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Insurance - Property & Casualty
North America
IndustryView
Insurance - Property & CasualtyInsurance - Property & Casualty
MONTH DD, YYYY HH:MM AM/PM GMT
North America Insight: Digital Disruption
in Small Business Insurance
InsurTech startups & new entrants are driving a digital disruption in
the ~$100b small business insurance mkt. We see 3 scenarios and
est. $17-33b mkt. opportunities to gain/lose by 2020. Incumbent
carriers & brokers must adapt, and investors should pay attention.
Digital disruption in ~$100b SBI market. Small business owner
demographics favor digital insurance. By 2020, more than 60% of US small
business will be owned by Millennials & Gen Xers, who prefer to manage
insurance digitally. In our recent survey, 38% of small businesses would buy
insurance online if they were starting out today. InsurTech startups are zeroing
in on this opportunity. And traditional carriers (incumbents & new entrants)
are positioning for changes in this large, profitable & fragmented marketplace.
A $25b+ digital SBI market opportunity to gain (or lose). We see 3
scenarios with 15-30% digital SBI penetration by 2020, up from ~4% today.
This translates into a $17-33b market opportunity. In our most likely scenario,
we estimate ~24% of SBI, or ~$26b premiums, sold digitally by 2020, a ~46%
CAGR vs. ~2% for SBI market overall. The scenarios imply $3-8b operating
profit up for grabs for carriers and $400m-1b for brokers.
InsurTech & new entrants likely to drive changes. InsurTech companies
are poised to fill the needs of small businesses seeking simpler products that
are easy to understand & buy. E-brokers provide a consumer-friendly
experience. Aggregators give small businesses a quick look at options.
Adjacent players are cross-selling insurance. Technology enablers are assisting
incumbent carriers/brokers. Some non-incumbent insurers are taking
innovative, digital/direct approaches to SBI.
Incumbent carriers & brokers must adapt to changing landscape. In the
past 2 decades, the top 3 direct auto insurers gained 17% share, at the expense
of larger & smaller competitors. Given tech advances & the ubiquity of digital
offerings, the SBI shift should happen much faster. To address the opportunity,
insurers must adopt digital/direct distribution & improve customer experience.
Brokers face a more significant reinvention to embrace an omni-channel
approach & redefine their value proposition.
Who are the likely winners (and laggards)? Among our coverage, Hartford
(EW), Travelers (EW), Chubb (OW) & AIG (EW) have the most exposure in SBI.
We estimate each point of share gain could boost their earnings by 4-14%.
They have financial & technology resources but could be constrained by
channel conflict and inertia. Smaller insurers and brokers could face the
biggest challenges. In our broker coverage, Brown & Brown (UW) is most
exposed. New entrants (startups or traditional insurers) could be the biggest
beneficiaries in the digital transformation of SBI.
Exhibit 1:Exhibit 1: Three Scenarios for Digital SBI Market in 2020
So u rce: The Bo sto n Co n su ltin g G ro u p an d M org a n Stan ley R esearch
Morgan Stanley does and seeks to do business with
companies covered in Morgan Stanley Research. As a result,
investors should be aware that the firm may have a conflict
of interest that could affect the objectivity of Morgan
Stanley Research. Investors should consider Morgan
Stanley Research as only a single factor in making their
investment decision.
For analyst certification and other important disclosures,For analyst certification and other important disclosures,
refer to the Disclosure Section, located at the end of thisrefer to the Disclosure Section, located at the end of this
report.report.
Insurance - Property & Casualty
1
June 29, 2016 04:01 AM GMT
Executive SummaryExecutive Summary
We think the ~$100b small business insurance (SBI) market is in the early stages of a digital
disruption. Changing demographics of small business owners, increasing number of InsurTech startups, and
heightened focus of traditional carriers (both incumbents and new entrants) in this sizeable and profitable
market are catalysts for this secular trend.
Changes in the personal auto insurance market provide an important case study. Over the past two
decades, the top three direct underwriters (GEICO, Progressive, and USAA) collectively gained 17% market
share, at the expense of both larger and smaller competitors who are unable or unwilling to adapt the changing
consumer preference. Besides convenience, direct/digital distribution also lowers insurance costs which drives
consumer adoption as well. We believe the pace of digital adoption in the SBI market could be much faster as
the internet and mobile technologies are ubiquitous now.
A $25b+ digital SBI market opportunity to gain (or lose). We estimate 15-30% of SBI will be sold digitally
by 2020, up from ~4% today. This translates into a $17-33b premium market opportunity.
Demographics favor digital insurance solutions. By 2020, more than 60% of small business in the
US will be owned by Millennials and Gen Xers, two groups that prefer to purchase and manage
insurance digitally. According to our recent survey, 38% of small businesses would buy insurance
online if they were starting their businesses today.
There are unmet insurance needs of small businesses. Proprietors look for simpler products,
easier to understand and buy. "Mom and pop" agents have difficulty filling this demand as
commissions are too small and the investments too big.
InsurTech startups are zeroing in on this emerging opportunity. Backed by venture capital and
even traditional insurers, a growing number of startups are focusing on SBI, leveraging experiences
from personal auto and other financial services, including FinTech companies.
Traditional carriers are positioning for digital disruption. As SBI is a large (~$100b annual
premiums), profitable (~90% combined ratio), and fragmented market (none of top players has more
than 5% share), large incumbents are ramping up their digital efforts and new entrants are
expanding into SBI.
In the most likely scenario, we estimate ~24% digital SBI penetration by 2020, or ~$26b annual
premiums. This represents a ~46% CAGR vs. ~2% for SBI market overall.
Based on certain underwriting and operating margin assumptions, the digital SBI market could imply
$3-8b operating earnings for underwriters and $400m-1b for brokers.
Among our coverage, Hartford (EW), Travelers (EW), Chubb (OW), and AIG (EW) have the most SBI
exposures (8-33% of total P&C premiums). We estimate one point market share gain could be 4-14%
accretive to earnings while one point market share loss could negatively impact earnings by 2-7%.
They have financial & technology resources but could be constrained by channel conflict and inertia.
Smaller regional insurers could struggle to maintain their market share as SBI market consolidates, if
they are not proactively adjusting their go-to market strategy.
Smaller agents/brokers could face the biggest challenges. Among our brokerage coverage, Brown &
Brown (UW) has the most SBI exposure.
Insurance - Property & Casualty
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InsurTech and new entrants are likely to drive the disruption. InsurTech startups are focusing on
distribution: E-brokers (such as Embroker, Next Insurance, and CoverWallet) are providing consumer friendly
digital experience; Aggregators (like Compare.com and Einsurance) try to give small businesses a quick look at
their options; Adjacent players (such as Intuit, Justworks, and Zenefits) are cross-selling insurance;
Technology enablers (like MarketScout and QuanTemplate) are assisting incumbent carriers or brokers.
Traditional insurers are taking innovative, digital/direct approaches to SBI: Berkshire Hathaway plans to sell
worker's comp and BOP policies directly online; Hiscox offers SBI products directly from its website; American
Family invested in AssureStart, a direct writer of SBI; AIG, Hamilton Insurance Group, and Two Sigma plan to
establish a technology-driven platform in SBI. Most recently, Travelers announced a direct SBI online platform in
the UK. Incumbents must adapt to survive and thrive. Carriers need to adopt digital/direct distribution and
reduce product complexity. Brokers must embrace omni-channel distribution and redefine their value
proposition.
Larger brokers AON (EW), Marsh McLennan (EW), Willis Towers Watson (OW), and AJ Gallagher
(EW) among our coverage, while not immediately threatened by digital disruption in SBI, could face
increasing competition if smaller brokers have to move up to middle markets.
Digital disruption in SBI provides an opening for non-incumbents to gain a foothold — and share.
The biggest beneficiaries could be InsurTech companies — nothing but to gain share. However the
lack of data and underwriting expertise could impede or even doom some efforts.
Exhibit 2:Exhibit 2: The SBI Market Is Poised for Strong Growth ($b)
Non SBI, $185
SBI, Not
digitally
underwritten,
$96
SBI, Digitally
Underwritten,
$4
2015
($285b Total Commercial Lines Market)
(4% of SBI)
Non SBI, $206
SBI, Not
digitally
underwritten,
$84
SBI, Digitally
Underwritten,
$26
2020
($316b Total Commercial Lines Market)
(24% of SBI)
So u rce: SNL a n d M o rgan Stan ley R esearch estimates
Exhibit 3:Exhibit 3: SBI Exposure ($m)
So u rce: SNL a n d M o rgan Stan ley R esearch
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We outline three possible scenarios in the evolving SBI market for 2020. E-brokerage Pioneers scenario
(~15% digital SBI, or ~$17b premiums) contemplates startup e-brokers appealing to newly created small
businesses. Carrier Catalysts scenario (~24%, or ~$26b) assumes digital distribution platforms adopted by
major incumbent carriers. Game Changer scenario (~30%, or ~$33b) envisions a few dominant SBI carriers
also distribute directly online.
