thismeans that investments in retention candeliver better returns than investments inacquisition. Existing customers tend to

have better risk profiles, and their carriershave usually adjusted pricing to reflectthe risks over time, rendering the ac-counts profitable. In addition, expensivemarketing is not an integral part of reten-tion dynamics.

Carrier performance on overall retentionvaries less than in shopping, but the per-centage of customers who shop and thenultimately renew varies by as much as12 points. Some carriers therefore facegreater risk of attrition—possibly becausetheir customers lean towards the “pas-sive” end of the loyalty spectrum.

As noted, customers display two kinds ofloyalty. Two-thirds of loyal customers are“actively loyal,” meaning they renew with-out shopping, are willing to recommendtheir carriers and are harder for com-petitors to dislodge. More vulnerable arethe 24 percent who are “passively loyal,”

staying the course out of inertia and notthrough any real attachment to their carri-ers. Many of these customers simply findshopping and switching inconvenient.

High levels of passive loyalty for a carrierare like an iceberg to an ocean liner—riskthat is mostly hidden. In personal lines,direct carriers such as GEICO and Pro-gressive grew mostly by attracting pas-

2 Derived by taking the productof a carrier’s conversion rateat each stage of the consumerdecision journey.


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sive loyalists from incumbents. Exclusiveagency carriers were particularly hard-hit.

A similar degree of disruption could eas-ily be in store for small commercial carri-ers. By definition, passive loyalists do notshop; however, they are more open thanactive loyalists to effective marketingefforts from competing insurers—particu-larly if those insurers hit the sweet spotof dissatisfaction that prevents thesecustomers from being actively loyal.

Carriers with higher levels of passive

loyalty are vulnerable and may not beaware of it. Higher levels of active loyaltytrack closely to certain segments—localrelationship/brand loyalists, for in-stance—and the drivers of active loyaltyare unique to each customer segment.

Along with a segment-specific targetingstrategy, carriers need to understandwhat drives active loyalty for their targetsegments and tailor the customer experi-ence to meet those needs.

It is widely understood that multi-producthouseholds are more likely to renew. Re-search reveals that 43 percent of smallcommercial consumers bundle personaland small commercial insurance withthe same carrier, and that 64 percent ofthese customers lead with the personallines policy. This means that roughlya quarter of small business customersplace their commercial policies with theirpersonal lines carrier.

In short, as competition intensifies in thesmall commercial insurance market, awinning strategy will be defined less byindustry or business-size specializationand more by targeting specific customersegments, developing a compelling mes-sage through the full range of channels,and delivering a distinctive value propos-ition to acquire and retain customers.

Consumer demand for alternativesto agents exceeds supply

Small commercial insurance custom-ers are taking more control in the earlystages of their decision journeys. Almost70 percent are gathering informationthrough non-agent channels, includingonline, and almost half of these shoppersare using both agent and non-agentchannels at this stage in the journey.

As they quote and bind, more peopleturn to agents. More than 60 percent

quote exclusively through an agent, and17 percent gather quotes on their ownas well as from the agent. “Purchase”shifts even more heavily toward agents,with 82 percent of customers bindingthrough the channel (Exhibit 10). In-terestingly, 18 percent of consumersrepresenting 10 percent of premiumssay they are binding direct, and someare indeed binding with carriers such as

Allstate-Esurance and USAA that havetrue online or call-center sales capabil-ities. But some of these customers mayhave misconceptions about what carriersmean by “direct” in this setting. For ex-ample, a customer may call an agent’soffice and consider that “direct.” Onthe other hand, some consumers whoactually did buy direct were surprisedto be informed of the fact. Particularlyin the smaller end of the market wherethe average buyer is less sophisticated,the distinction between channels is lessclear-cut to customers than it is to carri-ers or industry observers.

Some customers will always valueagents’ advice and personal relation-ships and will continue to bind throughthat channel, even if access to and theconvenience of direct quote and bindimproves, but a significant number of


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customers use agents simply becausethey are the most prominent and avail-

able channel, and would switch to directif given the option.

About 60 percent of small commercialinsurance customers surveyed wouldconsider interacting directly with acommercial insurer, and 56 percent ofthese customers would consider bind-ing direct (Exhibit 11, page 16). Almosthalf of respondents would be interestedin interacting with a remote or virtual

agent, a new model sometimes referredto as “pseudo direct,” currently beingpursued by Insureon, Bolt and otherproviders who have no local offices. Only40 percent currently say they would bewilling to bind through this channel.

A number of trends suggest an evengreater potential for virtual and direct dis-tribution in small commercial insurance.

