In part one, we challenged insurers to rethink how they serve small and medium-sized businesses in light of the momentous changes triggered by the global pandemic. In part two, we explore in more detail the way forward for those insurers who want to embrace change and, based on the latest advances in analytics, unlock the huge potential in this vast market.
Let’s first be clear that in the post-pandemic world, small and medium-sized businesses (SMBs) will need insurance as much, if not more, than in the past: This remains a large and profitable market. But there are two big shifts happening that will shape the SMB insurance market over the next few years, creating new winners and losers.
First, SMBs are modernizing at a faster pace than traditional underwriters.
SMBs typically behave like consumers, wanting fast and convenient coverage at a low cost. To meet these demands, most underwriters are forced to assess risk based on broad statistics such as sector and turnover, gathered on an annual basis. The result? Broad-brush pricing and very little differentiation among risk profiles.
As we argued in part 1, SMBs in the post-pandemic world will be fundamentally altered: Those that survive, and the new ones that emerge, will be highly agile, technology-enabled enterprises with fluid business models.
In this new world, number crunching data that is limited or static will produce underwriting outcomes that are even more detached from reality. Any risk assessment conducted 12 months previously will become almost meaningless, and with margins already tight in this segment, even incremental shifts in pricing efficiency can have a disproportionate impact on profitability.
Second, as SMBs digitize, their demands and expectations as insurance customers will change.
Annual policies and laborious paperwork will become an anachronism as low-touch digital experience becomes the norm and policyholders demand greater product personalization and flexibility.
A McKinsey survey of SMBs in the UK showed that the number of respondents prioritizing flexibility in product coverage had risen four percentage points in the past five months alone. This is just the beginning of an upward curve, and insurers should be prepared.
The Power of Analytics
The challenge for insurers is this: To win in this market, they must adopt underwriting strategies that encapsulate the fast-changing world, while also creating a new style of product that can adapt and align to the needs of their clients. And all of this while maintaining customer convenience and competitive pricing.
These are huge challenges, and a tweak here or there to existing strategies will not be enough. We believe that a fundamental rethink is needed, and this is where advanced analytics is taking center stage.
Advanced data-driven underwriting, enabled by predictive analytics and artificial intelligence, allows underwriters to have at their fingertips a vast universe of current nontraditional data—both external and internal. Examples include key risk indicators such as demographics, crime rates, employee sentiment, social media sentiment, and more than 700 other characteristics that can be highly predictive of loss.
With this data, underwriters can build sophisticated risk profiles and make up-to-date and competitive decisions that accurately reflect the risk rather than relying on a blunt set of risk classifications. Suddenly, the risks inherent in two seemingly similar businesses now look very different, and underwriters can price accordingly.
Winning Customer Loyalty
The beauty of this approach lies in its simplicity. The process requires only two pieces of information: business name and address. This low-touch, automated underwriting monitors and adapts changing risk profiles with very little input required from the customer—a big tick in the customer convenience box.
The product personalization that this opens up is limitless. Data triggers can monitor if a business expands into a new territory, increases its digital footprint, or temporarily ceases trading. It then automatically adjusts the policy as needed. For those in the gig economy, short-term needs can be met with on-demand insurance rather than annual policies.
Advanced analytics will also enable insurers to support businesses holistically by using model outputs to offer risk management advice based on their clients’ specific needs. This will demonstrate an understanding of the customers’ broader needs and develop long-term relationships in a market where loyalty to insurers is historically low.
Traditional underwriting methods were stretched before the pandemic, and now they are reaching their limits. The next few years will see yet more change as the pandemic shock waves continue to reverberate, but unlike 2020, we can see what direction we are moving in. This is a big opportunity for insurers. From crisis comes innovation, and insurers should take a lesson from the many examples of entrepreneurship seen in the SMB sector this year.
Paul Mang is Chief Innovation Officer at Guidewire. For more detail on the topics raised in this blog, read his white paper “What Does Evolutionary Biology Tell Insurers About SMBs in the Post-Pandemic World?”