Exhibit 4:Exhibit 4: Three Scenarios for Digital SBI Market in 2020
So u rce: The Bo sto n Co n su ltin g G ro u p an d M org a n Stan ley R esearch
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The (Digital) Future of Small Business InsuranceThe (Digital) Future of Small Business Insurance
From music, photography, and video rental to travel agency, print media, and auto insurance, we have seen
waves of digital disruptions. We think small business insurance (SBI) could be the next frontier. How fast will
the digital breakthrough come? If US insurers are to increase their share of the attractive small business
market, they would do well to enhance their digital small business offering. There is every reason to believe that
small businesses will favor digital solutions for their insurance needs, and that a substantial advantage will go to
carriers and distributors that see what’s coming and get there first.
Because of the tight regulatory environment in which it operates and the low frequency of customer
interactions, insurance has lagged other industries in terms of digitization. Disruptive players haven’t yet
redrawn the landscape of insurance, thus giving customers a reason to alter their behavior or switch providers.
So far, personal insurance is the only area where digitization has taken place in a meaningful way. Small
business, however, won’t be far behind. The two types of insurance have a lot in common, and roughly two in
every five people who own a small business insurance policy look to get it from the same carrier they use for
personal insurance.
Exhibit 5:Exhibit 5: Waves of digital disruption - SB Insurance is next
So u rce: The Bo sto n Co n su ltin g G ro u p an d M org a n Stan ley R esearch
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What makes it highly likely that small business insurance offerings will take on a more digital character — and
do so, we think, more quickly than many in the industry expect — is the changing composition of customers in
the segment. By 2020, more than 60% of small businesses in the US will be owned by Millennials and Gen Xers
— two groups that prefer to do as much as possible digitally. Small businesses come and go quickly, reflecting
the increase in the freelance economy and the ease with which many workers go back and forth between full-
time jobs and running their own single-person businesses or consultancies. These single-person businesses are
part of a surge in so-called “microbusinesses” (businesses with 0-4 employees), and are part of the reason why,
according to estimates by the Boston Consulting Group (BCG), roughly one in every four small US businesses
that will exist a year from now don’t exist today. The variable workload and intermittent risk exposure of small
businesses (not just microbusinesses) is ideal for a type of insurance that is more flexible than traditional
insurance. Digital solutions for purchasing and managing insurance products may be in the best position to fill
this segment’s needs.
It isn’t just those starting small businesses today and in the next few years who will create the demand for digital
insurance solutions. Plenty of existing US small businesses would jump at the chance to use digital channels for
purchase and management of insurance if convenient options existed. These businesses already make extensive
use of online and cloud technology for their business dealings. For instance, many use Intuit QuickBooks to
handle their taxes and financial reporting, Square to process mobile payments, and platforms like Zenefits to
manage their human resources needs.
Exhibit 6:Exhibit 6: Digital SBI Market Is Poised for Strong Growth ($b)
Non SBI, $185
SBI, Not
digitally
underwritten,
$96
SBI, Digitally
Underwritten,
$4
2015
($285b Total Commercial Lines Market)
(4% of SBI)
Non SBI, $206
SBI, Not
digitally
underwritten,
$84
SBI, Digitally
Underwritten,
$26
2020
($316b Total Commercial Lines Market)
(24% of SBI)
So u rce: SNL a n d M o rgan Stan ley R esearch estimates
Exhibit 7:Exhibit 7: Steady Growth Ahead for US Small Business
So u rce: The Bo sto n Co n su ltin g G ro u p an d M org a n Stan ley R esearch estimates
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The interest in digital insurance solutions among existing small businesses came through clearly in an April
2016 survey conducted by BCG (see Appendix I for details). Thirty-eight percent of existing small business
owners said if they were starting their businesses today, they would want to buy their insurance directly online.
The percentage saying this was significantly higher (49%) among those running newly formed businesses —
that is, businesses started in the last two years.
The holdup: a lack of strong digital offerings. Indeed, the real obstacle to growth in the digital part of the
small business insurance market isn’t the readiness of the customer base — it’s the absence of strong digital
products and propositions from suppliers. For the US small business insurance market to move toward more
digital solutions, carriers and distributors will have to take a new approach to the customer experience.
Imperatives for carriers in an era of digitally distributed insurance.
Imperatives for distributors in an era of digital insurance. If anything, the distribution side of the business
will have to undergo an even more dramatic reinvention than the carrier side if it is to remain relevant in an era
of digitally distributed insurance. Agents and brokers have to:
Reduce product complexity. Insurance continues to be a complicated product — full of legal
language, multiple coverage tiers and exemptions, and cumbersome claims processes — making it
confusing and difficult to use. Put another way, traditional insurance products are very different from
what one encounters elsewhere in the digital realm, where convenience and instant gratification are
the norm. To underwrite more premiums digitally, small business insurance providers will have to
develop simpler modular products, ones written in plain English and easy to understand and buy.
They are going to have to find ways to speed up the application process, with shorter forms that can
be prepopulated with existing data (such as small business’ financial statements or real estate
information). Finally, the coverage schemes and pricing are going to have to become more flexible to
better suit the needs of small business owners. This could involve usage-based or on-demand
models that provide coverage only if and when needed.
Improve customer service, particularly in claims. One of the big inconveniences of insurance is all the
manual steps that are required when the policyholder is making a claim. This has started to change in
personal insurance — people who have been in car accidents can often send pictures of their
damaged vehicles using smartphones — and business insurance has to follow suit. Another part of
improving customer service is ensuring that all claim-related transactions, such as appraisals,
eyewitness statements and other supporting documents, are immediately available to all parties at
the same time. In much the same way that a customer can track a package delivery on her
smartphone in real time, she should be able to see every update while her insurance claim is in
progress. At the same time, the technology shouldn’t be overused; there are interactions that are
better done person to person, such as when an injury has occurred.
One good thing about becoming customer centric in this way is that it won’t necessarily be costlier to
carriers. In fact, by making the right digital investments, carriers will be able to automate more
processes, enable self-service where appropriate and redeploy their human resources more
productively.
Embrace an omni-channel approach. In today’s world customers interact with their brokers and
carriers through many different channels: call centers, the Internet, email, mobile technology, and in-
person. Many customers prefer to go back and forth between channels, depending on the nature of
the interaction or their personal situation. To these customers, a good experience would be one in
which all of the channels were seamlessly integrated and had the same customer information at all
times. In other words, if the customer made changes to a policy online through the carrier’s website,
he would want his agent (when he spoke to the agent two days later) to be fully aware of the online
interaction and its outcome. This isn’t what happens currently. The status quo today is for agents to
try to “own” all interactions with the customer. This leads to a bad customer experience (if the
customer would rather change his address online and the agency doesn’t have that capability) and to
a poor use of the agent’s time (since the agent has to receive the change and manually feed it
Insurance - Property & Casualty
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Change likelier to come from start-ups than incumbents. Despite the growing interest in digital insurance
solutions on the part of small businesses, incumbent carriers and distributors haven’t made a beeline to the
area. To incumbent carriers, the prospect of a full digital embrace at the small business level has its drawbacks.
On the sales front, the drawbacks include the channel conflicts that would result if the carriers moved
aggressively into a type of insurance that small businesses could buy directly online, bypassing existing brokers
and agents. On the technology front, the drawbacks include the complexity and cost associated with the legacy
systems that are supporting millions of existing small business accounts. In addition, designing and delivering a
digital customer experience would require significant new investment.
As part of this study, BCG and Morgan Stanley conducted interviews with two dozen major carriers and brokers
in the small business space. Many of these companies said they would prefer to keep an eye on the market and
be “fast followers” should the pace of the change accelerate dramatically. In the meantime, these companies said
they are content to make smaller bets, just enough (they hope) to evolve with the market.
This leaves a substantial opportunity for new entrants to be the catalyst of change, exactly as technology players
have been in other industries. And these “InsurTech” companies are coming, thanks to a substantial flow of
capital from both traditional venture firms and corporate venture arms. In the unmet customer needs, the high
margins (particularly on the distributor side), the market fragmentation, and the absence of any company with a
clearly superior digital strategy, the investors in InsurTech rightly see a major opportunity.
