With around 3,700 new third-party sellers emerging every day on Amazon alone, e-commerce continues to make significant gains, even as the pandemic wanes. But while the phenomenon may be impressive, the lifespans of individual e-commerce businesses can often be anything but: 20% of e-commerce start-ups end in failure within their first year, often due to the razor-thin operating margins that regularly hinder digital businesses.
In such businesses, insurance can be the difference between a manageable setback and total collapse. There's just one underlying problem: Traditional insurance companies do not offer the coverage options e-commerce retailers need to protect themselves against emerging risks.
An insurer's main objective is to analyze the nature of a business, identify the risks it faces and provide coverage accordingly. But when it comes to offering coverage plans for e-commerce retailers, the tools carriers have to assess the risk are often insufficient. Instead, many continue to sport outdated classification models and rarely consider the ever-changing digital landscape these businesses occupy. Retailers may have to pay unnecessarily high fees yet have insufficient coverage, while insurance carriers may face unexpected losses due to unanticipated risks or be incapable of offering coverage at all.
For the $10 trillion [and growing] global e-commerce industry, insurers have nothing to lose and everything to gain by leveraging market data to better address the specific risks digital businesses face on a daily basis.
Risky Business
Existing insurance protections such as general liability, product liability and transit insurance, to name a few, have evolved to cover most digital retailer needs, but not at the pace e-commerce-specific risks are proliferating.
Digital retailers don't need to anticipate the same slip-and-fall accidents or damages to property that most brick-and-mortars do, but that doesn't mean they are immune to other perils.
The ever-changing digital economy brings its own unique set of risks -- liabilities such as third-party bodily injuries, physical damages from products, cyber-attacks, shipping delays, account suspensions, IP infringements, unexpected refunds, list hijacking and downtime events. With e-commerce businesses often enjoying only the tiniest financial wiggle room, any one of these risks can at best create significant headaches and, at worst, be insurmountable.
See also: Underwriting Enters a New Age of Data
Missing Data
Insurance coverage is conventionally based on tangible factors like a retailer's size, operating history and sales volume, and is completed following an assessment of risk exposure. Naturally, the greater the risk, the more comprehensive the insurance will need to be, and the pricier the policy.
Yet many traditional insurers lack the requisite data and tools to accurately assess the emergent risks tied to e-commerce -- a data gap that is widening. Many retailers end up paying for overpriced, static coverage that ultimately underserves them. In fact, approximately 30% of e-commerce businesses are unable to acquire the coverage they need.
Such coverage gaps will only multiply as the evolution of risks continues to outpace mitigation solutions. Take suspension, a nightmare scenario for digital businesses. Solutions that can minimize the risk of unjustified account termination while providing financial stability as they're reinstated can have huge impacts on businesses, especially SMBs.
Seize the Opportunity
Offering online businesses insurance options that cover any combination of current or emerging risks is complicated. Regardless of the type of insurance, costs hinge on the severity and frequency of the risks in question.
That said, in this digital age, e-commerce businesses should not have to struggle to find appropriate, comprehensive coverage that addresses the risks that so often plague them.
Aligning e-commerce needs with financial services and traditional insurance offerings may be an enormous challenge for insurers, but it is certainly also an opportunity. As the e-commerce market continues to boom, the insurance providers that recognize and capitalize on its largely untapped potential first will be the primary beneficiaries.
