When the economy cools down as it has in the last few years, small businesses typically are the first commercial entities to reduce costs, with many scaling back expenses such as comprehensive business owners insurance.These tactics might help foster cost-containment, but it's a negative development for insurers, agents and third-party providers of small-business insurance that want to build new business. But low demand isn't the only challenge that they're encountering in the small-business market. One chronic dilemma has been an inability to precisely pinpoint insurance needs of small businesses, many of whom are fitted with either too much or too little coverage.

With this one-two punch staring them squarely in the face, providers nevertheless remain optimistic. The emergence of real-time data exchange efficiencies via extensible markup language (XML) helps lure agents who are now able to furnish a customer with multiple quotes in one search. Moreover, independent agents who lacked the volume requirements to work with large insurers now have easier entrée via third-party distribution outlets.

Also, a war of attrition has thinned the ranks of third-party providers of small-business insurance. The survivors-realizing they are in the business for the long haul-have made the necessary long-term investments in technology to attract the best agents and insurers.

Furthermore, a larger stable of industry-specific products is enabling insurers to better pinpoint small-business needs and identify risk.

"The insurers serving the small-business market have done a much better job matching the risk of a business with the right product for the business," says Matthew Josefowicz, senior analyst at Celent Communications Inc., a Boston-based research and advisory firm. "Across the board, legacy system inefficiencies have hampered insurers' ability to unlock the power of their data. This has also been true for their inability to meet the needs of the small-business owner."

No small task

The current economic downturn has made it more difficult for carriers to anticipate the needs of small-business owners. In a poor economy, small businesses are inclined to cut back on various policy riders and endorsements.

"The economy has had a great impact on insurance for small business," says Kathryn Emmerson, CEO of Chicago-based e-broker Insurance-Noodle, which provides online insurance solutions for small businesses via agents, brokers and banks. "Certain trade classes have pulled back from buying discretionary products, such as an employer practice liability policy."

One way that small-business owners might be inclined to maintain or even expand coverage is through access to customized, value-added insurance options. The pipeline is starting to fill up with a greater threshold of products, albeit gradually.

"Carriers in the past sat on the sidelines when it came to small business," says Ed Gillman, president and CEO of AgentSecure, an Atlanta-based insurance agency serving the small-business market both offline and online.

"They didn't invest a whole lot in either the technology infrastructure or the good will. They have vastly improved these areas, but there is still a lot of progress to be made with new product development."

Leading insurers in the small-business arena, such as St. Paul, The Hartford, AIG, Chubb and Zurich, are among those that have upped the ante on capital investments required to better cater to the small-business customer.

"Over the past year, we've seen our partners become very aggressive developing not only products but systems to best serve small-business insurance," says InsuranceNoodle's Emmerson, a former executive with Aon Risk Services.

Revamping systems

"The St. Paul has revamped its internal processing system for small-business coverage. CNA had a small-business processing center in Florida with a host of flaws, and they made the necessary upgrades. And Safeco has quickly put together a formidable small-business selling program," says Emmerson.

The Hartford Financial Services Inc., Hartford, Conn., which has long been on the leading edge of serving the small-business market, has also made several strategic and tactical adjustments to its small-business program.

The company has a packaged approach to selling coverages through its Spectrum program, which was launched 15 years ago. The Hartford has identified more than 1,000 business classes and even sub-classes.

"The Hartford has been targeting small businesses for 20 years, and we've known from the beginning that flexibility is important in meeting their changing needs," says Jim Ruel, senior vice president of small business insurance at The Hartford.

"We designed our original small-business product to be easily adapted for virtually any business, and have increased the specific classes on an ongoing basis," he says.

"We have more than 1,000 classes, and we've built technology to be flexible and adaptable to a variety of systems and preferences."

Basically, agents have to target the right business at the right time with the right product, Ruel adds. To do this, they need high-quality leads that have been pre-qualified. "That's why we provide a lead generation program to agents who are committed to growing their small-business book."

Technology's role

Technology barriers have impeded many agents' ability to optimize their small-business opportunities. If an independent agent deals with five insurers and attempts to generate a quote for a small-business customer, that agent likely would have to log on to all five Web sites to obtain it.