Where the new challengers are placing their bets. To date, the distribution part of the market has been the
focus of the most startup activity, specifically startups looking to displace existing agents and brokers. It might
seem unrealistic that a startup insurance broker could step in and disintermediate a company like HUB, Alliant,
or USI, which provide insurance brokerage services to businesses. But the mom and pop brokerage shops that
account for a large share of distribution to small businesses are an easier target. Startups like Embroker, Next
Insurance, and CoverWallet are using consumer-friendly digital interfaces, streamlined application processes
and the promise of faster claims-processing to win over small business customers who are willing to switch for
a better experience. (See sidebar, “Startup E-Broker Aims to Simplify Insurance-Buying Process.”)
through to the carrier). An omni-channel approach that gets past these limitations — allowing
customers to use any channel in a seamless way — will improve the customer experience and agent
productivity.
Redefine the value proposition of distribution. Brokers and agents have typically played their biggest
roles in the acquisition and renewal stages. They need to provide value at other points that matter to
customers — including risk prevention and claims handling. Another way to say this is that
distributors (despite the business model of receiving commissions from carriers) need to act as
though they have a direct fiduciary responsibility to clients. If they are to improve the value
proposition to the customer, agents and brokers will have to heavily leverage technology. Whether
they’ll be able to do this is a question. With many of their relationships not generating more than
$150 to $250 in annual commissions, smaller brokers and agencies don’t have the scale to make the
investment that’s required in digital.
Develop new marketing capabilities for customer acquisition and retention. In the past, traditional
agents and brokers acquired broker-of-record status by sitting down with small businesses and
presenting their pitches (the proverbial kitchen table conversation). The new generation of small
business owners (whether they are wine stores, six-person law firms, or physical therapy practices)
will be most easily engaged online. Most brokers can’t afford to buy search terms on Google, so
they’ll have to do their digital marketing in other ways, including through social media and other
online tools. Brokers may also want to look at doing the kind of affinity analysis that Amazon does.
The difference in this case would be that the “people who bought this also bought that” guidance
would be insurance-specific: the coverage, deductible levels, price points and carriers that
"businesses like yours" most commonly use.
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Startup E-Broker Aims to Simplify Insurance Buying ProcessStartup E-Broker Aims to Simplify Insurance Buying Process
Of the many characterizations that exist for insurance, “easy to use and understand” isn’t often one that
springs to mind. Yet this is exactly the position that CoverWallet, an e-broker launched in 2015, wants to
stake out for itself.
The New York-based firm uses infographic presentations to help small businesses figure out what kind
of insurance they might need and what they should expect to pay. Prospects can click on a type of policy
(general liability insurance or commercial auto, for instance) to find out what it is and why they would
need it. And if they want to receive a quote, instead of keying in all of their information (company name,
number of employees, company address, and so on), business owners can send PDFs of the first page of
existing insurance policies to CoverWallet and the company will use that information to fill out their
applications and access an insurance quote.
CoverWallet wants to be the broker of choice for companies with 25 or fewer employees and annual
insurance costs of less than $30,000. The founders are two MIT graduates looking to make customers of
people a lot like themselves: running small businesses, and without a lot of time to investigate insurance
options.
Alongside of these pure “e-brokers” are companies that are trying to move into insurance brokerage from a
different starting point with small businesses, in an attempt to further monetize those relationships. For
instance, upstart HR firms like Justworks or Zenefits are using the position they have with small businesses to
branch into insurance brokerage. Intuit has partnered with The Hartford to offer worker's compensation
insurance to small businesses that use Intuit’s software. Despite the threat they represent to smaller brokers,
partnerships like these could be a boon to incumbent carriers.
Another source of potential competition to brokers are aggregators like Compare.com and Einsurance. These
companies try to give small businesses a quick look at their options in areas like auto insurance and general
liability insurance. To the extent that their information is seen as thorough and trustworthy, they could erode the
position that mom-and-pop brokers have in the microbusiness market today.
After broker substitution, the next most promising InsurTech strategy is providing technology assistance to
incumbent carriers or brokers. For instance, MarketScout (which has been in business since 2000, making it one
of the older InsurTech companies) operates an exchange that allows individual brokers to pinpoint carriers that
have the exact type of coverage needed by small businesses. QuanTemplate (which got going in London in
2013, but now also has an office outside of New York) consolidates a massive amount of insurance industry
data, allowing agents, brokers and carriers to get a picture of what’s happening in terms of pricing and
underwriting trends.
There’s been much less activity from InsurTech firms, by contrast, to compete directly with carriers. This is a
function of significant barriers to entry, including reserve capital requirements, operational capital requirements
(including IT infrastructure), a lack of access to historical claims and underwriting performance data. Among the
exceptions — that is, insurers trying to replace US companies by offering a digitally-enabled experienced for
small businesses — is Hiscox, an insurer that got its start mostly in the UK and doesn’t have a big US
distribution network to upset in the first place. (See sidebar, “Direct Insurer That Started Overseas Stakes Out a
Position in US.”) And at least one of the would-be incumbent substitutes is a U.S. carrier with a well-known
brand in insurance: Geico-owner Berkshire Hathaway, which said last December that it would roll out workers
compensation and business owners policies that small businesses can purchase directly online. Other carriers
with small business capabilities outside of the U.S. might decide to enter the market with similar digital models.
Insurance - Property & Casualty
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Direct Insurer That Started Overseas Stakes Out a Position in USDirect Insurer That Started Overseas Stakes Out a Position in US
In the US, Hiscox is trying to replicate the success it has enjoyed in the UK’s farther-along small business
insurance market. Hiscox’s digital insurance strategy is to go both direct to customers and through
digital intermediaries, including e-brokers. In the 40 US states in which it currently operates, it has stayed
under the radar to some extent by targeting companies with fewer than 10 employees, many of them
white-collar businesses in the technology, professional services, and health and beauty fields. As rapidly
as these businesses are popping up, they are still not sources of major revenue or profit for big
incumbent insurers. For now, Hiscox is a minor annoyance, something the big insurers swat away with
their tails.
Small companies entering markets with big competitors have always understood the need to provide
excellent customer service, and Hiscox is no exception. The company’s direct to customer offering is
multi-channel, combining online, call center and outbound mail. And with the intermediated part of its
business, Hiscox is positioning itself to work with just about every e-broker and InsurTech player in the
market. This is an ecosystem play that could serve it well in the long run.
Most likely models for digitally delivered insurance in next few years: Between now and 2020, we expect
three models of digital delivery to get at least some traction in the small business insurance market.
Exhibit 8:Exhibit 8: Where Ins Tech activity has focused so far
So u rce: The Bo sto n Co n su ltin g G ro u p an d M org a n Stan ley R esearch
E-brokerage model. This refers to the possibility that a broker — whether one that has come of age
in the Internet era or that has been around for decades — might create a platform designed to give
small businesses both choice and breadth of coverage. The idea of an e-broker is to do digitally what
brokers today do mostly offline, while vastly improving customer service, customer analytics and the
customer experience.
E-brokerage is likely to be the fastest model to evolve. There is a lot of incentive to create something
like this, and — in theory at least — there aren’t many barriers.
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Digital small commercial insurance in 2020: three scenarios. The share of small business insurance
premiums in the US that will be digitally underwritten ( in this context, digitally underwritten is defined as
having most purchase processes - shopping, application, quotation, and binding - conducted through online,
mobile, or call center channels) is certainly going to grow in the next few years from its current 4% level, but by
how much? Here are our stakes in the ground on that, accompanied by commentary on plausible ways for that
scenario to materialize.
Digital-direct model. Essentially, carriers marketing directly to customers through digital distribution.
There is nothing stopping this from happening other than the fact that the incumbent carriers that
are in a position to do it would be risking a lot and the carriers that can afford to take the risk aren’t
in a position to do it. Still, it’s inevitable that there will be more direct-digital offerings in the next few
years, as incumbents (especially incumbents that have seen positive responses to digital services in
their personal insurance lines) stick their toe in the water, and as new players build brand awareness.
An unexpectedly big investment by an incumbent in digitizing its small business offerings could
propel this model much faster than now seems likely.
Aggregator model. While there are many companies that would like to be the Google of insurance, a
lot stands in the way of this model — in which a specialized search engine would allow small
businesses to compare insurance products and would serve as a lead-generation engine for carriers
and agents. Among the biggest obstacles is the extent to which it would push carriers toward price
competition and product commoditization. Many carriers would prefer less transparency rather than
more, and are not going to make it easy for aggregation companies to locate the necessary
information. This won’t stop some would-be aggregators from trying, but our money isn’t on
aggregation as a game-changer in the small business insurance market three to five years from now.
