Author: Greg Palumbo Key Takeaways - The COVID-19 pandemic accelerated an already booming micro-business market, spurring a record number of non-employer and non-store retailer business applications, according to the U.S. Census Bureau, adding to the huge premium potential for insurers.
- Lack of or little basic insurance knowledge among many small business owners, combined with cost concerns, are contributing to significant underinsurance in the micro-business market.
- The ISO Micro-Businessowners program (Micro-BOP), complimentary with the ISO Businessowners program (BOP) subscription, offers simple language and ready-made coverages for micro-business needs, helping insurers overcome cost and education barriers.
According to the U.S. Small Business Administration (SBA)1: - Small businesses (fewer than 500 employees) comprise 99.9% of all firms in the U.S.
- 81.7% of small businesses in the U.S., or 27,104,006 firms, have no employees.
- 50% of all businesses start at home.
With the micro-business market experiencing a surge post-COVID, and many micro-business owners unaware of their insurance needs, there’s a significant gap ready to be filled. Plus, many micro-businesses may grow into larger businesses, adding to the potential for cross-selling and growth down the line. The ISO Micro-BOP, included in the ISO BOP, can help insurers take advantage of this relatively untapped market. COVID-19 Accelerated the Microbusiness Trend, Especially for Non-Store Retailers Before 2020, micro-businesses – businesses with no or few employees – had already been growing: - Home-based businesses, like freelancers, crafters, and dog-walkers, surged as new mobile and Internet technologies and increased digital fluency made these options more accessible.
- The gig or sharing economy emerged, connecting independent providers of goods and services with consumers via digital platforms.
- E-commerce platforms allowed third parties to sell a wide variety of items online.
- Shared-space businesses like pop-up vendors, commercial kitchens, and shared professional offices allowed business owners to operate without a brick-and-mortar location.
The COVID-19 pandemic accelerated these trends further: - Stay-at-home orders forced many small businesses to shut their doors, and larger businesses to transition to a work-from-home, remote model.2
- April 2020 saw a historic high unemployment rate of 14.8%,3 forcing many people to look for new income streams that they could generate safely from home.
- Stimulus checks from the CARES Act likely helped some people start new businesses.4
- In 2021, workers quit their jobs at historic rates in a phenomenon that became known as the “Great Resignation,” spurred by return-to-office mandates, competitive job offers, and revelations about better work-life balance.5
The result? A record number of new business applications, especially for non-employer and non-store retailer businesses.6 According to a 2021 U.S. Census Bureau analysis7: - The cumulative increase in business applications for likely non-employers is 30% in week 40 of 2020 relative to 2019 – or about 600,000 more non-employer businesses nationwide.
- Business applications for non-store retailers (NAICS 454) account for the vast majority of the observed surge in 2020, indicating a shift in retail activity to online transactions.
In addition, among the roughly 6 million small businesses with employees, 49% have just one to four workers, according to the latest estimates for 2021 from the Census Bureau’s Annual Business Survey.8 With micro-businesses dominating the small business space in sheer numbers, they represent a large potential untapped market for insurers – especially considering that many small businesses are under- or un-insured. Many Micro-Business Owners Are Confused About Their Insurance Needs One in four small businesses is underinsured.9 The main reason? Lack of insurance knowledge. According to a 2023 Next Insurance Survey of companies with 50 employees or fewer10: - 90% of small business owners aren’t confident they are adequately insured
- 96% of small business owners didn’t pass a basic insurance knowledge test
- 53% of small business owners said their biggest barrier to getting insurance coverage is knowing what kind of insurance their business needs
While many business owners are more than capable of researching insurance themselves, the complex nature of business insurance can add stress to the experience. Half of the Next Insurance Survey respondents cited the complexity of business insurance as the main source of worry about their coverage; and 40% said it is more stressful to understand insurance than taxes.11 It’s likely that this lack of insurance literacy is even more pronounced for micro-business owners. Micro-business owners who work out of their home – for example, dog-walkers or freelancers - may mistakenly believe that their personal insurance policies cover their business as well. If they do seek insurance, traditional insurance agents may be reluctant to spend time educating accounts with low commission potential, leading to a complex, frustrating customer experience. In addition, micro-businesses often have specific needs that often don’t fit into typical commercial or personal insurance programs. For example, micro-businesses may differ from traditional small businesses in that they often: - Have limited property exposures outside of personal business property
- Lack retail stock, equipment, shipping supplies, or tools
- Have policies that share premises liability risk
- May move quickly to a different shared space
As a result, micro-business owners may not know they need insurance at all – and, if they do try to find coverage, may end up with a policy that doesn’t fit their unique needs. Thus, there’s significant opportunity for insurers who can effectively educate this market and improve their experience. Insurance Costs Are a Concern for Micro-Businesses In addition to finding insurance difficult to understand, micro-business owners may be reluctant to seek insurance, feeling that coverage is too expensive. For a micro-business, every cost counts. While micro-businesses may not cost much to start – around $3,000, according to the SBA – most are self-funded or have a lower income, and many experience funding issues. According to U.S. small business statistics12: - 78% of small business owners use their own funds to launch their business; 16% of small businesses are funded by bank loans; and 2-6% of initial small business funding comes from family and friends.