The emergence of single-entry, multiple company interface (SEMCI) using XML data exchange standards enables agents to get multiple quotes returned quickly. AgentSecure has affiliations with four large insurers, and generates half of its new-business premiums electronically, with the goal to increase that to 75% in the near future.

"We've been endorsed by 37 state associations of the Big I (Independent Insurance Agents & Brokers of America)," AgentSecure's Gillman explains. "The year before, we had only garnered endorsements of 13 state groups. This increase is indicative of our operating model."

Providers such as AgentSecure are discovering that it's not imperative to attract the most agents, but the best. For example, AgentSecure has made its mark targeting "niche" agents, such as small, rural insurance agents who otherwise lack resources to obtain carrier appointments.

In leveraging the strengths of its program, InsuranceNoodle has expanded from 2,000 agents in early 2002 to 3,700 presently, says Don Urbanicz, CEO of InsuranceVianet, the holding company for InsuranceNoodle and InsureVianet. "You have to be able to bring choice of market to independent agents by offering a bigger and broader product line," he adds.

After registering with Insurance-Noodle, agents-many of whom have high-speed Internet access to maximize their selling efforts-can log on to InsuranceNoodle's secure, password-protected Web site.

In a search for coverage regarding an esoteric business category, the technology is able to recognize red flags that can alert an agent during the pre-qualification process. Agents agree that being able to quickly identify red flags makes the difference between obtaining and losing business.

"We've been able to increase our new business 5% to 10% per year since joining InsuranceNoodle," says John Axtell, principal of Torrance, Calif.-based The Axtell Group. "But more importantly, we have retained a large number of customers by rolling them into the Noodle program. It might be a case where one of our customers was going to terminate coverage through an existing insurer because of a rate increase. In networking through the Noodle, we found a competitive rate and salvaged the business."

Third-party prospects

Over the years, several third-party insurance distribution Web sites have fell by the wayside. Wary of this, the providers that serve the small-business sector believe they've learned lessons from those past failures.

One key to the future of Web-enabled small-business programs is the refinement of new products. "We have to continually add new products to our mix," says Emmerson. "A small business might want to formulate a board of directors, but they realize that to attract the bank president to sit on their board, they have to offer a D&O (directors and officers) policy to get that individual on board. We recently added AIG's D&O coverage in response to this need."

"We're at the mercy of insurers regarding their appetite for certain types of business risks," says AgentSecure's Gillman. "I sit on an advisory group with carriers, and the discussions revolve around ongoing new product development, what they have an appetite to insure today and what they will (insure) tomorrow."

Conversely, insurers are evaluating third-party models to see where they fit into their overall selling scheme (see article, page 47).

"The key to success with these third-party distribution models is to use the technology advantageously to write a profitable book of business," says The Hartford's Ruel.

"Our main distribution channel, however, remains the traditional independent insurance agency model. Most small businesses rely on their independent agent to provide the expertise and knowledge they need when researching their insurance needs," he says.

Understanding the changing needs of the small-business owner is crucial.

"A widget maker is part of the old line economy, but if that business is now doing 50% of its business online, it's now doing business in the New Economy," says AgentSecure's Gillman. "Often, the insurance plans available don't fully reflect this shift in strategy."

Both tactical and strategic refinements are necessary, according to some industry sources, because after the shakeout of 2002, a burst of new competitors will enter the small-business space-perhaps by 2004. One potential opportunity is workers' compensation coverage, which operates under complicated state regulations. Providing this type of coverage has proven difficult, so new players that can master workers' comp could conceivably bundle this product with an array of existing BOP coverages, Gillman predicts.

In fact, competition-from a distribution standpoint-could come directly from a carrier. The Hartford, for example, in 2000 rolled out its Electronic Business Center (EBC), which is designed as an extranet site and geared for agents to retrieve quotes, download forms and provide comprehensive services for small-business customers. Agents can design individual portals within EBC and customize marketing brochures and proposals embossed with their own logos alongside The Hartford's.

AgentSecure, which is 60% ahead of last year in business volume and generates about $1 million in new business every month, can weather these storms, if it maintains its focus, Gillman says.

"To bring value to the independent agency system-the cornerstone is choice. But we not only must give the agents choice, we also must give carriers choice. And, ultimately, the winners are the insurance-buying customers-who get to decide how they want, and who they want, to take care of their business," Gillman concludes.

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