As the business world continues to evolve, so do the risks faced by small enterprises. Recent research highlights six key areas of insurance coverage that are becoming increasingly relevant for small business owners. This overview explores emerging trends in cyber, flood, and excess and surplus lines insurance, offering insights into why these protections are gaining importance in the current business climate.
Cyber insurance
The prevalence of cyber risks is rising as businesses become increasingly digital. However, small business owners may be unaware of this risk or of the financial and reputational consequences of an attack until it's too late. According to the Hiscox Cyber Readiness Report, "41% of small businesses experienced at least one cyber attack during the last year. The median cost of cyber attacks for one small business in a year is $8,300."
Madison Williamson, senior insurance product manager at At-Bay ,stated, “As all businesses are forced into the digital world, it is no surprise that small businesses are sometimes ill-equipped to recognize the risks or react with the necessary speed to rectify errors or attacks. While it can be tempting for small businesses to [ignore] the risk of cyber attacks, it is vital for business owners to carefully consider not just the financial impact of lost sales and profits but also the reputational impact of being considered not secure by customers.”
The types of cyber attacks and the associated technologies that cyber pirates use are quickly evolving and dynamic. For this reason, small businesses can be an easy target for cyber hackers, sometimes with devastating effects.
Small businesses usually don't have the luxury of dedicated, trained resources to address cybersecurity weaknesses or rebuild systems. Hackers target smaller businesses because they typically focus less on cyber risk management and have weaker security than enterprise corporations.
According to Mathew Probolus, chief underwriting officer at Berkley Management Protection, "Small businesses are frequent targets of cyber attacks. A recent Datto report found that in the last year 32% of small businesses reported that they dealt with a phishing email or attack. 30% of small businesses reported that they also dealt with a computer virus."
Risk can be mitigated, though not eliminated, by "implementing strong internal controls and procedures, maintaining security controls, and proactive action," according to Chris Hojnowski, vice president, technology and cyber practice leader with Hiscox USA. "Where there are humans, there's vulnerability to cyber attacks. And where there is any kind of sensitive or valuable data, such as customer information, there's a target for bad actors."
See also: Top Global Business Risks in 2024
Flood insurance
According to a recent article by the Insurance Information Institute, "Flooding is the most common and costly natural disaster in the United States, causing billions in economic losses each year. According to the National Flood Insurance Program (NFIP), 90 percent of all natural disasters in the United States involve flooding."
The Federal Emergency Management Agency (FEMA) has shared some eye-opening statistics:
- Just a few inches of flooding can cause thousands of dollars of damage. The deeper the flood water, the higher the repair cost.
- From a 2018 press release: "About 25 percent of businesses do not reopen after [natural] disasters. Having an emergency disaster plan and a continuity operations plan in place can reduce that risk and help the business recover faster."
- From a 2023 FEMA fact sheet: "Ninety-nine percent of U.S. counties have experienced a flood since 1998, and over 40% of flood insurance claims come from outside high-risk flood areas."
There's reason to hope innovations in the parametric flood insurance space will help fill some flood coverage gaps in the U.S. in coming years. Flood risk is difficult to price for carriers, so what follows oftentimes is a coverage gap. New tech tools are being developed to improve the accuracy of underwriting data for conventional insurers, which could ultimately help expand access to parametric flood insurance to even the smallest businesses.
See also: "Micromorts": A New Way to Talk About Risks
Excess and surplus (E&S)
According to the International Risk Management Institute, "Excess and surplus lines insurance is any type of coverage that cannot be placed with an insurer admitted to do business in a certain jurisdiction."
In a recent interview, Mark Schauss, executive underwriting officer, small commercial, for Markel, summarized, "The most significant trend in the E&S insurance landscape is the continued growth of the E&S marketplace itself."
According to a recent McKinsey report, "Between 2016 and 2021, the E&S industry has grown by three times as much as the admitted market."
E&S submissions have increased by double digits in the past year, propelled by independent agents and wholesale brokers. Agents have become increasingly reliant on this high-risk insurance coverage tool to ensure their customers' investments are properly protected.
Within the commercial category of E&S, commercial liability and commercial property have made up the bulk of the market. As summarized in a recent Insurance Journal article, "Premiums in [commercial liability and commercial property] lines increased nearly 10% and 32% to about $26.8 billion and $24.2 billion, respectively, in 2023."
We expect this growth in high-risk insurance for commercial markets to continue, at least for the short term.
What factors contribute to the increased demand for E&S coverage?
- Non-admitted markets for high-risk insurance have stepped in for admitted markets
Admitted carriers are not renewing business and are reducing their industry and coverage offerings. Additionally, the increasing cost of claims is leading to the need for admitted carriers to increase premiums. And because of regulatory requirements, it can be difficult to raise those premiums quickly, leading insurers to exit certain markets altogether. Because E&S carriers can offer more flexible premiums where admitted markets can't budge, they have been able to fill the coverage gaps where there are no, or only prohibitively expensive, coverage options.
- Catastrophic events have increased the demand for high-risk insurance
Regions that tend to experience more natural disasters can drive demand for high-risk insurance options like E&S.
- Nuclear verdicts have exceeded expectations
Nuclear verdicts are jury awards or settlements in a liability lawsuit that significantly exceed expectations. Because E&S carriers usually have higher limits, they can be a valuable option in these high-risk insurance situations.
- Flexibility and agility when remarketing
The industry has demanded creative solutions to an ever-changing variety of high-risk insurance exposures, like cyber risk. Those solutions aren't readily available, or have become very expensive, on admitted markets. E&S carriers, buoyed by their financial strength and agile underwriting, have quickly responded with solutions when remarketing was needed, allowing them to capture new business due to their flexibility.
