The small and medium-sized business market will rebound from the pandemic stronger and more resilient than before, but it will be fundamentally altered. Underwriters must
act now to prepare for permanent shifts in this lucrative market.

It seems that not a day goes by without the media reporting on yet another business being forced to permanently shut its doors thanks to the pandemic-induced economic turmoil. And more often than not, the casualty is a small or medium-sized business (SMB): a local photography enterprise, a small restaurant chain, an event venue… the list goes on.

There isn't a sector or market left untouched by the colossal impact of COVID-19. But SMBs have undeniably borne the brunt of economic hardship in 2020.

The statistics are stark and saddening. Approximately 80% of SMBs report declining revenues, and despite unprecedented global government support, the IMF predicts that the failure rate for this market will almost double in 2020 without further government measures.

Two factors are behind this. The first is the lower financial resilience of SMBs. Prior to the pandemic, close to a third were operating at a loss or just breaking even. With far smaller capital reserves and inflexible supply chains, small businesses find it more difficult to withstand plunging demand and liquidity challenges.

The second factor is that the sectors most negatively impacted by global lockdowns have correlated with those with a higher SMB presence. Retail, hospitality, food service, entertainment services, and construction have suffered the most. In countries within the Organization for Economic Co-operation and Development (OECD), 60%‒70% of SMBs do business in these sectors.

Prepare for Recovery

As we reflect on these gloomy statistics, should we in the insurance industry write off this enormous section of the global economy? Absolutely not! Despite the picture painted in the media, the medium- and long-term outlook for SMBs is remarkably strong.

News reports may expose the fragility of individual businesses, but they do not accurately reflect the sector as a whole. If we take a step back, we see that the SMB segment at a macro level is extremely robust and resilient due to its sheer size and diversity.

With greater agility, less bureaucracy, and niche appeal, many SMBs are adapting quickly to shocks and are well placed to capitalize on pent-up demand when economies reopen.

Yes, there will be higher casualties in the short term, but this will be offset by a new wave of startups that will exploit changing consumer trends, especially in low- and no-touch services such as shopping, entertainment, and dining.

So does this mean that insurers in this space can bide their time until we see the first glimmers of the promised recovery?

Again, the answer is a resounding no! SMBs are undergoing permanent changes, and so are their insurance needs. The businesses that do survive the turmoil-and the startups that emerge-will be those that have modernized and responded successfully to the dynamics of the post-pandemic world.

They will be an entirely different kind of business characterized by dynamic business models, highly digitized enterprises, and increased operational velocity.

Questions for Insurance Leaders

This has huge implications for insurers. In the new landscape, SMBs will have more fluid risk profiles that traditional underwriting methods will struggle to accommodate.

Their insurance expectations will also have modernized as the preference for a low-touch digital experience grows and as savvier policyholders seek greater product personalization and flexibility to match their own agile business models.

Insurers that hope they can pursue the same underwriting methods and sell the same products will find themselves out of step with the new world.

This is, therefore, a crucial moment for insurers to rethink how they serve this market and prepare for the permanent changes in their clients' insurance needs. Proactive leaders should be asking themselves key strategic questions:

We already have enough visibility to start to answer these questions with credibility. For details, you can read our white paper titled 'What Does Evolutionary Biology Tell Insurers About SMBs in the Post-Pandemic World? '

One thing we can say with certainty is that, in our new world of fluid business models and fluctuating risk variables, insurers must equip themselves with the tools-enabled by advanced analytics and nontraditional data sources-that empower them with a more sophisticated and nuanced understanding of their risk exposures, while providing relevant, flexible solutions for their clients.

Despite being at the heart of a devastating crisis, the SMB market will rebound with vigor and continue to be the powerhouse of the global economy. Effective underwriting in this segment is not without its challenges. But for those that succeed, it is a profitable market.

In the post-pandemic world, insurers that have used the current disruption to anticipate and adapt will win this market. Those that do not will be left behind.

Paul Mang is Chief Innovation Officer at Guidewire.

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Guidewire Software Inc. published this content on 22 January 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 22 January 2021 20:25:07 UTC