Four Small to Medium Business Insurance Types, Explained
March 10, 2023
From accidents to theft to lawsuits, there are plenty of scenarios that could result in unexpected costs for a small to medium business (SMB). Insurance is a vital tool for SMBs to protect themselves and their employees from potentially serious financial losses. However, with so many kinds of SMB insurance products on the market, it’s not always clear which types a certain business may need. In this blog, we will outline four useful insurance products and explain which kinds of companies would most benefit from having them. With 98% of businesses having an online presence, and many businesses storing sensitive customer and company data in internet-accessible databases, cyber insurance has never been more relevant or necessary. As the world becomes even more digital, the volume, sophistication, and frequency of cybercrime are rising, and the need for cyber protection is growing in equal measure. When a company experiences an attack on its digital property, the cost can be devastating. In 2021, the average cost of a data breach hit $4.24M, and on average, it takes a minimum of two years for SMBs to pay off the cost of a data breach. Commercial cyber insurance is a product that helps businesses financially protect themselves from the risk of cybercrime. Similar to any other insurance product, companies can save themselves from exorbitant expenses in the event of a cyber attack by making regular premium payments. A cyber insurance policy typically covers expenses such as: Even more comprehensive policies might reimburse a business if its money is stolen in a fraudulent transaction. One example would be if a company’s email is hacked, and the scammer uses it to initiate a fraudulent bank transfer. Other policies can include coverage for hardware replacement if computers were permanently damaged, higher ransom payments to regain control of systems or data after a ransomware attack, or reimbursement if a scammer tricks the business into sending money. Any company with an online presence can and should have some form of cyber insurance. If a company has a website where it conducts business—making transactions, storing information, or communicating with customers—or if it uses a cloud storage system to house critical information, that company would benefit from cyber insurance. Large corporations tend to be more appealing targets for cybercriminals because criminals can make more money per hack. However, SMBs are also frequently attacked, which can be far more detrimental for those companies. Because SMBs don’t have as much expendable income as larger corporations, the loss can have deeper, longer-lasting financial repercussions. Traditional insurers tend to create products that only cater to large corporations both in coverage options and pricing, which has historically left the SMB market significantly underserved and overcharged. However, the landscape for SMB cyber insurance is changing, and more digital, customizable cyber insurance products are becoming available for a wider variety of businesses. Running a small business comes with a lot of risk. For example, if a customer were to slip and fall on the floor of a hair salon, they might bring a personal injury lawsuit against the business. If a coffee shop’s espresso machine breaks down, the cost to replace it might be substantial (not to mention lost revenue while the shop couldn’t serve espresso). For an SMB, these kinds of costs can endanger the entire company. It’s far better for companies to err on the side of caution and protect against these risks, and for that, BOP insurance is essential. BOP insurance exists to protect a company’s assets and operations. By paying a monthly premium, businesses can protect themselves from larger expenses if a covered incident occurs, such as: BOP insurance policies often have options for additional endorsements such as cyber, that provides basic protection against cyberattacks, or crime in the event of robbery, theft, counterfeit money orders, forgery, or unauthorized credit card use. Depending on what industry the business is in, it could also have industry-specific coverage. For example, a restaurant might add endorsements that would cover losses related to food contamination. A retail store might add an endorsement to cover related costs if one of their products is recalled and must be withdrawn. Every SMB should have BOP insurance, but what varies is the level of complexity depending on the size of the business. For example, a self-employed freelancer would have different coverage from a medium-sized startup with a hundred employees. The needs of SMBs will be different as well, and the products available to them are unique. Digital insurtech providers of BOP insurance typically build easier-to-understand products that are made for freelancers and gig economy workers, and can be configured online. These products often aren’t enough for SMBs' needs—they only offer a limited amount of coverage, and often exclude risks that SMBs frequently encounter. On the other hand, legacy insurance providers of BOP typically build complex products that are too expensive and too complicated to understand without the help and recommendations of a traditional insurance agent. In many cases, the coverages and limits they offer are overkill for SMBs. Options are more limited for single-location small businesses, but as the insurtech industry expands, more digital-first BOP insurance products are entering the market that cater specifically to the SMB market. Allegations of employment discrimination, wage disputes, and sexual harassment are only a few of the issues that can spark a lawsuit, and all are expensive to defend against. In 2022 alone, workplace settlements cost companies nearly $2 billion combined. From big corporations to start-ups, a workplace lawsuit can be a major financial liability. Even if a company has done nothing wrong, the cost of legal defense can endanger the entire business, and cost thousands, if not millions, of dollars. Management liability insurance is a collection of coverages designed to mitigate the cost of lawsuits against the company—specifically related to upper management. That means that if the company is sued, the insurance may cover legal fees, settlements, and other related costs. The three most common coverages included in management liability insurance all cover a different type of lawsuit: Some management liability packages may also include non-lawsuit-related coverages, such as a type of crime insurance that covers kidnapping for ransom and other specific crimes against a company’s senior management. Any business with a management or leadership team should have management liability insurance. Companies with a C-suite, board of directors, or strategic investor partners could benefit from the protection that management liability offers.