First, although 82 percent of consumerspurchased through an agent, “top two

box” satisfaction3 with this channel was51 percent. While online purchase is a farnewer capability, customers who boughttheir commercial policy online report 49percent top-two-box satisfaction, and citeconvenience and comfort with conductingnancial transactions online as the pri-mary drivers. These factors will likely in-crease as carriers’ direct quote-and-bindcapabilities improve. Second, more thanhalf of the interactions consumers have

with their agents are by phone or e-mail,and most interact with their agents onlyone to three times per year. Over time, asin other industries, direct customers willlikely promote their experiences to others,creating a ripple effect.

Online retail across most categories,including financial services, is nearlyubiquitous, which is why the shift to

Small business insurance shoppers’ multichannel journeyPercent

Total 100100 100

Mixed:Both agentand direct

5

20

8

3

13

100100

Direct:Call centeror online 18

14

16

6

11

12

Agent :In ofce andover phone

in

82

4

25

2

4

57

Saleschannels

Informationgathering Quote Purchase

32

36

32

17

23

61

100

19

81

Service

Top three mostcommon journeysNearly 70% ofsmallbusinessesstart theshopping

journey usingdirect channels,while 18%purchase theirpolicy direct

Exhibit 10

Note: weighted N=705


3 Total percent of respondents who responded “extremely” or“very” satisfied.


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direct-to-carrier and virtual agencychannels in small commercial insurance

will likely occur at a faster clip than itdid in personal auto. Direct and pseu-do-direct channels could represent 20to 25 percent of premiums and 30 to40 percent of small businesses in fiveto 10 years. Customers choosing thesenew channels will likely be concentratedin certain needs-based customer seg-ments, industries such as retail and mer-cantile, and standard, low-hazard lines.

The only major constraint to growth wil l

be carriers’ ability to get direct and vir-tual quote, bind and service capabilitiesto market. McKinsey expects attackersto emerge with sharply defined direct ap-proaches; consider how the UK’s DirectLine upended the personal lines marketwith a simple direct model back in 1985.

McKinsey found significant overlap be-tween customers interested in direct and

those who are open to using a virtualagent to match them by phone with in-

surance professionals who are expertin their industry and can provide quickquotes from multiple carriers. Assumingthat exclusive agency carriers will bemore likely to pursue direct as a meansto drive leads to their agents, while in-dependent agents will prefer to partnerwith virtual agencies to avoid channelconflict, the result will be a battle forthe 43 percent of consumers interestedin both. Winners will likely be first-to-

market with a higher quality customerexperience across not only the directand pseudo-direct channel but the entiremultichannel environment.

The shift to direct distribution will haveimplications for underwriting. A separ-ate analysis indicates that policies forsmall businesses in 20 to 40 percent ofsub-standard industrial classication codes

Of interested customers, majority woulduse direct channel for info and quotingPercent (n=907)

Almost half of all decision-makers areinterested in binding direct from carriersPercent

“How interested would yoube in buying directly froma commercial insurancecompany in the future?”

Not very interestedor not at all interested

Extremely interested,very interested orsomewhat interested

Actual propensity to go direct will vary byproduct complexity and customer segment

100% = 1,518

40 (610)

60 (907)

Info-gathering

Getting a quote

Purchasing a policy

64

79

56

More than halfof customersinterested indirect showhigh propensityto bindin-channel

Exhibit 11



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can be underwritten with no-touch orone-touch underwriting. Yet, with notableexceptions including Travelers and TheHartford, carriers are struggling to extendstraight-through-processing beyond thesmallest, simplest risks.

Straight-through-processing capabilitiesare also becoming more important forcarriers in their relationships with trad-itional brokers, such as Marsh & McLen-nan with MMA, who are experimentingwith centralized, integrated models for

small commercial. As these models ad-vance, carriers who are unable to “con-nect” into these new systems will risklosing a major point of market access.

Consumers see products as over-complicated and feel unprotectedagainst emerging risks

Changing customer behaviors are amajor driver of opportunity in small com-mercial, but carriers can also addresstrends in product satisfaction and emer-ging risks to win share. Many customerswant to simplify the process for gettingthe right combination of products andcoverages, and several stated that mostof their interactions with agents involveconstructing the optimal combination oflines, identifying and modifying the re-quired coverages and then procuring thepackage at the most competitive rate.

Carriers could offer simple packagestailored to the largest industries, and themajor sub-classifications within them,to streamline this process. Lower-touchunderwriting and lower agent commis-sions could have a material impact onexpense ratios.

