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Is small business a logical market extension for major commercial insurance carriers or a different space where few of their strengths apply? That critical question is increasingly surfacing as commercial carriers pursue small business.

Seeking new growth avenues outside of their highly cyclical core markets, heavyweight commercial carriers are tackling small business expansion from a variety of angles, including product development, streamlined systems for policy originations and new service options and delivery mechanisms.

Origination systems, for example, need to be simple and efficient but they are inheriting needless complexity from their commercial carrier authors.

Many of those commercial carriers are more attuned to the intricacies of serving large corporations. Targeted marketing, an absolute essential for peak results, seems absent from the agenda of those seeking to expand in the realm of small business clients. For these and other reasons, there is a question whether commercial carriers have fully established a strategic center of gravity in the small business market. Such a strategy is achievable but most commercial carriers haven't gotten there yet. Surmounting this management challenge will mean the difference between those companies who are achieving also-ran status and those who are creating breakout performances: Carriers need to awaken to this priority.

Most importantly, commercial players must adopt more of the retail orientation and capabilities of property and casualty carriers.

This underscores the significance of the March 2008 decision by Zurich Financial Services Group to migrate its $800 million U.S. small business portfolio from its commercial lines division to its personal lines division. And there's more to be done in adapting product knowledge and underwriting capabilities from the commercial domain.

Far from being abstract considerations, these issues will critically impact near-term market penetration and revenue growth. At a time when many commercial carriers are preoccupied with building software and regional distribution systems for the small business market, the advantage will go to those who can also keep their eyes on the factors that will nurture robust sales.

BRIDGING THE GAP

It is no secret that the U.S. property/casualty industry is in need of a jump start. Coming off of a 2007 contraction in net premiums written--a slump not seen since 1943--carriers in both the personal and commercial domains are training their sights on the small business market.

Research by New York-based Novantas LLC indicates that a fully-served small business insurance market could have generated roughly $150 billion of premium revenues for insurance carriers in 2007 alone, with more than a third of that potential remaining untapped.

Despite their impressive backgrounds in business underwriting, commercial carriers face many hurdles in penetrating the smaller end of the market. In the corporate market, commercial carriers are accustomed to working through large brokers to provide high-touch service to clients numbered in the thousands.

To succeed with small businesses, by contrast, they must work through independent agents and, increasingly, online wholesalers to provide highly automated service to a client base numbered in the hundreds of thousands, or even millions, within each large metropolitan area.

This has placed competitors on an extensive developmental curve that includes process automation, field marketing, sales and product development. Most commercial carriers are still working on technology platforms and core distribution and underwriting questions and haven't fully broached the revenue issues, meaning the race to penetrate the small business market is wide open.

To be sure, the most visible initiatives unveiled by the various major commercial carriers add up to a substantial expansion commitment. Yet the place where many companies are getting bogged down right now is in reducing transaction friction, despite substantial outlays.

In one instance, a major commercial carrier spent several tens of millions of dollars to upgrade its agency software, only to find that field reps and office managers actually found it more complicated to use, sparking a flood of requests for assistance in completing transactions.

In working with independent agents (and their varying skill levels) and a high volume of small dollar transactions, it is imperative to streamline underwriting and service as much as possible. For possibly several more years, we would anticipate significant additional effort and expense in this area.

As an example of transaction streamlining, Connecticut-based Hartford Financial Services Group Inc. this spring was expected to complete a nationwide rollout of its ExpressWay for Small Business, an application that allows agencies to obtain quotes without having to re-key information already contained in agency management systems.

Product development is another priority. The traditional business owner's policy is still valuable for many small enterprises, but many others need coverage for sector-specific risks, such as legal professionals vs. restaurateurs vs. construction contractors.

Commercial carriers have responded with offers that combine general liability coverage with various types of sector-specific coverage.

Last December, for example, Boston-based Liberty Mutual Group Inc. said it would expand liability coverage for 10 specific industry segments, ranging from retailers to janitorial service providers, under its Liberty Direct Solutions program. And sector-tailored coverage has been offered for several years by Minnesota-based St. Paul Travelers Cos., as part of its Select Accounts platform for small commercial insurance.

Streamlined service is a third concern. Even as carriers strive to customize offers to improve sales and retention, they also are seeing the need to centralize delivery to improve efficiency and customer satisfaction. This formula comes together online and in regional centers.

As it extended small business coverage to include employment liability, for example, Travelers gave customers access to a suite of online risk management services, including an attorney hotline, samples of employment policy statements and forms and Web-based training on employment issues.

A much more vital form of delivery centralization lies with regional and local service centers, not only for specialized sales, but also for claims. Carriers recognize that small business needs differ from those of personal lines customers, yet find it hard to financial justify dedicated service from agents.

One workaround, as seen at Hartford, is to establish small business service centers which can then coordinate with agents in addressing customer needs.

PULLING EVEN

In the midst of these efforts is a growing emphasis on technology and efficiency in processing insurance sales and service transactions--and no wonder.

On a per-client basis, the comparatively small premium revenues in the small business market don't justify the level of in-depth client interaction and service provided to corporate clients. And efficiency pressures could redouble if the market moves to an open pricing system that allows agents to make side-by-side comparisons, as with personal lines.

Critical though process efficiency may be, however, low unit costs ultimately may prove no more than the price of admission to the market. And all commercial entrants needing to reach certain thresholds in order to profitably serve small businesses.

This introduces the larger question of revenue strategy--what will it take for carriers to win new customers and market share?

The larger challenge for insurers is adapting current sales and underwriting models for commercial lines to the specific customer needs and risk profiles associated with the small business niche.

Carriers are wise to put their time and energy into: 1) adapting underwriting models to small business; 2) redefining sales and service processes in the distribution network to win the premium risk profile; 3) identifying priority opportunities for investment; and 4) developing adequate sources of small business information.

Cracking the code on the small business market presents a challenge well worth broaching, but commercial carriers won't have the field to themselves. Personal lines carriers have their own strengths, including a longstanding retail orientation and substantial relationship inroads established meeting the household insurance needs of small business owners.

While rigorous efficiency will be an important aspect of competition, ultimately it will be just the price of entry to the market.

For standout performance in small business insurance, commercial carriers will need two additional attributes: 1) a standalone management culture that is appropriate to this sector of the business insurance market; and 2) enhanced business intelligence to better target priority markets, customers and agents.

SAM RADWAN is a managing director and DALE JOHNSON is a principal in the Chicago offices of Novantas LLC, a management consultancy.

August 1, 2008

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