What SMB management liability insurance products are available? The small to medium businesses that are most likely to need management liability insurance are startups. However, this market often has a difficult time finding a suitable policy. Because most available management liability insurance products were created for larger companies, these products evaluate the level of risk associated with the business based on things like how long the company has been in business, how many employees they have, and their revenue numbers. Since startups often have little or no revenue and relatively limited business history, these kinds of underwriting factors often lead to startups being flagged as very high risk. When a company is flagged as high-risk, they will either be denied coverage altogether or, if they do get approved, the policy they are offered may be extremely expensive. Many startups simply can’t afford it. A secondary challenge is how coverages are sold. It can be difficult for startups to understand what coverages they need because most distributors sell D&O, EPL, and Fiduciary coverages as separate products without a clear explanation of how they work together. This can be a barrier for these businesses getting the protection they actually need. However, there are management liability insurance products on the market that cater specifically to startups. These products package the three coverages as a unit so they are easier to understand, and they use alternative datasets to better evaluate startup risks. That being said, it’s important for startups—and companies that cater to startups—to do their research and find a product that fits their business. Parental leave is the third most requested benefit for US workers, but according to the Bureau of Labor Statistics, only 23% of privately employed U.S. workers had access to paid parental leave benefits in 2021. In the absence of a national parental leave solution, it’s up to the private sector to find ways to support new parents in the workforce. Some companies offer self-funded paid leave to employees, but for many SMBs, this can be prohibitively expensive. Parental leave insurance is a business insurance innovation designed to make parental leave affordable specifically for SMBs. The company chooses a package that covers the kind of leave they want to offer their employees, including factors such as what percentage of their employee’s salary to pay during leave, and how long employees can take leave. Once the policy is customized and purchased, the SMB simply pays the insurance provider a recurring premium based on their selected benefits and employee demographics. When a covered employee takes parental leave, the company files a claim through their insurance provider’s claims process. Then the company will be reimbursed for the cost of paying the employee during the covered leave period, up to the contracted amount. Every SMB can and should offer parental leave insurance. It is an important benefit for employee acquisition, retention, and overall satisfaction. It’s a solution that mitigates the large, unexpected leave costs that often prevent SMBs from being able to offer this benefit. With a parental leave insurance product, the employer can avoid unexpected costs by paying a regular premium, and they can rest easy knowing their insurance policy will protect them. Boost’s parental leave insurance is a first-of-its-kind product and is currently the only parental leave product on the market. It is specifically designed for SMBs and fills an important gap in the market. Seeing as there is no national parental leave program or solution, the other options for parental leave include short-term disability, a combination of state-funded parental leave and PTO, and the Family and Medical Leave Act, which legally gives 12 weeks of protected, unpaid parental leave wherein the parent cannot lose their job during that time. However, most people cannot afford to go 12 weeks without pay. In short, parental leave insurance is a great option for SMBs who are looking to provide an equitable solution to their employees. All businesses need protection against unexpected financial loss, and SMBs are no exception. When something does go wrong, the right insurance products can be a crucial support for SMBs getting back to business as usual.