Among emerging r isks, cyber risk ismost troubling to small commercialdecision-makers, with nearly one in threenaming it as a top-of-mind concern andmore than one in three reporting thatthey are not adequately covered. Otheremerging risks include slander and lia-bility via social media (20 percent feelexposed) and terrorism, where concernvaries by industry. Businesses in con-struction, for example, are disproportion-ately concerned about terrorism. Anotherproduct-related insight from the researchwas that 40 to 50 percent of customerswould be comfortable buying health in-surance products from their P&C carrieror buying commercial P&C insuranceon a healthcare exchange, contingenton the choice of carriers and qualityof coverages.

Partner to fuel growth

Carriers may be missing significant

opportunities for growth by not pursu-ing partnerships more vigorously. Whenasked about what kinds of companiesthey would consider as small com-mercial business partners, 44 percentof respondents to McKinsey’s surveystated that they would be open to pur-chasing branded P&C products fromhealth exchanges. Separately, AmericanExpress was the individual companythat decision-makers associate most

with small business. While the executionmay be complex, there are opportun-ities for carriers to drive growth throughstrategic partnerships outside the P&Cinsurance industry.


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Success in the NewSmall Commercial

Insurance MarketExperience in the pre-direct personal auto lines marketcan help shape a perspective on how the U.S. smallcommercial insurance market will develop over the next fewyears. In the mid-1990s, GEICO and Progressive startedusing direct distribution and, over the next two decades,grew at three times the rate of the industry, mostly at

the expense of large incumbents. By the mid-2000s, theindustry was spending about $6 billion on marketing everyyear as attackers pursued new customers and incumbentstried to hang onto them. GEICO’s “15 minutes can saveyou 15 percent on car insurance”—as explicit a play forprice-conscious shoppers as the industry has ever seen—forced incumbents to try to stem the attrition. The result


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was massive value destruction. Pre-miums eroded and the perception ofauto insurance as a commodity productwas firmly established. It was not untilthis decade when personal auto insurersbegan to develop sophisticated market-ing capabilities and to stake out differ-entiated value propositions that marketshares finally started to stabilize.

As small commercial insurance headsdown a similar path, incumbents musttake action. Customer demand for digital

information and education, quote andbind in small commercial is already wellbeyond the capacity of carriers to provideit, so the door is open for fast-moving andinnovative attackers to disrupt the statusquo. In other words, the small commercialversion of GEICO is likely to emerge inthe near term. Nimble new rms, such asHiscox on the carrier side and Insureon indistribution, already have momentum. 4 Inshort, disruption is already afoot.

To meet the challenge, carriers will needto rethink their operating models on anumber of fronts:

1. Dedicated organization structure

and leadership. Carriers looking tostep up performance in small commer-cial should take a page from leadingcarriers such as Travelers, wherededicated small commercial leadershipteams report to overall commercial

lines or P&C leadership. This structure,which makes responsibility for smallcommercial performance clear andexplicit, has proven impact in termsof clarity of strategy and better eco-nomic outcomes.

2. Better marketing in a rapidly con-

solidating competitive landscape. As the “consumerization” of small

commercial insurance gains steam,marketing will be an increasingly im-portant factor in growth and retention,particularly at the smaller end of themarket. Large personal lines carriersare already leveraging their advertisingexperience to win at initial consider-ation with smaller businesses. At thelarger end of the market, where indus-try referrals and expertise carry moreweight, word-of-mouth references,industry publications and mailings aremore inuential. As noted, customersegmentation in small commercial in-surance will help carriers grow throughdifferentiated strategies and valuepropositions. Multiline carriers maymake advances by dedicating partof the broader corporate marketingteam to improving small commercialacquisition and retention, or by hiringmarketers to focus exclusively on smallcommercial. Other carriers may needto establish a new marketing func-tion at a level that is senior enoughto inuence strategy. However themarketing function is structured, it willrequire capabilities in areas includingmarketing strategy, customer segmentidentication and targeting, customerinsights, brand positioning, value prop-osition development, marketing touch-point mix optimization, and digital andsocial media marketing, lead genera-tion and retention.

3. Channel diversity and integration.

Although around 70 percent of smallcommercial customers use directchannels for some combination ofinformation-gathering, quoting andbinding, few carriers offer consum-er-friendly education content and toolson their Web sites, let alone directquote and bind. They have work to

4 Hiscox year-on-year growthrate between 2013 and 2014 was 39 percent. In recent press,Insureon CEO Ted Devinementioned that Insureon’s growthrate is around 40 percent.


