Two-thirds of small business owners remain optimistic about growth in the rest of 2023 despite expecting a recession, Goldman Sachs reported in their February survey report. Still, the regional banking crisis along with the Federal Reserve’s latest interest rate hike is translating to more expensive capital and a probable recession, which experts have been predicting for months. Sixty-one percent of small business owners indicated the high interest rates and inflation (72%) have already had a negative impact on their businesses.
And then there’s the exorbitant cost of insurance, a necessity too easily – and wrongly – moved to the back burner when dealing with the pressure of numerous challenges. Lingering supply chain bottlenecks, natural disasters, geopolitical strife, and rising cyberattacks remain ongoing risk concerns that cannot be ignored. In today’s risk environment of unprecedented complexity and perpetual crises, resilience – the ability to endure destructive disruptions — has become a difference maker in success or failure. For small businesses, risk management is an essential element of building business resilience, and insurance is a fundamental pillar of response planning and risk mitigation.
Let’s look at the current state of play in the small business commercial insurance environment and some practical solutions. Fortunately, disruptive non-traditional providers have created insurance products specifically designed for small and medium-sized businesses (SMB), which are both cost effective and generally protective against today’s expanded risk surface.
Digitization and remote work create new risks for SMBs
The ongoing digital transformation of SMBs — as well as their vendors, partners, and clients — has made cybersecurity a leading risk vector. Because large companies were migrating to the cloud and prioritizing spending on cybersecurity, hackers aimed for small business targets beginning in 2020, when small business cyber breaches jumped by over 400%. Additionally, protecting customers’ data has become paramount to ensure success and brand reputation, as well as compliance with data privacy regulations. In a National Cybersecurity Alliance study, 25% of small businesses that experienced a data breach filed for bankruptcy and 10% went out of business.
A CNBC survey found that only 26% of small businesses had cyber insurance in 2021. Since attacks can be catastrophic for small businesses, owners should not only have cybersecurity response plans and tech solutions in place, but also cyber insurance coverage. SMB owners can seek out more affordable bundled or embedded insurance solutions from non-traditional providers or insurtechs, so they are not forced to sacrifice critical cyber coverage because of cost. Taking it a step forward, some insurers offer enhanced plans that also cover losses from an interruption in business and help protect against lawsuits from employee or customer data theft.
SMBs want to build resilience for the next major threat
To mitigate the unwieldy risk environment and to stay competitive in recessionary times, it has become mission critical that SMBs find insurance solutions that insulate their businesses from destructive threats that hit the bottom line. Along with cybersecurity, pandemics, business interruption, and systemic risks like supply chain issues top the list of the leading risks not currently covered for which SMBs would like to add coverage/protection. Nearly every major small business trend calls for insurance and bonding, including expanding expectations around data privacy and consent, retirement plan rules, ESG, and the proliferation of remote work that complicates protection against employee theft or injury.
Small business challenges in finding affordable insurance coverage
A third of small business owners said they wanted to update their insurance coverage and were willing to pay more in the next year. The number one reason (37%) was to “get coverage better suited to current needs.” The pandemic introduced an array of new risks while also shining a spotlight on the gaps in SMB protection provided by legacy insurers. It has become a thorny obstacle course for SMBs to acquire affordable insurance that provides adequate protection. The Council of Insurance Agents & Brokers’ Commercial Property/Casualty Market Report Q4 2022 reported that premiums increased for the 21st consecutive quarter in Q4 2022, with respondents reporting an average premium increase across all account sizes of 8%. At best, it is frustrating. At worst, it is causing urgent concern for not being able to keep businesses viable.
Traditional insurers are also feeling the squeeze
Not only are SMBs trying to adapt to the emerging risk vectors, but insurance carriers are as well. Rising claims inflation and growing competition from distributors are squeezing their profits. Insurers who would normally offer protection to SMBs are now requiring more time and effort in application completion. Carriers are expecting all buyers of commercial insurance to accept reasonable and realistic deductibles and per-claim retention amounts on the liability side. Further, most traditional insurance sales are induced on a commission basis, which forces the retail insurance salesperson to focus on higher premium, enterprise accounts. Traditional insurers provide traditional policies that are inflexible and limiting, within a commoditized market, providing limited coverage in areas where SMBs are especially vulnerable to claims. SMBs have no choice but to consider innovative, non-traditional solutions.
Non-traditional insurtechs open routes to building resilience
Risk management is more difficult for SMBs than for larger businesses, requiring heavy expenditure of limited resources in the analysis, evaluation, cost, and time for implementation. Only a small number of insurers are really focused on SMBs, so small businesses should consider insurers that either specialize in SMBs or offer products designed for SMBs’ unique needs. SMBs should shop for providers or insurtechs that have online tools, flexible term and payment options, flexible coverage options, and customized value-added services. Additionally, some of these products are available for longer than an annual policy term, which allows owners to place solid insurance coverage for an extended period, enabling them to focus on other business functions in the first years of operation. Insurtechs can efficiently provide cyber, errors and omissions, fiduciary, and professional liability bonds and insurance, coverages that are indispensable in building business resilience.
The World Economic Forum recently reported that 67% of SMBs worldwide are fighting for survival. SMB owners’ eyes are now opened to the unpredictable, existential events which the pandemic demonstrated are more than a remote possibility. Commercial insurance need not be prohibitively expensive or onerous. If small businesses seek non-traditional alternatives toward comprehensive protection against everyday risks and liabilities, they can fortify operational resilience and gain peace-of-mind as they compete in a difficult economy.
See these resources for more advice and information on insurance and bonding for small and medium-sized businesses.
Richard Clarke is Chief Insurance Officer at Colonial Surety Company. With more than three decades of experience, Clarke is a chartered property casualty underwriter (CPCU), certified insurance counselor (CIC) and registered professional liability underwriter (RPLU). He leads insurance strategy and operations for the expansion of Colonial Surety’s SMB-focused product suite, building out the online platform into a one-stop-shop for America’s SMBs.