If you cater to small to medium businesses and want to learn more about how you can grow your revenue by offering insurance—including but not limited to cyber, BOP, management liability, and parental leave— contact us, or dive into building your insurance program with Boost Launchpad. Continue Reading
SMB vs. Enterprise Insurance: Why It Matters
June 23, 2023
Regardless of size, shape, location, or industry, all businesses have one thing in common: they need insurance. From employee mishaps to cybercrime to lawsuits, running a business carries a lot of risk, and insurance is a vital tool in preventing potentially ruinous financial loss. While all businesses need insurance protection, there’s no single product that will work for every company. Even within the same industry, SMBs and large enterprises will likely need different insurance products to best meet their needs. For businesses that offer B2B insurance, this means that serving both enterprise and SMB customers will most likely require offering multiple products of the same type. In this blog, we’ll discuss how insurance needs differ between enterprise and SMB companies, and why SMBs need insurance products designed specifically for them. A large corporation faces very different risks than an SMB, across nearly all risk categories. This can make it difficult for a single insurance product to effectively protect both an enterprise and an SMB. For an example, let’s look at two hypothetical companies, and their risk factors. One is a fully-remote software startup with 20 employees, the other is an established SaaS provider with 3000 employees split across six office locations (including two offices outside the U.S.). Both companies share some of the same general risks. For instance, both could be targeted by cyberattacks, or by lawsuits alleging mismanagement by their leadership teams. However, the specifics of those risks can vary quite a bit. The startup likely has a much smaller leadership team than the enterprise, with a much narrower focus. It has no physical offices, and likely relies on cloud providers rather than owning its own servers. With a relatively small footprint, its cyberattack risk is more likely to come from general phishing attempts than specific targeting by determined, well-resourced attackers. The enterprise, on the other hand, likely has a large and multi-layered executive team, across multiple countries with different financial and employment laws. Its IT infrastructure will be significantly more complex than the startup, and its position as a well-known business software provider is more likely to attract unwanted attention from cybercriminals hoping for a big payday. While both the startup and the enterprise will need cyber insurance and management liability insurance, it would be difficult for the same products to work well for both companies. A product that fit the needs of the enterprise would require the startup to pay for extra coverage it doesn’t need, while a product that fit the needs of the startup would leave the enterprise dangerously underprotected. The differing risks between SMBs and enterprise affect more than the kinds of coverage they need: it can also affect how much they need to pay for it. The underwriting guidelines for traditional business insurance products usually consider factors like how long a company has been in business, how many employees they have, and their revenue numbers to determine the pricing for a policy (or whether they will offer a policy at all). While these are reasonable factors to use for assessing an enterprise business, they can cause problems for SMBs. Going back to our example: these traditional metrics of how many employees, how much revenue, etc. can paint a good picture of the risk of providing insurance coverage to our enterprise SaaS company. The hypothetical business is large, very profitable, and is a mature player in its space. With a significant track record to consult, an underwriter could reasonably determine which policy rate accurately reflects the risks of providing the enterprise with insurance. For SMBs on the other hand, these metrics can be very challenging. Our example startup has only 20 employees and just two years in business. As a venture-backed company focused on building its product offering, the startup also has almost no revenue. While these are very common conditions for startup businesses, they would be alarming at a large enterprise - and so the traditional underwriting guidelines view them as red flags. The startup may be a well-run, reasonably stable business, but if it attempts to buy traditional business insurance it will likely be quoted a very high rate - or refused coverage altogether. For the startup to get fairly-priced business insurance coverage, its risk needs to be assessed by guidelines designed specifically for SMBs and startup companies. SMB-specific insurance products will evaluate risk based on the business realities for smaller companies, and come to a more accurate decision about how much risk a small company actually represents to the insurer’s portfolio. The third big difference between insurance protection for enterprises and SMBs? How much they can afford to pay for it. For most SMBs, the reality is that they simply do not have the budgetary resources of a large enterprise company. If an insurance product is too expensive, then it doesn’t matter how crucial it is for protecting the business. The SMB can’t afford to buy it. This is related to the coverage issue - after all, the more coverage an insurance policy includes, the more it will cost the buyer. The extensive coverages included in enterprise-oriented business insurance, while valuable for their intended buyer, also drive up the cost of those insurance products. For SMBs, this means unnecessary insurance protection can actually be a negative, in that it makes it harder to afford insurance at all. Insurance products designed for SMBs take these budgetary concerns into account, and are built around how to provide cost-effective protection. Sometimes this involves SMB-centric risk assessments like we discussed above, which enable insurers to offer lower prices through a clearer understanding of the SMB’s risk. Other times this may mean prioritizing protections that would be most valuable to SMB customers, and removing coverages that aren’t as important.
While business insurance is critical for both enterprises and SMBs, the two company categories are different enough that one product rarely fits all. Insurtechs that want to serve a range of business sizes should consider offering separate enterprise and SMB products for insurance types like cyber or management liability, to ensure their customers can get the best protection for their money. Looking to expand your business insurance offerings to include SMBs? Learn more about how Boost makes it easy to add new LOBs, or talk to an expert to get started. Continue Reading