Exhibit 9:Exhibit 9: Bet on growth or play in a declining segment
So u rce: The Bo sto n Co n su ltin g G ro u p an d M org a n Stan ley R esearch
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"E-brokerage Pioneers"
Digitally enabled products remain a
constraint
Conservative scenario ~15%
In this scenario, the growth of digital insurance is
predominantly a function of start-up e-brokers’ appeal
to newly created small businesses that don’t have any
preexisting broker or carrier relationships. A market
representation of this size in 2020 will mean large
brokers haven’t prioritized the small business
opportunity. It will also mean that incumbent carriers,
hoping to avoid channel conflicts with traditional
agents and brokers, have been slow to digitize their
products and processes. Aggregator models have
barely gotten off the ground and there have been no
disruptive plays in the carrier space.
"Carrier Catalysts"
InsurTech companies gain rapid
acceptance
Most likely scenario ~24%
This scenario, the most probable, in our view (and also
in line with the projections in BCG publication "Digital
Disruption in the US Small-Business Insurance Market"
on April 7, 2016), assumes that e-brokers gain
significant traction and that mid-market and large
brokers become increasingly interested in the small
business space — prompting rapid development of
distributor-enabling software and technology. The
scenario further assumes that two of these distributor
platforms get adopted by major incumbent carriers,
prompting other carriers to step up their digital
insurance initiatives. In this scenario, most carriers still
resist the idea of connecting to aggregator platforms.
Carriers’ and distributors’ digital business is still coming
mostly from new companies that are relatively small in
size, though digital is starting to make inroads with
traditional customers and with companies in the ten to
50 employee range in lower-risk industries.
"Game Changer"
Game changers shake up the industry
Aggressive scenario ~30%
This represents the barbarians-break-through scenario.
It assumes that one or more of the leading small-
business carriers have built or acquired an e-broker and
are distributing directly to customers. In addition, both
a major foreign small business player and a technology
firm have entered the carrier space with disruptive
digital plays: new, simple products, predictive
underwriting, or a paradigm-changing digital claims
service. This is the only scenario in which aggregators
have caught on in any real way, though their success is
still limited to standardized products (business owner
policies, workers’ comp, commercial auto) in white-
collar industries. With the broader presence of digital
offerings, a significant number of existing policyholders
starts shifting to digital, encouraged, in some cases, by
incumbent carriers’ conversion initiatives.
Insurance - Property & Casualty
12
Investment Implications: A $25b+ Digital SBI Market OpportunityInvestment Implications: A $25b+ Digital SBI Market Opportunity
Digital disruption creates a $25b+ market opportunity in small business insurance. As the landscape of
small businesses changes, so too will the demand for digital solutions to meet the insurance needs. Quick
turnaround on quotes, easier to understand policy terms, and an ever-growing demand for direct channel
distribution will be just a few examples of what small business owners will expect. We estimate 15-30% of SBI
will be sold digitally by 2020, or $17-33b in annual premiums. This is a significant market to be gained (or lost).
For incumbent SBI carriers, they must invest in digital platforms to maintain or gain shares. For “mom & pop”
agencies focusing on SBI, they are facing a greater challenge. For insurance carries or brokers not competing in
SBI currently, they now have an opening to establish themselves. The biggest beneficiaries could be the
disruptors — InsurTech companies.
Learning from the past… The personal auto insurance market set the stage for what can happen when the
market is disrupted by new technology or distribution channels. With Berkshire Hathaway’s purchase of GEICO
in 1996, a disruption began as direct writers began what would become a significant market share shift. In the
last 2 decades, the top three direct underwriters (GEICO, Progressive, and USAA) collectively gained 16.5% of
personal auto market share, at the expense of other top-10 players (-9.4%) and smaller competitors (-7.1%).
Specifically, GEICO leaped from No. 8 to No. 2, Progressive jumped from No. 7 to No. 4, and USAA moved up
from No. 6 to No. 5. This translates into +11.1% premium CGAR for GEICO, +9.2% for Progressive, and +6.1%
for USAA vs. +3.2% for the personal auto industry. We note that each one point of market share is a ~$2b
business opportunity in the ~$200b personal auto market. GEICO alone grew premiums by almost $20b during
the period. Another example is the small business insurance market in the UK. (See sidebar, “UK Market Shows
How Fast Fortunes Can Change.”)
Exhibit 10:Exhibit 10: Direct Writers Gain Significant Market Share
Company 1996 2015 DWP Mkt Share Company DWP Mkt Share CAGR
State Farm Mutl Automobile Ins 1 1 23,348,417 21.4% State Farm Mutl Automobile Ins 36,553,861 18.3% 2.4%
Allstate Corp. 2 3 13,569,007 12.5% Berkshire Hathaway Inc. 22,805,195 11.4% 11.1%
Farmers Insurance Group 3 5 8,191,287 7.5% Allstate Corp. 20,036,973 10.0% 2.1%
Liberty Mutual 4 7 5,464,230 5.0% Progressive Corp. 17,502,500 8.8% 9.2%
Nationwide Mutual Group 5 8 5,099,323 4.7% USAA Insurance Group 10,539,707 5.3% 6.1%
USAA Insurance Group 6 5 3,415,913 3.1% Farmers Insurance Group of Cos 9,985,969 5.0% 1.0%
Progressive Corp. 7 4 3,277,616 3.0% Liberty Mutual 9,942,667 5.0% 3.2%
Berkshire Hathaway Inc. 8 2 3,078,433 2.8% Nationwide Mutual Group 7,468,708 3.7% 2.0%
Travelers Companies Inc. 9 10 2,456,823 2.3% American Family Insurance Grp 3,694,271 1.9% 3.5%
American Family Insurance Grp 10 9 1,924,188 1.8% Travelers Companies Inc. 3,377,404 1.7% 1.7%
Subtotal 69,825,238 64.1% 141,907,255 71.2% 3.8%
All Other 39,105,074 35.9% 57,466,713 28.8% 2.0%
Total Industry 108,930,312 100.0% 199,373,968 100.0% 3.2%
1996
2015
Rank
So u rce: SNL a n d M o rgan Stan ley R esearch
Insurance - Property & Casualty
13
UK Market Shows How Fast Fortunes Can ChangeUK Market Shows How Fast Fortunes Can Change
The UK market offers a glimpse of how quickly the small commercial market can move toward non-
intermediated insurance products including digital.
Between 2011 and 2014, the Direct Line Group, a former insurance division of the Royal Bank of
Scotland, increased its share of the UK’s small and medium enterprise insurance market from 2% to 7%
by focusing on simple products that customers could buy through whatever channel they chose,
including directly through their tablet computers or smartphones.
Other insurers that saw what was happening and jumped in with their own digital investments were able
to hang on to their market shares. For instance, Aviva’s introduction of an e-trading insurance platform
— enabled by an investment exceeding £50 million — allowed it to keep its almost one-third share of
the UK SME insurance market. Likewise, AXA’s rollout of its new direct digital channel allowed it to hold
onto its low- to mid-20s share of the UK SME market, while others who moved slowly saw their market
share erode.
In addition to showing how quickly traditional insurers can lose ground, the UK example dispels the myth
that brokers and agents can never be replaced. Upwards of a quarter of all small-business insurance in
the UK is now bought without the help of an intermediary. While the US and UK have different regulatory
frameworks, it remains a reminder that channel disruption is possible in insurance and can happen
quickly once it starts.
Small business insurance is a fragmented market in the US. US commercial lines is a ~$285b premium
market overall (across large/mid-market and SBI). Top-10 players account for ~39% of market share vs. ~71%
for top-10 insurers in personal auto. Since 1996, the top-10 players have actually ceded market shares (from
46% to 39%) to smaller underwriters. Eight insurers in top-10 in 1996 remained in the top league in 2015 and
only two of them gained shares (Chubb from 4.8% to 5.6% and Nationwide from 2.3% to 2.9%) during the
period.
