What insurance solutions do SMEs need for resilience

The Federal Reserve's interest rates hikes in 2022 have yet to adequately contain inflation, so it recently announced that it will enact higher than expected hikes in 2023. This translates to more expensive capital and a probable recession, which experts have been predicting for months. 

Aside from the rampant inflation plaguing businesses across sectors and geographies, small and medium-sized enterprises in particular are grappling with finding quality employees and increasing regulatory oversight. In fact, the World Economic Forum recently reported that 67% of SMEs worldwide are fighting for survival. Lingering supply chain bottlenecks and rising cyber incidents remain ongoing concerns that cannot be ignored. And there's also the exorbitant cost of insurance, a necessity too easily – and wrongly – moved to the back burner when experiencing the pressure of so many challenges. 

In today's risk environment of unprecedented complexity and uncertainty, resilience is the greatest competitive advantage. 

Here are some immediate non-traditional approaches to insurance that SMEs should consider to protect their businesses from new and evolving risks.

SME trends call for insurance solutions

Pandemics, cyber risks, business interruption, and systemic risks like supply chain issues top the list of the leading risks not currently covered which SMEs would like to add coverage/protection. The ongoing digital transformation of SMEs — as well as their vendors, partners, and clients — has made cybersecurity a leading risk vector, since attacks can be catastrophic for SMEs. In a National Cybersecurity Alliance study, 25% of small businesses that experienced a data breach filed for bankruptcy and 10% went out of business. Because large companies were migrating to the cloud and prioritizing spending on cybersecurity, hackers turned to small business targets beginning in 2020, when small business cyber breaches jumped by over 400%. Other major new trends include the expanding compliance requirements around data privacy, retirement plans, ESG and the proliferation of remote work and hybrid work complicating protection against employee theft or injury. These evolving risk exposures, regulatory rules, digitization, cyber threats, and remote work are calls to action for SME owners to fortify their insurance and risk management. 

Finding affordable coverage

One-third of small business owners said they wanted to update their insurance coverage and were willing to pay more in the next year. The number one reason (37%) was to "get coverage better suited to current needs." The pandemic introduced an array of new risks while also shining a spotlight on the gaps in SME protection provided by legacy insurers. It has become an obstacle course for SMEs to acquire affordable insurance that provides adequate protection. The Council of Insurance Agents & Brokers' Commercial Property/Casualty Market Report Q4 2022 reported that premiums increased for the 21st consecutive quarter in Q4 2022, with respondents reporting an average premium increase across all account sizes of 8.0%. At best, it is frustrating, and at worst, it is causing urgent concern for being able to perpetuate the business, unless some of these damaging trends can abate, or solutions present themselves to address the various problems. 

Carriers want to get comfortable with the risk

Not only are SMEs trying to adapt to the emerging risk vectors, but insurance carriers are as well. Insurers that would normally offer protection to SMEs are now requiring more time and effort in application completion. Further, only a small number of insurers are really focused on SMEs, not offering online application completion, and limited coverage in those areas where SMEs are especially vulnerable to claims. An even smaller number of insurers offer embedded protection in areas such as cyber, employee theft, and basic property insurance. Carriers are expecting all buyers of commercial insurance to accept reasonable and realistic deductibles and per-claim retention amounts on the liability side. Most traditional insurance sales are induced on a commission basis, which forces the retail insurance salesperson to focus on higher premium, enterprise accounts. SMEs have no choice but to consider innovative, non-traditional solutions.

Non-traditional insurtech routes

Risk management is more difficult for SMEs than for larger business enterprises, requiring heavy expenditure of limited resources in the analysis, evaluation, cost, and time for implementation. SMEs should seek out providers or insurtechs that have online tools, flexible term and payment options, flexible coverage options, and customized value-added services. Traditional insurers provide traditional policies that are inflexible and limiting, within a commoditized market. Many do not have the online tools to make the customer experience more streamlined. 

Disruptive non-traditional providers have created insurance products specifically designed for SMEs, which are both cost effective and generally protective against today's expanded risk surface. Additionally, some of these products are available for longer than an annual policy term, which allows the SME to place solid insurance coverage for an extended period, enabling them to focus on other business issues in the first years of operation. Insurtechs can efficiently provide cyber, errors and omissions, fiduciary, and professional liability bonds and insurance, coverages that are indispensable in building resilience. SME owners should also seek out bundled or embedded insurance solutions, so they are not forced to sacrifice critical coverages like cyber because of cost. Some insurers offer enhanced plans that also cover losses from an interruption in business and help protect against lawsuits and regulatory actions.   

SME owners' eyes are now opened to the unpredictable, existential events which the pandemic demonstrated are more than a remote possibility. To mitigate the unwieldy risk environment and to stay competitive in recessionary times, it has become mission critical that small and medium-sized enterprises find insurance solutions that insulate their businesses from destructive threats that hit the bottom line.