- According to the SBA, the average income for self-employed small business owners is $51,816 per year; $26,084 for unincorporated businesses.
- 33% of businesspeople experience challenges or failure due to lack of capital.
Without sufficient knowledge of the type of insurance they need, or easy access to a policy tailored to their unique needs, micro-business owners may see quotes for businessowners insurance and experience sticker shock. By offering a ready-made, cost-effective policy, insurers can help relieve some of the financial worry, while providing needed protection. ISO Micro-BOP Offers Overview Policyholder Notice and Cost-Effective Coverage Included at no extra cost with our ISO BOP subscription, the ISO Micro-BOP is designed to help small business insurers overcome micro-business insurance entry barriers. It includes a policyholder notice which provides a general overview of the program and describes the coverages within the base Micro-BOP coverage form, tailored to their unique insurance needs. Eligibility for the Micro-BOP is designed to address various service and retail risks with four or fewer employees and $500,000 or less in annual gross sales. ISO BOP and ISO Micro-BOP Coverage: What’s the difference? Businessowners insurance policies, including the ISO BOP, may provide coverages micro-business owners don’t need, adding unnecessary expenses for them. Verisk tailored the ISO Micro-BOP to help insurers provide cost-effective coverages for these unique businesses. For example, most micro-businesses run out of homes or shared spaces rather than offices or brick-and-mortar stores. With limited property exposures, most don’t need the broad property coverages offered in the full ISO BOP. Micro-businesses can also quickly change locations – for example, switching from working at home to different shared-space locations. So, property coverage for the ISO Micro-BOP is not limited to a specific location, as it is with the ISO BOP. Since micro-businesses have few or no employees, can lack expensive, hard-to-replace machinery, and are able to get back up and running quickly compared to larger, more complex businesses, they typically do not require business income insurance. By only offering the coverages that micro-businesses typically need at more appropriate limits, insurers can reduce premium costs, making coverage more accessible for budget-conscious micro-business owners. Meanwhile, the ready-made program makes it easier for insurers to underwrite such risks, potentially reducing operations costs. Using the ISO Micro-BOP as a foundation, insurers can tap into the huge premium potential in the market. For more information about our small business insurance programs, visit Verisk’s Businessowners Hub. If you have questions about the ISO Micro-BOP or want to subscribe to the ISO BOP, please contact our team at property@verisk.com. Greg Palumbo is senior manager of the ISO Commercial Property Product Development team responsible for research, development and support of commercial property, businessowners, capital assets, agricultural capital assets, equipment breakdown, commercial inland marine and commercial flood forms and rules. In 2003, Greg began his career at Verisk and has spent most of his time here focusing on businessowners forms and rules development. He graduated with a Bachelor of Arts degree in Economics from the University of Delaware. Republished with permission of ISO/Verisk, 2024 Originally Published: December 6, 2024 _____________________________________________________________________________________________________________________________________ Copyright © 2024, Big “I" Virtual University. All rights reserved. No part of this material may be used or reproduced in any manner without the prior written permission from Big “I" Virtual University. For further information, contact jamie.behymer@iiaba.net.
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