Exhibit 11:Exhibit 11: BRK + PGR + USAA Steady Mkt Share Gain
9.0%
9.6%
10.4%
11.7%
12.4%
12.6%
13.6%
14.8%
15.7%
16.6%
17.3%
17.5%
18.2%
19.4%
20.2%
21.2%
22.2%
23.2%
24.1%
25.5%
55.1%
53.0%
52.6%
51.6%
50.1%
50.1%
49.4%
48.7%
48.5%
48.3%
48.5%
48.6%
48.7%
48.2%
47.5%
46.8%
46.1%
45.6%
45.2%
45.7%
35.9%
37.4%
37.1%
36.7%
37.5%
37.3%
37.0%
36.5%
35.8%
35.1%
34.3%
33.9%
33.1%
32.4%
32.3%
32.0%
31.7%
31.2%
30.7%
28.8%
0%
10%
20%
30%
40%
50%
60%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
BRK, PGR, USAA All Other Top-10 All Other
So u rce: SNL a n d M o rgan Stan ley R esearch
Insurance - Property & Casualty
14
We estimate SBI to account for ~$100b annual premiums or ~35% of overall commercial line market. It is even
more fragmented, with the top-10 players account for ~30% of market share and none garners more than 5%
of market share. Nationwide, State Farm, The Hartford, Liberty Mutual, Travelers, AIG, Cincinnati Financial,
Farmers, AmTrust, and Chubb are among the leading providers.
Sizing up the small business insurance market opportunities in 3 scenarios. Using the 3 scenarios of
digital market share in SBI, we estimate ~$3-8b pretax profit potentially up for grabs for insurers by 2020. By
comparison, US P&C industry collectively earned $65b in 2015. We assume combined ratios of 86-94%, 3x
investment leverage, 3.4% investment yield, and 15%, 24%, and 30% of digital market share in 2020. For P&C
agents and brokers, there could be ~$400m to $1b operating income shifting hands. We assume 12.5%
commission rate and varying operating margins (20-25%).
Exhibit 12:Exhibit 12: Commercial Lines Mkt Share: 1996
Rank
Company DWP
Mkt Share
1
Travelers Companies Inc. 11,210,945
8.6%
2
American International Group 9,245,613
7.1%
3
Liberty Mutual 7,836,896
6.0%
4
CNA Financial Corp. 7,072,945
5.4%
5
Chubb Ltd. 6,207,807
4.8%
6
Zurich Insurance Group 4,856,584
3.7%
7
Hartford Financial Services 3,628,692
2.8%
8
Allianz Group 3,442,573
2.6%
9
State Farm Mutl Automobile Ins 3,420,093
2.6%
10
Nationwide Mutual Group 3,025,637
2.3%
Subtotal
59,947,784
46.0%
All Other 70,418,325
54.0%
Total Industry 130,366,109
100.0%
Source: SNL and Morgan Stanley Research
Exhibit 13:Exhibit 13: Commercial Lines Mkt Share: 2015
Rank
Company DWP
Mkt Share
1
Travelers Companies Inc. 16,214,165
5.7%
2
Chubb Ltd. 16,076,216
5.6%
3
American International Group 15,990,539
5.6%
4
Liberty Mutual 13,384,371
4.7%
5
Zurich Insurance Group 13,297,325
4.7%
6
CNA Financial Corp 8,880,641
3.1%
7
Nationwide Mutual Group 8,399,667
2.9%
8
Hartford Financial Services 7,455,552
2.6%
9
Berkshire Hathaway Inc. 6,980,214
2.4%
10
Tokio Marine Group 5,922,971
2.1%
Subtotal
112,601,660
39.4%
All Other 173,045,857
60.6%
Total Industry 285,647,517
100.0%
Source: SNL and Morgan Stanley Research
Exhibit 14:Exhibit 14: A Fragmented Commercial Insurance Market
70%
27%
3%
1%
40%
45%
8%
8%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Top-10 Next 90 Next 100 All Other
Personal Auto Commercial Lines
42 of the 90
companies here are
publicly-traded
So u rce: SNL a n d M o rgan Stan ley R esearch
Insurance - Property & Casualty
15
Potential impact to our covered P&C companies: Among our coverage AIG, CB, HIG, and TRV are top small
business insurers. Given certain company specific assumptions, we calculate potential EPS impact under various
market share gain/loss and combined ratio combinations. We estimate each point of market share gain at 90%
combined ratio could be 4-8% accretive for AIG, CB, TRV, and ~14% for HIG. Conversely, market share loss
would have a negative impact on earnings.
Exhibit 15:Exhibit 15: Digital SBI Operating Income, P&C Underwriters
($mm)
Scenario E-brokerage Pioneers Carrier Catalysts Game Changer
Digitally Underwritten Premium, 2020 16,500 26,400 33,000
(% of small commercial insurance market) 15% 24% 30%
Combined Ratio 94% 90% 86%
Pretax Underwriting Gain 990 2,640 4,620
Investment Leverage 3.0x 3.0x 3.0x
Yield 3.4% 3.4% 3.4%
Pretax Net Investment Income 1,683 2,693 3,366
Total operating profit, 2020 2,673 5,333 7,986
Insurance Carrier Opportunities
So u rce: SNL, Th e Bo sto n Co n su ltin g G rou p, a n d M o rgan Stan ley R esearch
Exhibit 16:Exhibit 16: Digital SBI Operating Income, P&C Brokers
($mm)
Scenario E-brokerage Pioneers Carrier Catalysts Game Changer
Digitally Underwritten Premium, 2020 16,500 26,400 33,000
(% of small commercial insurance market) 15% 24% 30%
Commission Rate 12.5% 12.5% 12.5%
Broker Revenue 2,063 3,300 4,125
Operating Margin 20.0% 22.5% 25.0%
Total Operating Profit, 2020 413 743 1,031
Insurance Broker Opportunities
So u rce: SNL, Th e Bo sto n Co n su ltin g G rou p, a n d M o rgan Stan ley R esearch
Exhibit 17:Exhibit 17: Company-specific Assumptions
Assumption AIG CB HIG TRV
2015 SBI market share 2.5% 3.0% 3.5% 4.0%
Underwriting income tax rate 35.0% 16.0% 35.0% 35.0%
Investment leverage 3.0x 3.0x 3.0x 3.0x
Net investment income tax rate 25.0% 16.0% 23.0% 20.0%
2015 shares outstanding (mm) 1,324.5 328.8 403.4 314.2
2016 consensus EPS $4.01 $9.86 $3.91 $9.55
So u rce: SNL, Th o mso n Reu ters, Morg an Stan ley R esearch
Insurance - Property & Casualty
16
Exhibit 18:Exhibit 18: Potential EPS Impact for AIG
Incremental EPS in 2020 - AIG % of 2016 Consensus EPS - AIG
-2% -1% 0% 1% 2% -2% -1% 0% 1% 2%
86% ($0.25) ($0.11) $0.03 $0.17 $0.32 86% -6.1% -2.6% 0.9% 4.4% 7.9%
88% ($0.23) ($0.10) $0.03 $0.16 $0.29 88% -5.7% -2.4% 0.8% 4.0% 7.3%
90% ($0.21) ($0.09) $0.03 $0.15 $0.27 90% -5.2% -2.2% 0.7% 3.7% 6.6%
92% ($0.19) ($0.08) $0.03 $0.13 $0.24 92% -4.7% -2.0% 0.7% 3.3% 6.0%
94% ($0.17) ($0.07) $0.02 $0.12 $0.22 94% -4.2% -1.8% 0.6% 3.0% 5.4%
SBI Market Share Gain/Loss (over 5 years)
SBI Market Share Gain/Loss (over 5 years)
SBI C/R
SBI C/R
So u rce: SNL, Th o mso n Reu ters, Morg an Stan ley R esearch
Exhibit 19:Exhibit 19: Potential EPS Impact for CB
Incremental EPS in 2020 - CB % of 2016 Consensus EPS - CB
-2% -1% 0% 1% 2% -2% -1% 0% 1% 2%
86% ($1.17) ($0.48) $0.20 $0.89 $1.57 86% -11.9% -4.9% 2.1% 9.0% 16.0%
88% ($1.07) ($0.44) $0.19 $0.82 $1.44 88% -10.9% -4.5% 1.9% 8.3% 14.7%
90% ($0.98) ($0.40) $0.17 $0.74 $1.31 90% -9.9% -4.1% 1.7% 7.5% 13.3%
92% ($0.88) ($0.36) $0.15 $0.67 $1.18 92% -8.9% -3.7% 1.5% 6.8% 12.0%
94% ($0.78) ($0.32) $0.14 $0.60 $1.05 94% -7.9% -3.3% 1.4% 6.0% 10.7%
SBI Market Share Gain/Loss (over 5 years)
SBI Market Share Gain/Loss (over 5 years)
SBI C/R
SBI C/R
So u rce: SNL a n d M o rgan Stan ley R esearch
Exhibit 20:Exhibit 20: Potential EPS Impact for HIG
Incremental EPS in 2020 - Hartford % of 2016 Consensus EPS - HIG
-2% -1% 0% 1% 2% -2% -1% 0% 1% 2%
86% ($0.77) ($0.30) $0.16 $0.63 $1.09 86% -19.7% -7.8% 4.1% 16.0% 27.9%
88% ($0.71) ($0.28) $0.15 $0.58 $1.01 88% -18.2% -7.2% 3.8% 14.8% 25.8%
90% ($0.65) ($0.26) $0.14 $0.53 $0.92 90% -16.7% -6.6% 3.5% 13.5% 23.6%
92% ($0.59) ($0.23) $0.12 $0.48 $0.84 92% -15.1% -6.0% 3.2% 12.3% 21.5%
94% ($0.53) ($0.21) $0.11 $0.43 $0.76 94% -13.6% -5.4% 2.8% 11.1% 19.3%
SBI Market Share Gain/Loss (over 5 years)
SBI Market Share Gain/Loss (over 5 years)
SBI C/R
SBI C/R
So u rce: SNL a n d M o rgan Stan ley R esearch
Exhibit 21:Exhibit 21: Potential EPS Impact for TRV
Incremental EPS in 2020 - Travelers % of 2016 Consensus EPS - TRV
-2% -1% 0% 1% 2% -2% -1% 0% 1% 2%
86% ($0.98) ($0.37) $0.24 $0.85 $1.46 86% -10.2% -3.9% 2.5% 8.9% 15.3%
88% ($0.90) ($0.34) $0.22 $0.79 $1.35 88% -9.5% -3.6% 2.3% 8.2% 14.1%
90% ($0.83) ($0.31) $0.20 $0.72 $1.24 90% -8.7% -3.3% 2.1% 7.6% 13.0%
92% ($0.76) ($0.29) $0.19 $0.66 $1.13 92% -7.9% -3.0% 2.0% 6.9% 11.8%
94% ($0.68) ($0.26) $0.17 $0.59 $1.02 94% -7.2% -2.7% 1.8% 6.2% 10.7%
SBI Market Share Gain/Loss (over 5 years)
SBI Market Share Gain/Loss (over 5 years)
SBI C/R
SBI C/R
So u rce: SNL a n d M o rgan Stan ley R esearch
Insurance - Property & Casualty
17
A detailed example calculation supporting the Travelers EPS impact of $0.59 given a small commercial insurance
market share increase of 1% and a combined ratio of 94% is found below.
