So Far, So Close

In the past decade, the overwhelming rise of online channels has changed the distribution landscape of personal lines insurance, while commercial insurance products are still largely sold through intermediaries, seemingly immune to the sweeping trend of direct distribution.

But the landscape is slowly changing. In the next five to eight years, indicators are that there will be an opportunity for innovative commercial carriers to leverage online channels to target young, tech-savvy small business entrepreneurs with commoditized “micro” commercial products.

Independent brokers have traditionally controlled the distribution of property and casualty (p&c) insurance products.

The dominance, however, is fading steadily. In Canada, independent brokers’ substantial market share of 62% in personal lines premiums written in 2012 has also been their all-time low, due to a steady decrease of 0.5%, year-over-year, for the past 22 years.

The rise of the alternative distribution channel is mainly attributed to the advancements in online technology, combined with a significant shift in consumers’ preferences and expectations. The shift is expected to accelerate as the Generation Y and Millennial consumers are replacing the Baby Boomers and the Generation X in the insurance market.

However, the change has not affected all lines of business equally. In personal lines – and specifically personal auto – where products are highly commoditized, online distribution is fast becoming the prevalent method of purchase.

In sharp contrast, in commercial lines, the combination of complexity of insurance products and the diversity of consumers’ needs has accentuated brokers’ value proposition as the trusted insurance advisor. Consequently, independent brokers distribute 96.3% and 73% of commercial insurance products in Canada and in the United States, respectively.

To foresee the future of the commercial insurance market, the banking industry may be viewed as a viable case study. More than a decade ago, commercial banking served small businesses through commercial banking channels. This meant that, in some cases, entrepreneurs would make the trip to visit large mahogany-lined banking offices to apply for a working capital loan. However, innovative banks discovered that their small business portfolio can be better-served using the retail banking operating model.

The paradigm shift occurred as banks realized the transaction intensity and relationship preference of small businesses were closer matched to behaviours and preferences of retail customers, rather than larger commercial accounts. For example, small business owners were increasingly supplementing the branch channel with telephone, ABM and Internet banking – much like retail consumers.

As a result of realizing this demand for direct access, banks started to serve small businesses in a markedly different fashion. Small businesses were provided with online and mobile access, as well as in-branch service through dedicated small business advisors.

The back office operation was also modified such that small business transactions were serviced with retail banking infrastructure.

In addition, recent innovations such as mobile apps, social media networks, and new options for transactions (e.g., short message service, text payments and mobile swipe payments) were developed to cater to this segment.

In the United Kingdom, for example, a large high street bank has introduced a successful Business Internet Banking application, which was optimized for tablets and smartphones. The capabilities of this application include bill payments, foreign currency account balances, and balance and statements for the commercial card.

The track record of the banking industry is a positive gauge that the same can potentially be achieved in the insurance industry. Experience indicates that the global insurance industry follows banking by a lag of five to 10 years. Hence the change, although not imminent, may be on the horizon.

Deloitte has studied the U.S. market for signals of change in small business owners’ appetite for buying insurance online. A recent survey based on 751 small business owners in the U.S. found that there is a sizeable segment willing to use the direct channel for buying insurance products. Further, the study revealed the likelihood of interest is hinged on three factors: the size of the business, the age of the business owner, and the type of the required insurance products.

The findings illustrate that more than half of the respondents are open to the idea of buying through online channels, with 16% reporting “very likely” and 35% “somewhat likely” to buy commercial insurance online. Of those, a majority indicated general liability, commercial property and the packaged Business Owners Policy, commonly referred to as BOP in the U.S., are the top three products of choice to purchase directly.

In terms of business characteristics, the study found that small businesses run by younger entrepreneurs are more likely to buy insurance online. More than 60% of young small business owner respondents aged 26 to 34 indicated interest in buying directly, whereas the comparable ratio for their older counterparts is about 50%.

In terms of revenue size, findings show that small businesses with less than $100,000 in annual revenue are significantly more likely to buy insurance directly – 28% of smaller businesses with less than $100,000 annual revenue reported being “very likely” to buy insurance directly, compared to about 15% for small businesses with $100,000 to $5 million annual revenue.

Further, 84% of respondents indicated a “cheaper price” is the major reason that they are willing to buy small business insurance online. However, their expectations on discounts are fairly modest, largely under 15%.

The results of the U.S. survey, Deloitte believes, is applicable to the Canadian market. The structure of insurance distribution in the U.S. has striking similarities to that of Canada, in that the significant majority of commercial insurance products are distributed through independent brokers and the market share of direct online channel is low (7.3% of p&c products in the U.S. are distributed online in 2011).

Moreover, Deloitte’s research shows that both Canada and U.S. markets are composed of nearly the same percentage of small businesses. Defined as having fewer than 100 employees, small businesses constitute 98% and 99% of the U.S. and Canadian markets, respectively. For micro businesses – defined as having four or fewer employees – the percentages are 55% for Canada and 56% for the U.S.

However, there are differences that need to be acknowledged: there is a “technological maturity gap” of five to 10 years between leading Canadian and U.S. insurers. Moreover, there exists a higher degree of risk aversion among the business owners on the northern side of the border.

Deloitte’s Business Attitudes Survey of 2011 shows that not only do more Canadian business owners fall into a “risk avoiders” category, Canadian “risk avoiders” are significantly less likely to plan to increase revenues from innovation than their U.S. counterparts. This would suggest technology adoption rates that lag those of U.S. small businesses.

As a result, both the attitude of the market and the reaction of the insurers can be expected to follow that of the U.S., albeit with a sizeable delay.

It should be noted that despite the small business market’s positive attitude toward direct channels, the survey also revealed significant barriers that may hold many small business owners back. Lack of trust is the major one.

About two-thirds of surveyed small businesses indicated they do not trust an insurance company to deal with them fairly. Some other concerns include not receiving enough individual services, failing to properly assess the financial stability of insurers, not having an advocate in case of claims, and not having time to shop on their own.

All of these reasons su ggest that the broker value proposition as trusted insurance advisors resonates strongly with small businesses.

However, some innovative insurers have already attempted to bridge the barriers, successfully. In the U.S., for example, one insurer has already launched a professional liability product through its website. This carrier offers real-time online quoting and purchasing of the policy, as well as online claims reporting capabilities. In addition, it has strengthened its presence in the social media space in order to engage customers and create value through providing relevant data to small business owners.

Another indicator of change is the move by some leading commercial carriers to offer commoditized small business products through E-aggregators, both in Europe and in North America. This may indicate an acknowledgement of small business owners’ changing preferences, as well as willingness of insurers to test this emerging opportunity before committing to the up-front investment required to build proprietary capabilities.

Deloitte’s perspective is that there is a growing segment of small business owners who are ready to embrace the online channel for their commercial insurance needs in Canada. Research shows that micro businesses and young entrepreneurs are inclined toward direct channels, provided that part of the distribution savings is passed on to them in the form of lower premiums.

Although it may take five to eight years for small business buying preferences to change and for commercial carriers to build the required capabilities (e.g., product design, infrastructure, business model), winning companies, looking to differentiate in this highly competitive yet profitable space, should and will invest ahead of the pack and focus on this opportunity to succeed. 

The author wishes to thank Mehrad Ahari, senior consultant, Monitor Deloitte, for his help with researching this article.