Small businesses may be the final frontier for Group Insurers. When the current market forces mitigate, the growth potential will be substantial. Small businesses are taking a hard hit with the pandemic, ensuing economic impact, and various social and political forces that are at play in the insurance ecosystem. Coming out of the pandemic, companies that want to capture the small business group market will have to plan to use highly digitized and automated systems to ensure a reasonable financial outcome.
Of the 17,640,798 businesses in the US with North American Industry Classification System (NAICS) codes, at least 16mn are small businesses with less than 100 employees. So while a war wages for the top 5% of business for the lucrative voluntary benefits and overall employee benefits wallet share, the small market sits ravished by the pandemic, quietly waiting to awaken and re-spark what had been the fastest-growing segment for group insurance.
Models for capturing the small business group insurance market
The challenge to aspiring group insurers is how to capture the small business group insurance market. The fundamental characteristic that makes it a challenging endeavor is that it includes a large number of employers with a low number of employees - meaning high onboarding and setup cost per group with a relatively low premium per account. This drives a requirement for substantial automation, from group setup to claims and renewals, to minimize expense ratio and preserve some level of profitability.
There are several models for approaching Group Insurance for small businesses with various pluses and minuses for each.
Model 1 - An InsurTech-driven approach
One way to move forward is to approach the market with an InsurTech spirit of extensive digitalization and automation. This requires:
- Social media and a smartphone-friendly digital infrastructure.
- Extensive automation for group setup, given that a large number of employers with a small number of employees is necessary.
- Extensive and flexible intake of automation is required to deal with the census, health, employee enrolment, claims, etc.
- Full multi-generation (Maturists to Gen Z) usability including fax, paper, and smartphone.
- Underwriting will leverage inputs from all available external sources to offload the tedious customer data inputs that so often end in virtual walk-away applications. (Tried but never finished). Of these necessities, Group set-up will be the biggest digital challenge. Getting enough information to avoid fraud, accurately underwrite, and competitively bundle attractive offerings will make up most of the set-up challenges.
The upside for insurers that want to launch a new platform will include getting a cool new platform with a modern user experience, unhindered by existing infrastructure and legacy systems. This will provide speed to market for new products and services, straight-through processing for underwriting, claims, enrolment, and renewals. The financial results will be supported by great economies of scale if the offerings and price points are competitive and attractive. This will make the investment worthwhile.
The challenges of such an endeavor will include a relatively expensive up-front capital investment for someone that is a party to the program. The effort to build and launch a new fully digital operation will eat up 1-2 years of the calendar, which we have seen in recent history, can span a lot of ups and downs in the market and somewhat unpredictable financial results.
Model 2 - Leveraging Broker or Agent or Producers (BAP)
There are other ways to pursue this market. One is to leverage Broker/Agent/Producers (BAP). This means wholesaling bundles for select groups, affinity groups, employer types. Support the supply of offerings through brokerage system interfaces. Focus on supporting the BAP channel with training, a call center, and field tools. The advantage of this approach is to limit CAPEX. The challenge is the profit impact of commissions for the channel. Giving up the customer interface also gives up some level of control of the market. Furthermore, the consolidation of Brokerage firms in the future could cause awkward positioning if the approach is to wholesale offerings.
Model 3 - Leveraging Third-party Administrators
Become a wholesale provider to third-party administrators (TPA) with the infrastructure to support a small group. This could be achieved by down-market adjustments to the existing TPA infrastructure. The advantage here is an easy start-up with low CAPEX. But again, it is giving up a certain amount of control, and certainly an amount of profit to the TPA. Product and system functionality may also be impacted by fitting offerings into an existing TPA architecture.
So what are the options that make the most sense given the juncture we now face? A survey of existing competitors shows variations across the themes presented above. The best solution will be calculated based on the insurer’s strategy around the target market, operating model, and timelines for the go-to-market. Picking the right technology partner to achieve the targets will be key. Having a partner like Coforge with a breadth of understanding and domain knowledge across the InsurTechs, legacy, and innovation horizons will help considerably in the journey.
The NAICS system was developed for use by Federal Statistical Agencies for the collection, analysis, and publication of statistical data related to the US Economy.