For distribution, mom & pop agents could face the biggest challenge. Among our broker coverage, BRO has the
most small commercial insurance exposure, while others (AON, MMC, WLTW, and AJG) are servicing
large/middle markets which are less susceptible to digital disruption.
Who are the likely winners (and laggards)? Winning the “digital revolution” in small business insurance will
require significant investments in leading-edge technology. But the willingness to do so is just as important.
How soon will investors see the impact? While there are some early movers in digital SBI market, we believe
we are still in the very early innings of this secular change. Given the significant investments and mindset
change needed, we expect the market share shift to occur over time. In personal auto, it took direct writers 20
years to gain 17% market share, or less than one point per year. However, the world is drastically different today
than it was in 1996 when the internet and mobile technologies were in their infancies. We think the pace of
technology adoption in the SBI market could be much faster. Assuming even a 20bps market share gain per
year over the next five years for individual carriers in the SBI space, we note that the EPS accretion could be 4-
14% for some of our covered carriers (assuming a 90% combined ratio).
Exhibit 22:Exhibit 22: Specific Calculation Example of TRV EPS Impact (1% market share gain and 94% combined ratio)
Item 2015 CAGR 2020 Change Notes
(1) SBI Industry Premium 100,000 2.1% 110,950 10,950 Industry is $100b market; grows 2.1%/yr
(2) TRV market share 4.0% 5.0% 1.0% TRV grows its SBI mkt share by 1 pt
(3) TRV premium 4,000 5,548 1,548 = (1) x (2)
(4) Combined ratio for SBI 94% 94% Assume for this example a 94% C/R
(5) Pretax underwriting gain 240 333 93 = (3) x [100% - (4)]
(6) After tax underwriting gain 156 216 60 Assume tax rate of 35%
(7) Investment leverage 3.0x Assume investment leverage of 3.0x
(8) Investment yield 3.4% Assume investment yield of 3.4%
(9) Pretax net investment income 158 = (3) x (7) x (8)
(10) After tax investment income 126 Assume tax rate of 20%
(11) 2015 Shares outstanding 314.2 Given
(12) EPS impact $0.59 = [(6) + (10)] / (11)
So u rce: SNL a n d M o rgan Stan ley R esearch
Large, national, incumbent carriers have the financial and technology resources but they could be
constrained by channel conflict (direct vs. agency) and corporate inertia.
Smaller regional players could struggle to maintain their market share as SBI market consolidates, if
they are not proactively adjusting their go-to market strategy.
Smaller agents could be the most negatively impacted, given their clients are most prone to move
digital while mom & pop agents lack financial and technology resources.
Larger brokers, while not immediately threatened by digital disruption in SBI, could face increasing
competition if mom & pop agencies have to move up to middle markets.
Digital disruption in SBI provides an opening for non-incumbents to establish a foothold and gain
share.
The biggest beneficiaries could be InsurTech companies — nothing but to gain share. However the
lack of data and underwriting expertise could impede or even doom some efforts.
Insurance - Property & Casualty
18
Searching for the next GEICO (or Google): InsurTech disruption could have profound investment
implications. Among our coverage, AIG, CB, HIG, and TRV are top small business insurers. We estimate each
point of market share gain in small commercial insurance could boost their earnings by 4-14%. Mom & pop
agents could face the biggest challenge. Among our broker coverage, BRO has the most small commercial
insurance exposure while others are servicing large/middle markets which are less susceptible to digital
disruption. New entrants (either startups or traditional insurers) could be the biggest winners in the digital
transformation of small business insurance. InsurTech companies are learning from technology disruptors (see
sidebar). Some traditional insurers are taking innovative, digital/direct approaches to SBI market as well,
including recent examples of:
There are still many unanswered questions: Will pricing fall with lower distribution cost? Will lower pricing
increase demand? Will technology play important roles in not just distribution but also underwriting? One thing
is for sure — digital disruption in small business insurance is already happening.
Learning from Technology DisruptorsLearning from Technology Disruptors
Internet giant Google entered into auto insurance market through an model of Google Compare.
However the lack of participation from large carriers doomed this year-long experiment. We think
Google gained additional insights in this venture to better serve its core search business, with insurance
among the highest pay per click. Internet powerhouses, like Google, Apple, Amazon, and Facebook, all
possess brand and data analytics which could make them powerful competitors (or partners) in
insurance marketplace.
Customer experience is the key to a digital marketplace model. Insurance buyers, especially in small
business insurance, have unmet needs in product simplicity and shopping experience. InsurTech
companies or even traditional insurers and brokers could learn from other successful digital marketplace
models. Positive customer experience benefits from (1) more selections, (2) customer reviews, (3) price
comparison, (4) frictionless purchase process, (5) step changes (selling adjacent products/services), and
(6) sharing (who bought what).
Most InsurTech startups are focusing on distribution. The relationship with insurance carriers is vital to
their success. They could learn from other internet verticals such as online travel agencies.
Berkshire Hathaway’s recently formed unit to sell workers’ compensation and BOP policies directly
over the internet.
American Family Group’s investment in start-up firm AssureStart, which sells small business
insurance through direct writers.
Hiscox offers small business insurance product directly from its website.
AIG, Hamilton Insurance Group, and Two Sigma plan to establish a technology-driven platform
targeting SBI.
Travelers announced a direct SBI online platform in the UK.
Insurance - Property & Casualty
19
Appendix I: Small Business Insurance SurveyAppendix I: Small Business Insurance Survey
In conjunction with this research report, BCG conducted a survey of US-based small commercial insurance
decision-makers in April of 2016. The synthesized survey results represent 517 total survey respondents who
met the following three criteria: (1) Company size: Non-employers to 49 employees, (2) Company purchases
commercial insurance, and (3) Respondent is the primary decision-maker or equally shares decision-making
responsibility for this purchase.
Our respondents represent a wide range of small businesses across multiple firmographics including company
size, industry and firm age: (1) Company size: 39% of respondents are microbusinesses with <5 employees, 21%
with 5-9 employees, 13% with 10-19 employees and 27% with 20-49 employees, (2) Our top five industries
(Professional and specialty services, Contractors and construction, Retail, Healthcare, Real estate) represent 55%
of survey respondents – largely in line with US Census Bureau firm counts for same industries, and (3) 25% of
the respondents represent businesses that have been founded in the last five years.