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do in terms of customer-facing Webfeatures, but to deliver a pure direct

experience, carriers will also needstraight-through-underwriting for morethan just basic risks. In another ex-ample of needs outstripping capabil-ities, 40 percent of small commercialcustomers are open to using a virtualagent but only a few carriers havepartnered with rms that provide theseservices. A primary constraint is a lagin technological capabilities, such asscreen-scraping and XML, that allow

virtual agents to deliver on their prom-ises of super-fast quotes. Independ-ent healthcare exchanges could offeradditional opportunities for increasingvolume. In short, to succeed, smallcommercial carriers will need to offerbroad, integrated multichannel dis-tribution access (including a mix ofdirect and pseudo-direct), and developstrategic partnerships with smallcommercial-focused companies out-side the insurance industry. Carriersparalyzed by the risk of channel conictwith traditional agents run the risk ofbeing left behind.

4. An analytics-based, iterative ap-

proach to retention. Retentionvaries signicantly by needs-based

segment. Carriers should base theirretention strategies on clear ideas

about which segments are the coretargets, develop a deep understandingof what drives “active loyalty” in thesesegments, and then tailor customerexperiences accordingly. In the nextfew years, we expect carriers to renetheir value propositions as the growthin direct and pseudo-direct channelsimproves price transparency and easeof shopping. Carriers with high ratesof shopping in their book (as high as30 percent for some carriers), and alarge share of “passive loyalists” amongpolicyholders, will struggle to retainshare. All carriers should harness ana-lytical models to predict and preventchurn and develop suites of tactics toreduce churn, increase engagementand promote active loyalty that can beiteratively tested with customers.

5. More sophisticated analytics. Pre-

dictive analytics already plays a prom-inent role in selecting and underwritingrisks and processing claims, and thisrole will continue to grow. 5 In a recentMcKinsey survey, 90 percent of re-spondents reported medium to highinvestment in data and analytics, and30 percent called their investments“very signicant.” Many carriers havebuilt “centers of excellence” with morethan 50 data scientists, data engin-

eers and other experts working on abroad portfolio of use cases. Despitethese investments, however, signicantuntapped opportunities remain foranalytics across the value chain, fromacquisition to underwriting, pricing, re-tention, service and claims.

Analytics can help sales teams typeand target prospects in needs-based

5 See “Transforming into an Analytics-Driven InsuranceCarrier,” McKinsey & Company,January 2016

Carriers with high rates of shopping intheir book (as high as 30 percent forsome carriers), and a large share of

“passive loyalists” among policyholders,will struggle to retain share.


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segments, improving both acquisi-tion and retention, since loyalty variessignicantly by segment. In risk selec-tion and underwriting, carriers haveboosted protability by up to 10 per-cent by using data to identify and priceto primary loss drivers. And as in otherretail industries, analytics can help pre-dict and prevent churn to improve rev-enues and margins. Another importantgrowth opportunity that analytics canhelp uncover is cross-selling. Given thenumber of customers bundling per-sonal and commercial lines policies—and the fact that another 40 percentof the market is open to the idea—multiline carriers should pursue morecross-selling efforts. In certain indus-tries, associations have signicant inu-ence. Strategic partnerships with theseinstitutions could generate high-qualityleads for carriers. Since these oppor-tunities are limited, however, carriersshould stake them out quickly.

■ ■ ■

The U.S. small commercial insurancemarket will be a magnet for competitionin the coming years, due to its robustgrowth prospects and relatively frag-mented competitive landscape. As thekeys to success change, some carrierswill seek new insights, adapt and deliverthe tools and services their customersegments demand. Those who move tooslowly will falter; some will disappear.

Incumbent small commercial carriers willhave company as they adjust to the newlandscape. The big personal lines insur-ers—already a force in the market—are insome ways better positioned to succeedbecause they have already built capabil-ities to address “consumerization.”Innovative new rms—carriers and inter-mediaries alike—are primed to leveragetheir digital sophistication and legacy-freemodels to tap into the market.


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About McKinsey’s Small Commercial Insurance Buyer Survey

McKinsey’s Small Commercial Insurance Buyer Survey gathered responsesto a 45-minute online survey from more than 1,500 U.S. small businessdecision-makers. Industries included services, nance, construction, retail,transportation, wholesale and manufacturing. Product mix included liability,property, workers’ compensation, commercial auto and business interruption.


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Contact

For more information about this report,please contact:

Devin McGranahanDirector, [email protected]

Fritz NauckDirector, [email protected]

Brad MendelsonPrincipal, [email protected]

Sharmila Ray Senior Knowledge Expert, [email protected]


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Financial Services PracticeMarch 2016

Mckinsey Small Commercial Insurnace 2016

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