Morgan Stanley
  • Research
  • Jul 8, 2016

Millennials Drive Digital Shift in Small Business Insurance

InsurTech startups are offering simpler products and improved customer experience to small business owners, amid a demographic change that is challenging incumbents to speed innovation.

First, it was music, photography, and video, then travel agencies, print media, and auto services. The next frontier of digital disruption? Small business insurance, according to a recent report by Morgan Stanley Research that includes contributions from The Boston Consulting Group. 

A number of catalysts are driving change. Digital insurance startups, so-called InsurTech, have emerged to offer simpler products and streamlined customer experience, catering to a growing generational shift toward Millennials among small business owners.

Morgan Stanley and BCG estimate that by 2020, Millennials and Gen-Xers will own more than 60% of U.S. small businesses, up from around 38% today, and that digitally underwritten insurance could grow from $4 billion—out of $100 billion in 2015—to as much as $33 billion by 2020. This presents significant opportunities for both new entrants and traditional carriers who are positioning to take advantage of this large, profitable but fragmented marketplace, say Kai Pan, who covers property and casualty insurance at Morgan Stanley and is lead author of the report, and Achim Schwetlick, a Partner and Managing Director at BCG.

Slow but Steady Changes

Change has come relatively slowly to an industry built on, and known for, its ability to price risk and avoid overreaching. Still, the insurance sector has been adapting to technological challenges for some time. Take personal auto insurance, for example, where a number of direct underwriters have leveraged changing consumer preferences to collectively gain 17% market share over the past two decades, at the expense of both large and small insurers, says Pan. “We believe the pace of digital adoption in the small business insurance market could be much faster, as the internet and mobile technologies are ubiquitous now,” he says.

Indeed, Schwetlick notes that their recent survey found 38% of small businesses would buy insurance online if they were starting out today.

Despite the inherent opportunity, change is likelier to come from InsurTech and new entrants. “We interviewed two dozen major carriers and brokers in the small business space, and many of them said they would prefer to keep an eye on the market and be ‘fast followers’ should the pace of change accelerate,” says Morgan Stanley’s Pan.

“This leaves a substantial opportunity for new entrants to be the catalyst of change, exactly as technology players have been in other industries,” says BCG’s Schwetlick. In the insurance context, E-brokers are focused on providing a consumer-friendly experience; online aggregators can give small businesses a quick look at their options; adjacent players, such as online benefits managers for mom-and-pop outfits, are cross-selling insurance; technology enablers, meanwhile, are trying to help incumbent insurance carriers and brokers better leverage innovation to offer customers digital/direct approaches to small business customers.

Make It Simple

At this early stage of disruption, only a few traditional commercial insurers are jumping at the opportunity—some by investing or partnering with startups; even fewer are building up their own platforms. It will take a critical mass of new entrants and InsurTech players to gather enough momentum before many incumbents start fighting back.

They will have to overcome a number of obstacles, says Pan. These include the need to make their products less complex (think of multitier coverage and layers of exemptions), with easier to understand terms (legal language), along with a less cumbersome claims process (for example, an app with a short questionnaire and the ability to take and file related images using a smartphone camera). These improvements aren’t just more customer-friendly, notes BCG’s Schwetlick: “By making the right digital investments, carriers will be able to automate more processes, enable self-service where appropriate and redeploy their human resources more productively.”

In short: Going digital may be expensive and painful at first, but in the long run, it will save time, cut costs and allow insurers to better tap the dynamic and growing opportunities in the small-business market.

For more Morgan Stanley Research about digital disruption and opportunity in the insurance sector, ask your Morgan Stanley representative or Financial Advisor for the full report, “North America Insight: Digital Disruption in Small Business Insurance” (Jun 29, 2016). Plus, more Ideas.