Key takeaways:
Exhibit 23:Exhibit 23: Demand for an insurance digital solution already significantly exceeds a high quality solution
So u rce: The Bo sto n Co n su ltin g G ro u p
Insurance - Property & Casualty
20
Exhibit 24:Exhibit 24: Small business owners already leverage digital for many day to day operations.
So u rce: The Bo sto n Co n su ltin g G ro u p
Exhibit 25:Exhibit 25: … and are already using digital channels to communicate with carriers, agents, and brokers.
So u rce: The Bo sto n Co n su ltin g G ro u p
Insurance - Property & Casualty
21
Exhibit 26:Exhibit 26: Although face to face interaction and local presence are still important criteria in selecting
agents/brokers.
So u rce: The Bo sto n Co n su ltin g G ro u p
Exhibit 27:Exhibit 27: … Small businesses interested in buying direct place more importance in price, expertise, and
brand.
So u rce: The Bo sto n Co n su ltin g G ro u p
Insurance - Property & Casualty
22
Exhibit 28:Exhibit 28: Independence from carrier is not considered an important criteria in agent/broker selection.
So u rce: The Bo sto n Co n su ltin g G ro u p
Exhibit 29:Exhibit 29: We found low association of carriers with quality of service.
So u rce: The Bo sto n Co n su ltin g G ro u p
Insurance - Property & Casualty
23
Exhibit 30:Exhibit 30: Significantly more optimism among young businesses.
So u rce: The Bo sto n Co n su ltin g G ro u p
Exhibit 31:Exhibit 31: 70% of respondents have not had a claim despite of 50% holding insurance over 10 years.
So u rce: The Bo sto n Co n su ltin g G ro u p
Insurance - Property & Casualty
24
Appendix II: InsurTech Company ProfilesAppendix II: InsurTech Company Profiles
Exhibit 32:Exhibit 32: Select InsurTech Company Profiles
Startup Startup Launch Desription
Compare.com 2013
Price comparison website for auto, health, home, life and small business insurance
Bizinsure 2012
Focuses on combining knowledgeable, licensed human support with the simplicity and affordability of technology, allowing
consumers to compare multiple top rated business insurance quotes within minutes, and buy with the company online or
over the phone.
Einsurance 1999
Price comparison website for auto, health, home, life and small business insurance
Netquote 1989
Focuses on providing consumers with a free, simple, and effective way to fulfill insurance shopping needs. NetQuote
operates a web-based business through which local insurance agents and national insurance companies purchase high
quality leads of consumers in the market for competitively priced insurance policies. NetQuote's website enable consumers
to receive multiple insurance quotes in all 50 states from the Company's network of independent local insurance agents and
local representatives from its national insurance partners.
Bolt 2000
e-agent focused on delivering a better way for small businesses and individuals to choose and buy their insurance coverage.
Company bets on a combination of expertise, customer service, and online platform to help customers efficiently determine
which carrier and product are a good fit for the customers.
Coverwallet 2015
e-broker that leverages data, design and technology to deliver a better experience for small business owners. Its
assessment system to help small businesses identify their insurance needs and find a policy that fits their budget. The use of
consumer-friendly online technologies (e.g., automatic risk analysis, document management, benchmarking and data
analytics, intelligent data driven risk and insurance assessments, coverage recommendations, peer risk comparisons and
claims support) makes the process of obtaining a quote a lot simpler and faster for small business owners.
Coverhound 2010
Online platform for comparing and purchasing insurance, built to deliver fast, accurate and actionable rates from leading US
carriers based on clients specific needs. Company is dedicated to providing the best in class customer experience from
leading U.S. property and casualty carriers.
Embroker 2015
Cloud-based risk and insurance management platform that uses the company's own software, data and predictive analytics
to help businesses buy all types of commercial insurance. Focused on a broader spectrum of business insurance with
emphasis on efficiency, transparency, and empowerment
Insurance noodle 2000
Small business insurance wholesaler (mostly focused on white collar industries) that allows independent agents to find
insurance products quickly and easily by using state-of-the-art technology. It also plays in personal lines.
Insureon 1997
Online small business insurance agency that provides coverage for more than 175,000 small businesses. It both serves
retail clients directly and supports leading top-five banks, brokerages, and insurance companies in delivering their small
commercial business.
Just works 2013
Payroll management and benefits solution provider for small businesses. The dashboard allows companies to make it easy
to fill out forms such as the I-9 and offers direct deposit and processes payments for contractors (a free service), salaried
employees and hourly workers. On the platform, companies can also offer full medical, dental and vision coverage and
process payments, files required taxes, files for workers' comp and handle other legalities for its users.
Next Insurance 2016
Online small businesses insurance platform focused on creating a process that's online, transparent, fast and complete by
partnering with carriers that provide a digitally underwritten small business products.
DataRobot 2016
Data and Analytics company that helps users build better predictive models faster in the cloud. DataRobot is designed to be
a co-pilot by building and testing hundreds of models to find the best match for your data. Its platform integrates with R and
Python, allowing users to code, train and test models on its platform to see how they compare.
Earnix 2001
Integrated Pricing and Customer Analytics software that empowers financial services companies to predict customer risk and
demand and their impact on business performance, enabling the alignment of product offerings with changing market
dynamics. Banks and insurers rely on Earnix solutions to improve deposit, loan, and insurance policy offerings
Inedge 1994
Analytics solution provider specialized in the Insurance industry. Company focuses on helping clients gather and understand
large amounts of data from various sources to make real-time decisions in a more cost-effective, efficient, and reliable
manner by providing proprietary software accelerators and applications for a decreased implementation time, costs, and
risks.
Quantemplate 2011
Insurance reporting and analytics software built for the complex, collaborative world of the wholesale reinsurance markets to
enables importing, analysing, modelling, reporting and utilization of data. Through QuanTemplate, underwriters and brokers
can conduct all operational activities required to trade in the insurance market, while optimising their risk in realtime.
Verisk 1971
Provider of information about risk to professionals in insurance, healthcare, mortgage, government, and risk management.
Using advanced technologies to collect and analyze billions of records, Verisk Analytics draws on vast industry expertise and
unique proprietary data sets to provide predictive analytics and decision-support solutions in fraud prevention, actuarial
science, insurance coverages, fire protection, catastrophe and weather risk, data management, and many other fields.
6sense 2013
Predictive analytics platform that helps B2B marketing and sales leaders by combining robust data science and machine
learning with a "Buyer Intent Network" that captures time-based, structured and unstructured behavioral data from
thousands of sources. Company focuses on helping businesses identify prospects in new markets and verticals – or find
buyers with a need for products in new market categories
Platforms
Marketscout 2000
MarketScout is an insurance exchange with over 35,000 users (mostly independent retail agents) who use MarketScout to
access specialists that help insurance agents and their clients to secure insurance quotes that best fit their needs (i.e. from
Best of Class companies) by providing research support and serving as a third party advisor.
CSC 1959
Global provider of information technology (IT) services and solutions that focuses on enabling insurers to grow digitally while
simultaneously transforming their existing IT environment, for improved efficiency and speed to market.
N2uitive 2006
Claims software that helps improve decision support, advance best practices, and facilitate robust collaboration across your
entire organization.
Vertafore 1969
Largest technology provider for the insurance industry in the US, offers broad and adaptable technology solutions for carriers
and agents.
Aggregators
E-brokers
Data &
Analytics
Technology
So u rce: The Bo sto n Co n su ltin g G ro u p
Insurance - Property & Casualty
25
Valuation Methodology and Risks to Price Targets
AIG.N
Our $63 PT is based on sum-of-the-parts valuation. We estimate valuations of $26, $17, and $20 per share,
respectively, for non-life, life & other assets (including DTA). Our PT implies ~0.95x 1Q17e BVPS (ex. AOCI and
DTA), given ~9% ROE potential in 2017. We see +15% upside to our PT from current levels, but considerable
execution risks keep us on the sideline. Upside risks: better underwriting improvement, higher investment
income, top-line growth acceleration, lower than expected cat losses, favorable reserve development, and
stronger capital management. Downside risks: unable to execute on financial goals, large losses from
catastrophes or adverse reserve development, equity market volatilities, investment losses, non-bank SIFI
limiting capital deployment ability.
