Small Businesses are Big Business

According to the U.S. Census Bureau there were more than 5.6 million firms actively doing business in the United States in 2001, the latest available total. This doesn’t count the millions of people who are self-employed. About 5 million of these firms employed fewer than 20 people. Another 600,000 firms employed between 20 and 499 people. About 17,000 employed more than 500.

According to the National Federation of Independent Businesses (NFIB), “a typical small or independent business owner employs approximately five people and averages gross sales of $350,000 annually.” Its members, however, “come in all sizes … farmers, manufacturers, service company owners, neighborhood retailers and wholesalers.” Insurance is one of their primary concerns, as disasters that larger companies can absorb may literally put them out of business.

With such a large market, it’s unsurprising that almost every major carrier has some form of small business program. One of the best known and most established is Hartford’s, one of the top three carriers in the field. “We basically offer two programs according to the size of the business,” said Hartford spokeswoman Sue Honeyman. “Our small business sector is Select Customer and the product is Spectrum; our large small business sector is Select Xpand and the product is Spectrum Xpand. There’s a comforting symmetry in that, don’t you think?” Hartford defines small business as firms with “up to 20 employees and/or up to $5 million in annual sales.”

Hartford’s Spectrum package begins with definitions. It separates businesses into more than 1,000 classes by type. Honeyman termed the breakdown as a way of achieving “mass customization. We found a way that allows agents to write more classes of business more quickly,” she continued. “They’re able to pinpoint insurance needs by industry without spending a lot of time, which makes underwriting easier and faster.”

Both the agent and the company benefit from processing that enables faster and more accurate risk assessment. Not only does it save time, but it also lowers expenses incurred. “But at the same time,” Honeyman said, “there’s sufficient complexity [in the system] to really evaluate the situation properly and assess and cover the risks.”

This ability is critical for both carriers and producers. Technology makes it possible to acquire vast amounts of information—too much in fact. The secret of good information technology management is to get the critical information to the right person rapidly and coherently. No agent can spend an untoward amount of time on any one client, and being able to quickly evaluate a client’s needs and find the right carrier is crucial.

Carriers like Hartford recognize this. “Agents are our primary sales force,” Honeyman said. “Everything we do is with the agent in mind. We are mutually dependent, and we want to make sure they do business with us and make a profit.” With the right information available the agent can decide if he wants to talk to Hartford or another carrier. “We can’t write every business,” Honeyman said, “but we can write most of them.” The other side of the matter is that if the risk is in a class the company doesn’t write, or in a location it doesn’t cover, the agent and the client know this and go to another carrier without wasting time. Conversely, once a working relationship is established with a carrier it tends to grow.

This growth constantly changes the sector’s nature, so that a small business becomes something else as it grows. What is small and what is, perhaps, less small? One way to answer that question is by redefining it. That’s what the Hartford did recently with its new program aimed at “big small businesses,” which may sound like a contradiction in terms until you look at the parameters the company set. First, it noted that a number of today’s small businesses are rapidly expanding their operations, “moving into work spaces with higher property values, recording higher annual sales and hiring more employees.”

So, Hartford upgraded its “small commercial insurance offerings to embrace the needs of the upper end of the small business market—businesses with annual revenues or total property values of $5 million to $15 million.” Judy Blades, senior executive vice president of Hartford’s property/casualty operations, noted: “The 600,000 small businesses within this segment represent an estimated $20 billion in annual premium, and for insurance they now have a great place to call home at the Hartford. We have retooled and enlarged our small business capacity and invested tremendous resources to provide the right product, service and technology to satisfy this important segment.”

The company has set up a business unit, Select Customer Xpand, “specifically to provide agents with an easy and profitable means to write businesses that fall between the traditional small commercial and middle market segments. It described the “cornerstone product of the new business unit, Spectrum XpandSM,” as an “easy-to-write business owners policy with enhanced coverages and customized limits for larger small business accounts.”

Specific features of Spectrum Xpand include:

• Broad underwriting appetite with more than 500 eligible classes across a variety of industries;
• Electronic vandalism and business income protection available for all business classes;
• Specialized stretch endorsements—which bundle increases in individual base coverages and/or additional optional coverages in a single endorsement tailored to a specific industry group—available for broadcasters, building owners, business services, communications and media, special trade contractors, international, janitorial services, law offices, manufacturers, metal manufacturers, publishers, printers, retailers, technology and wholesalers;
• Higher optional coverage limits of up to $2 million for accounts receivable, valuable papers and electronic data processing;
• Option of adding blanket building and contents coverage across multiple locations;
• Split rating approach for all classes, so accounts aren’t overly penalized for higher exposures in a particular area.

As this approach recognizes, it’s practically impossible to create a one-size-fits-all type of coverage. Most businesses don’t remain static. As they grow, or they decline, new ones replace them. Howard A. Smullen, executive vice president and chief operating officer of R.C. Knox & Co., summarized how they evolve at the Professional Liability Underwriting Society’s recent annual convention in Philadelphia.

“Entrepreneurs start small businesses with management centralized in the owner rather than professional managers. The board of directors is the family, there’s no CFO and no human resources director. Professional advice comes from outsiders, typically lawyers and accountants.”

As the business grows the situation changes. “More outside management is needed and there’s more delegation of authority,” Smullen said. “Consequently policies [covering this type of business] become more complicated.” Eventually the enlarged company, its owners and employees, face risks that were at best minimal when it was a smaller enterprise. Management now has to consider such things as E&O coverage for professionals, D&O coverage, EPLI, increased workers’ comp costs, health plans and other employee benefits, retirement plans and a host of other needs. That market is growing.”

The U.S. economy now has around 1.1 million businesses with 20 to 1,000 employees, according to Jeff Jones, senior vice president and chief marketing officer of national broker USI Holdings. “It’s a big market sector,” he said, “and no one broker has a dominant market share.” He indicated that while USI also offers programs for both smaller businesses and larger ones as well, the “mid market sector has a desperate need for advice and for someone to ask.”

USI has adopted a multifacted, cross-selling approach. “Their business needs are much greater than property/casualty insurance,” Jones said. “They need health plans, wealth management and other financial services, and the key we’ve found is to make these professional services available from a single source.”

In order to make its holistic model work even better, USI’s three-year business plan calls for fully integrating service center personnel to address clients’ needs over the entire range of their business with specialists in each area in its offices, making them available to its clients on a regular basis.

“It’s not a question of going down the hall to ask advice, either,” Jones said. “These people are in each of our offices as part of the stewardship process. Each company’s needs are different—different products, different geographically—you have to find the right fit in order to become a strategic partner.” The people handling those accounts may no longer be categorized as producers in the traditional sense, but as experts in the various needs required to properly manage the needs of mid-size businesses.

“Part of our strategy involves bringing in new producers and assigning them to personal and small business lines for training and experience—to have them learn how these businesses work in the field,” Jones continued. “We’ve found that the carriers also want to participate. Eventually we are looking to create a small business specialist.”

There is a lesson to be learned here. It’s part of a broad transformation of the insurance agent from an order taker to a financial advisor. It’s highly important in the mid-size small business arena, where there’s explosive growth and clients are becoming more sophisticated. “Agents and brokers are going to need to provide a broad product line, which will see a separation between those who do and those who don’t,” Jones said. “Just because it’s a small P/C account, doesn’t mean it’s a small account.”