Digital Disruption In Small Biz Insurance-BCG & Morgan Stanley

Article Synopsis :

Insurers seem to embrace the notion that many small businesses in the US – those with up to 30 workers – will eventually buy insurance directly online. Opinions differ on how fast this shift is likely to happen.

The $100b Small Business Insurance market is poised for major disruption from digital players as buyers move online

“North America Insight: Digital Disruption in Small Business Insurance”, from BCG and Morgan Stanley explores the major drivers of insurance innovation in the $100b small business insurance (SBI) market. Key observations include:

• Changing demographics: By 2020, 60% of small business in the US will be owned by Millennials and Gen Xers. According to a BCG/MS survey, 38% of small businesses would buy insurance online if they were starting their businesses today.
• Unmet insurance needs of small businesses: Business owners are looking for simpler products. “Mom and Pop” agents will have difficulty filling this demand as commissions are small and investments too large.
• InsurTechs are tapping this emerging opportunity: Venture capitalists and traditional insurers, fintechs and start-ups are aggressively pursuing opportunities in the SBI space.
• Traditional carriers are entering the space: Recognizing the size of the opportunity (displayed below) large incumbents have started ramping up their digital efforts.

The Internet and mobile technologies will naturally be the main catalysts in digital uptake. Analyzing likely scenarios, the report makes the following predictions:

• By 2020, 15-30% of SBI will be sold digitally, up from 4% today, which will translate into a $17-33b premium market opportunity
• In the most likely scenario, by 2020 the report projects 24% digital SBI penetration or $26b annual premiums. This represents a 46% CAGR vs. 2% for SBI market overall
• Based on some underwriting and operating margin assumptions, the digital SBI market could result in $3-8b operating earnings for underwriters and $400m-1b for brokers
• Players could be constrained by channel conflicts and inertia
• SBI market consolidation may impact the market share of smaller regional players
• Smaller agents/brokers face the biggest challenges
• Large brokers could face competition from smaller brokers as they ramp up their digital investments
• Non-traditional players could rise up
• InsurTechs could be the biggest beneficiaries to gain market share, however, lack of underwriting and data expertise could impede or even doom some of these efforts

InsurTechs and new entrants will be the prime drivers of disruption with their focus on distribution variations such as E-Brokers, Aggregators, Start-ups, Technology Enablers, and Traditional insurers.

Based on in-depth market analysis the report puts forth three likely scenarios:

1. E-Broker Pioneers Scenario: (15% digital SBI, or $17b premiums) contemplates startup e-brokers appealing to newly created small businesses.
2. Carrier Catalysts Scenario: (24%, or $26b) assumes digital distribution platforms adopted by major incumbent carriers.
3. Game Changer Scenario: (30%, or $33b) envisions a few dominant SBI carriers distributing directly online.

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