Carriers with saturated lines, digital-based players expected suitors for U.S. small commercial insurance market: McKinsey

Representing one of the few bright spots in the U.S. property and casualty market growth over recent years, small commercial insurance has become the focus of intense competition that is expected to intensify in the near future, suggests a report released Thursday by McKinsey & Company.

It is anticipated this ramping up over the next few years will attract attention from carriers whose primary business lines are saturated and commoditized, as well as from digital-based attackers seeking new opportunities, notes the new report, Small Commercial Insurance: A Bright Spot in the U.S. Property-Casualty Market.

“The market is both fragmented and profitable, a scenario that is drawing attention from carriers whose primary business lines are saturated and commoditized, as well as from attackers seeking the fields that are open for innovation,” states the report, which reflects proprietary McKinsey research that includes dozens of qualitative interviews with consumers and distributors, as well as a survey of a representative sample of more than 1,500 small businesses south of the border.

The small commercial insurance market – which serves business with as many as 100 employees and US$100,000 in annual premiums – is more dynamic than both mid-commercial and large commercial lines, “with robust growth and a fragmented competitive and geographic landscape,” the paper notes. [click on image to enlarge]

Direct written premiums were between US$99 billion and US$103 billion for 2013, up from US$91 billion in 2011. “This represents just over one-third of the broader commercial lines market and includes about US$6 billion in non-standard specialty lines premiums that are fairly evenly distributed across the U.S.,” the report notes. “The small commercial insurance market is divided among many carriers, with the largest accounting for only 6% of total premiums,” it adds.

One wrinkle in plans for the anticipated suitors, however, is that “small business owners are increasingly using – or open to using – direct channels to shop for and purchase insurance coverage, which is altering the fundamentals that once defined success for carriers,” states the report. That may mean few traditional carriers are positioned to capitalize on the ripe opportunity.

Carriers will need new capabilities to stay ahead of agile attackers, the report suggests. In personal lines, for example, carriers will succeed by using “deeper insights to deliver tailored value propositions and messages, at the right moments, to satisfy the unique preferences of customers in each segment.”

The report contends that “carriers with customer-facing capabilities – particularly exclusive agent carriers with strong personal lines businesses and some small commercial presence – will have an advantage over those that distribute through independent agents.”

But as independent agency carriers “struggle to keep pace with rapidly evolving customer needs, a third group is likely to make inroads: digital attackers unencumbered by legacy issues that can launch nimbler direct models,” the paper notes.

“As changing customer behaviour upends traditional business models, carriers will need to improve in a number of areas: the ability to gauge the size and nature of the opportunity; targeting and reaching the right customers; and delivering value propositions that attract and retain them.”

In personal auto, about 6% of survey respondents switched carriers during their most recent purchase or renewal period compared to 9% in McKinsey’s most recent auto research. The report suggests there are parallels with small commercial and that the potential shoppers and switchers far exceeds the 6% who actually switch. [click on image below to enlarge]

“The challenge for carriers is to identify and reach those on-the-fence consumers and convince them to switch,” the report explains. “Shopping and switching rates will also likely increase as innovators lower barriers to purchase, such as lack of transparency, cumbersome processes for comparing coverages and rates, complex forms and multiple agent interactions,” the paper adds.

McKinsey suggests that to reach the almost 50% of small commercial consumers who are open to switching in every renewal cycle, carriers must harness new and more granular insights into customer behaviour.

That said, the company’s research also shows “the two factors with the most polarizing impact on segmentation are price sensitivity and the extent and nature of customers’ reliance on agents.”

McKinsey reports that agents represent about 30% of the influence on small commercial consumers’ consideration and selection of a carrier; the remaining 70% is comprised of a combination of experience, word-of-mouth and marketing, including print, direct mail and sponsorships.

“Carriers will need to develop a broader toolkit of marketing tactics to raise their profiles with insurance buyers in a meaningful way,” the paper argues.

McKinsey research further reveals 43% of small commercial consumers bundle personal and small commercial insurance with the same carrier, and 64% of these customers started with the personal lines policy. “This means that roughly a quarter of small business customers place their commercial policies with their personal lines carrier,” the report points out.

“As competition intensifies in the small commercial insurance market, a winning strategy will be defined less by industry or business-size specialization and more by targeting specific customer segments, developing a compelling message through the full range of channels, and delivering a distinctive value proposition to acquire and retain customers,” the paper emphasizes.

Carriers will need to rethink their operating models on a number of fronts:

• dedicated organization structure and leadership;
• better marketing in a rapidly consolidating competitive landscape;
• channel diversity and integration;
• analytics-based, iterative approach to retention; and
• more sophisticated analytics.