How Embedded Insurance Could Lower Costs For SMBs

Small businesses learned a lot during the pandemic. Whether it was accelerating existing digitization efforts, stepping into the eCommerce space for the first time, or overhauling business models entirely, the small to medium-sized business (SMB) ecosystem was forced to be flexible in order to remain resilient.

The implications of such changes are far-reaching, and many have yet to come to light. However, the small business insurance space is discovering that the old ways of operating are no longer suited to a new breed of SMB.

For some firms, said Alex Maffeo, CEO and founder of Boost Insurance, the small business insurance market became a matter of trying to fit a square peg into a round hole.

“All of a sudden, you’re running a business where people worked in an office and now they’re working in their living rooms,” he told PYMNTS in a recent interview. “How does that work with workers’ compensation, or general liability? The world completely shifted, so the insurance products that were built for it just do not apply.”

That’s not the only factor disrupting the small business insurance arena. As Maffeo explained, a new effort to fill in market gaps and connect smaller firms to more affordable products has opened up opportunities for the insurance market to take an embedded, X-as-a-Service approach to the market.

SMB Insurance Headaches

The ongoing health crisis and its subsequent economic impacts may have thrown a wrench in the small business insurance market, but Maffeo noted there have always been key points of friction for the space.

For one, commercial insurance rarely differentiates between small businesses and large corporate policyholders, creating blurred lines that can end up creating higher prices for SMBs.

Maffeo pointed to commercial cyber insurance as an example of this phenomenon.

“The severity of the claims for SMBs is obviously much, much lower,” he said. “But the frequency [of claims] is similar, so SMBs are being overpriced because of the fact that large enterprise[s] are being hacked, creating tens of billions of dollars worth of claims, and that trickles down.”

Other cost increases can be attributed to the struggle of the insurance space to verify policyholders’ financial information on applications. At the same time, complexities and a lack of transparency can not only make costs higher for SMBs but can lead to nasty surprises come claims time.

Maffeo said he expects a surge of denied claims and legal disputes on the horizon as small businesses seek payouts from their business interruption coverage. Due to the unprecedented nature of the COVID-19 crisis, however, understand what such insurance products do and don’t cover can be challenging and, in some cases, not entirely known.

The Embedded Opportunity

The rise of InsurTech has tackled many of these pain points, and then some. But Maffeo identified other ways to ease friction and costs for SMBs other than merely digitizing the insurance procurement and payouts process, and Maffeo discovered that the X-as-a-Service model may be able to unlock new paths to efficiency and risk mitigation.

Boost Insurance, which recently raised $20 million for its technology, allows businesses to customize and integrate insurance offerings into their own platforms. That includes businesses that are not operating in the insurance market in the traditional sense but may find that offering customers insurance products can be a valuable and complementary tool.

For small businesses, that could be anything from POS systems to inventory management platforms, and according to Maffeo, the benefits reach far beyond a more seamless experience for small business buyers. Rather, the data that these B2B platforms have access to can play vital roles in underwriting insurance products for small businesses.

“If you are processing revenue-generating transactions, that is about 80 to 90 percent of insurance underwriting,” he said, adding that before embedded small business insurance can use the information, a platform has to verify policyholder financials and eliminate uncertainty.

While embedded financial services become a popular strategy for nonfinance firms to open up new revenue streams and retain the customer experience, the opportunity for insurance to follow suit can end up bringing clarity and affordability to an industry that has struggled to address small businesses’ most pressing needs.

At a time when SMB insurance is now more important, though perhaps more complex, than ever, integrating insurance into the products — helping businesses streamline B2B payments, automate inventory or digitize the customer relationship — can offer a bit of relief to the headaches of outdated and legacy insurance workflows.