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Small business survey — Millennials fuel rise of direct insurance distribution

Results of an S&P Global Market Intelligence small business survey suggest that property and casualty insurers' investments in online distribution to small and midsize enterprises are well founded from a demographic perspective.

The vast majority of the 1,371 U.S. respondents who said their companies had property, liability, business interruption and/or other forms of coverage indicated that they purchased coverage either in person or over the phone from an agent. But an increasing amount of small businesses appear to be buying coverage online from an insurance carrier, and millennials and Generation Z buyers had a greater propensity to go direct.

The number of respondents who bought coverage for their companies online directly from a carrier rose to approximately 23% in the 2019 survey from 14% in the 2018 version. Of the direct buyers of insurance, 37% were between age 18 and 37; only 28% were age 53 or above.

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Consistent with the results of the previous survey, approximately one-half of respondents said they relied on their personal lines agent to obtain coverage for their small business. About 37% of respondents used a different agent to obtain business insurance. The personalized service provided by agents and existing agent relationships ranked as the primary reasons cited by respondents in their decisions not to purchase coverage directly.

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The relative number of respondents who said they did not purchase directly because they were unaware it was possible to do so declined in the 2019 survey to 7% from 10% in the 2018 survey. Among the 2019 survey respondents, a more popular reason for not purchasing directly was their perception that the process is too complicated. Approximately 15% of the respondents who did not purchase directly cited complexity as a factor in their decision, up from only 9% of respondents in the 2018 survey.

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That conventional wisdom finds itself in the crosshairs of one of the P&C industry's most prominent new initiatives in the direct-to-small and medium-sized business space: the THREE policy offered by Berkshire Hathaway Direct Insurance Co..

Big plans, short form

The Berkshire Hathaway Inc. subsidiary promises to offer customers a comprehensive, "jargon-free" three-page business insurance policy covering property, liability, auto, workers' compensation and cyberrisk at a competitive price. Businesses initially targeted include restaurants, residential construction, tradesmen, creative, professional financial services and transportation.

The 2019 survey found that certain of those businesses were well represented among the respondents who bought business insurance coverage on a direct basis. Approximately 29% of those who did so said their primary line of business fell into the "professional" category in sectors such as healthcare, finance, legal and education. Services — including the likes of transportation, automotive repair and information technology — included about 19% of the respondents who purchased directly. Construction ranked as the third-largest category; 14% of respondents who bought insurance directly said their business was in that field.

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Chairman Warren Buffett, speaking during Berkshire's annual shareholders meeting in May, suggested he has big long-term plans for an initiative with relatively modest beginnings.

"We're only just started up in four states, but 10 or 20 years from now, that will be a significant asset of Berkshire, just like [GEICO Corp.] has grown from $2-and-a-fraction billion of premium to, who knows, but well into the mid-$30 billion[-range]," he said in reference to the No. 2 U.S. writer of private-passenger auto insurance.

Berkshire Hathaway Direct generated direct premiums written of $7.2 million in the first quarter of 2019. The company's $17.1 million of commercial lines premium volume in 2018 represented little more than a rounding error in the U.S. P&C industry's overall commercial lines direct premiums written of $310.81 billion.

Not unlike GEICO with its familiar "15 minutes to save 15%" slogan, THREE seeks to differentiate itself from incumbent competitors on the basis of simplicity and price. Among other things, THREE's marketing materials state that the policy is designed to cost 20% less than comparable coverage and does not involve "costly brokers."

Budding rivalries

The initiative has not gone unnoticed by competitors or the brokers against which it is taking aim.

Arthur J. Gallagher & Co. Chairman, President and CEO J. Patrick Gallagher pledged that "we're going to fight this" in response to a question about THREE during a March conference call.

"Everybody's pouring billions of dollars into disrupting this business," Gallagher said. "We've fought multichannel carriers forever."

And, he added, the middle-market broker has chalked up some victories in those battles. Gallagher recalled that Liberty Mutual Holding Co. Inc. "threw in the towel" a decade earlier as it pertained to an initiative targeting direct distribution to middle-market and upper-middle-market business. Liberty Mutual sold renewal rights to that business to a handful of brokers, including Gallagher's company.

Berkshire is hardly the only large company targeting the small business insurance market. Progressive Corp. has expressed its intent to leverage its market-leading position in the commercial auto business to generate long-term growth in certain adjacencies. The company has been testing the sale of those products mostly on a direct basis on the paper of unaffiliated carriers, executives said during a February conference call. In May, Progressive launched BusinessQuote Explorer, an online quoting tool for small business insurance, including business owners' policies, professional liability, workers' comp and general liability.

"One of the things I like about this business is it's really creative, it's changing all the time," Gallagher said. He later added that while he does not "fear startups," he is focused on keeping his company relevant in an evolving marketplace.

A slow transition

Satisfaction with the status quo creates a near-term barrier to entry to those companies seeking to disrupt the marketplace, judging from responses to our 2019 survey about the service provided by an agent or the nature of the coverage provided. Overcoming perceptions regarding the cost, comprehensiveness, claims-handling process and complexity of direct purchases also remains a significant challenge.

Leading independent agency companies like Travelers Cos. Inc., which itself made one of the industry's most prominent investments in digital small business insurance capabilities through its 2017 purchase of U.K.-based Simply Business, do not seem to anticipate an immediate narrowing in their moat.

"We're not seeing any material shift of channel preference right now," said Travelers President of Business Insurance Gregory Toczydlowski during an April conference call. "We believe we've got a model that's very effective, and we're investing to make it as frictionless as possible. So wherever the consumer ultimately goes in the future, we think we're going to be positioned very well."

Methodology

S&P Global Market Intelligence's 2019 U.S. small business survey was conducted between Feb. 16 and Feb. 24. There were 1,597 respondents 18 years and older who worked at businesses with $50,000 to $10 million in annual revenue and were primary decision-makers for financing and/or purchasing. Out of that total, 1,371 respondents had a business insurance policy. Survey results have a margin of error of +/- 2.7% at the 95% confidence level based on the sample size of 1,371.