AJG.N
Our $48 price target is based on sum-of-parts valuation, valuing Core business at 19x NTMe EPS or 11x
EV/EBITDA and Clean coal at 5x EPS. Slowing economic growth and pricing pressure will lower organic growth
to ~3%, limiting margin expansion. Tuck-in acquisitions on a global platform along with top line growth and
margin expansion should drive ~11% CAGR in 2016-17e. Downside risks include: M&A execution, P&C pricing
declines, economic downturn, Clean coal business disappoints. Upside risks include: Faster top-line growth,
better margin, improving economy.
AON.N
Our $100 price target is based on 15x NTMe P/E and 11x EV/EBITDA, in line with peers, assuming low single
digit organic growth in risk segment, margins rising and buybacks continue. Healthcare exchange growth
continues and pushes valuation above historical average. Downside risks include: M&A, P&C pricing under
pressure, Economic slowdown, Healthcare exchange adoption slows. Upside risks include: Faster organic growth
(in Risk or HR, especially Healthcare Exchanges) drives higher margin expansion.
BRO.N
Our $30 price target is based on 17x NTM EPS and 9x EV/EBITDA, below 10-year averages, but above brokers
peers with faster EPS growth trajectory. Pricing headwinds and people/technology investments would pressure
margins near-term. We see better relative value in other brokers. Upside risks include: faster organic growth;
better margins; accretive acquisitions, and larger share repurchases.
CB.N
Our $136 price target is based on 1.3x 1Q17e BVPS, which is a blended valuation considering legacy Chubb
accounts for ~ 40% of the combined business post acquisition. We expect combined valuation to re-rate higher
from historical ACE average ~1.2x. More stable earnings and higher growth potential could support higher
valuation than peer averages ~1.2x. Risks include: Integration risk; declining P&C pricing; underwriting margin
deterioration; global growth and F/X headwinds; investment portfolio losses; large catastrophes or adverse
development.
HIG.N
We value the stock using a SOTP approach, where we value each division on a price to book basis based on peer
multiples. This method of analysis leads us to a fair value of $47. As this implies upside in-line with what we see
at its peers, we are reiterating our Equal-weight rating on the stock. Risks include execution challenges
associated with its restructuring actions, reserve developments in workers compensation, and any delays in
extracting capital from the Talcott operations.
Insurance - Property & Casualty
26
MMC.N
Our $63 price target is based on 18x NTM EPS and 11.5x EV/EBITDA, modestly above MMC historical averages.
We estimate ~13% EPS CAGR into 2018 driven by +4% organic growth, ~130bps margin expansion and strong
capital management. Improving economies and decelerating P&C pricing drive low single digit organic top-line
growth. Upside risks include: less than expected F/X headwinds, better organic growth and margin expansion,
larger share buybacks. Downside risks include: global economic slowdown, sharply declining P&C pricing
impacting organic growth, poorly executed M&A.
TRV.N
Our $110 price target is based on 1.25x 1Q17e BVPS, a slight premium to its historical averages. We estimate
2016-17e ROE of ~11-12% driven by stable core underwriting margins along with continued reserve releases,
share buybacks and steady investment income. Downside risks include: Margin deterioration, catastrophe
losses, investment losses, reserve charges, and dilutive M&A. Upside risks include: Better investment income,
top-line growth acceleration, continued low cat losses, continued reserve releases at current levels and higher
buybacks.
WLTW.O
Our $135 price target is based on 17x NTMe P/E, in line with historical averages. Twin expense drivers of
operational improvement at Willis and, merger synergies and tax savings should drive ~15% EPS CAGR in
2016-18e. Valuation expands toward global peers. Risks include: Integration issues; Decelerating P&C pricing or
global economic uncertainties hurt organic growth; Inability to execute on current cost saving plan.
Insurance - Property & Casualty
27
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Insurance - Property & Casualty
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Primerica, Inc., Principal Financial Group, Progressive Corp, Prudential Financial, Reinsurance Group of America, RenaissanceRe, Sun Life Financial Inc.,
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Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan
Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of
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Insurance - Property & Casualty
29
Global Stock Ratings Distribution
(as of May 31, 2016)
The Stock Ratings described below apply to Morgan Stanley's Fundamental Equity Research and do not apply to Debt Research produced by the Firm.
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our
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Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see
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Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
COVERAGE UNIVERSE INVESTMENT BANKING CLIENTS (IBC) OTHER MATERIAL
INVESTMENT SERVICES
CLIENTS (MISC)
STOCK RATING
CATEGORY
COUNT % OF
TOTAL
COUNT % OF
TOTAL IBC
% OF
RATING
CATEGORY
COUNT % OF
TOTAL
OTHER
MISC
Overweight/Buy 1177 35% 283 40% 24% 572 37%
Equal-weight/Hold 1431 43% 337 47% 24% 701 45%
Not-Rated/Hold 78 2% 7 1% 9% 11 1%
Underweight/Sell 663 20% 87 12% 13% 280 18%
TOTAL 3,349 714 1564
Data include common stock and ADRs currently assigned ratings. Investment Banking Clients are companies from whom Morgan Stanley received
investment banking compensation in the last 12 months.
Analyst Stock Ratings
Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a
risk-adjusted basis, over the next 12-18 months.
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universe, on a risk-adjusted basis, over the next 12-18 months.
Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's
industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on
a risk-adjusted basis, over the next 12-18 months.
Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant
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market benchmark, as indicated below.
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Insurance - Property & Casualty
30
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Insurance - Property & Casualty
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INDUSTRY COVERAGE: Insurance - Property & Casualty
COMPANY (TICKER) RATING (AS OF) PRICE* (06/28/2016)
Kai Pan
Allstate Corporation (ALL.N) E (07/06/2010) $67.73
American Int'l Grp (AIG.N) E (05/05/2016) $49.82
Aon PLC (AON.N) E (05/31/2012) $103.92
Arch Capital Group Ltd. (ACGL.O) E (07/06/2010) $68.75
Arthur J. Gallagher (AJG.N) E (05/31/2012) $45.28
Axis Capital Holdings (AXS.N) E (08/14/2015) $52.11
Brown & Brown Inc. (BRO.N) U (01/27/2016) $35.79
Chubb LTD (CB.N) O (11/12/2015) $125.22
Everest Re Group, Ltd. (RE.N) E (05/16/2013) $174.01
Intact Financial Corp (IFC.TO) O (05/23/2016) C$90.07
Marsh & McLennan Cos (MMC.N) E (02/09/2015) $65.59
National General Holdings Corp (NGHC.O) O (01/26/2016) $20.64
Progressive Corp (PGR.N) U (04/25/2012) $31.97
RenaissanceRe (RNR.N) E (03/09/2015) $113.01
The Travelers Companies, Inc. (TRV.N) E (03/02/2012) $114.13
Third Point Reinsurance Ltd (TPRE.N) E (01/06/2014) $11.06
W.R. Berkley Corp. (WRB.N) E (01/21/2016) $56.49
Willis Towers Watson PLC (WLTW.O) O (02/12/2015) $117.56
XL Group PLC (XL.N) O (05/12/2015) $31.74
Stock Ratings are subject to change. Please see latest research for each company.
* Historical prices are not split adjusted.
INDUSTRY COVERAGE: Insurance - Life/Annuity
COMPANY (TICKER) RATING (AS OF) PRICE* (06/28/2016)
Nigel Dally
Aflac (AFL.N) E (05/27/2011) $68.85
Ameriprise Financial, Inc. (AMP.N) O (04/15/2015) $85.70
CNO Financial Group Inc. (CNO.N) E (11/12/2014) $16.36
Genworth Financial, Inc. (GNW.N) E (05/28/2015) $2.60
Hartford Fin. Services Grp. (HIG.N) E (02/08/2012) $42.11
Lincoln National Corp (LNC.N) O (08/13/2015) $36.77
Manulife Financial Corp. (MFC.TO) E (11/13/2014) C$16.97
MetLife Inc. (MET.N) E (11/11/2015) $37.70
Primerica, Inc. (PRI.N) E (09/08/2010) $55.60
Principal Financial Group (PFG.N) E (06/09/2014) $39.06
Prudential Financial (PRU.N) O (05/10/2012) $68.70
Reinsurance Group of America (RGA.N) U (08/11/2014) $92.36
Sun Life Financial Inc. (SLF.TO) E (05/25/2012) C$40.80
Torchmark Corp. (TMK.N) U (08/13/2015) $58.64
Unum Group (UNM.N) E (02/17/2010) $30.68
Voya Financial Inc (VOYA.N) O (11/11/2015) $23.38
Stock Ratings are subject to change. Please see latest research for each company.
* Historical prices are not split adjusted.
© 2016 Morgan Stanley
Insurance - Property & Casualty
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