4 Key Insights from The Hanover’s Small Business Risk Report

The Hanover report analyzes the small business risk landscape and shares valuable insights for small business owners.

By: Shannon Flynn | June 2, 2022

In late April, The Hanover Insurance Group released its 2022 Small Business Risk Report, identifying major risk areas for small business owners and other critical information.

The report analyzes the ever-changing small business risk landscape, shares valuable insights for small business owners and highlights the important relationship between small business owners and independent insurance agents.

Because of the COVID-19 pandemic, the last two years have posed unprecedented challenges for small business owners. Many businesses across several industries had to become more flexible and willing to adapt under these circumstances. Whether it was enforcing mask-wearing or social distancing or handling labor shortages, it’s been a tumultuous time for small business owners.

Owning a business is a risk in and of itself. Still, other internal or external threats can emerge and negatively impact a business. Learning to manage these risks is no easy feat, nor is risk management a linear process. It’s common for small business owners to experience trial and error or even fail to manage risks while operating.

Michael R. Keane, president of core commercial, The Hanover

Thankfully, The Hanover Insurance Group’s 2022 Small Business Risk Report provides useful insights small business owners should understand and take with them moving forward.

Understanding the Results of The Hanover’s 2022 Report

In partnership with Statista, a major data analytics firm, The Hanover Insurance Group conducted a blind survey of 300 small business owners across the United States to form its report. Contractors, manufacturers, and owners of technology companies were among the professionals whose feedback was captured.

The survey was conducted online in November 2021 and asked small business owners questions about key business risks, evaluating and buying business insurance, and their unique insurance management preferences.

The report, authored by The Hanover’s Michael Keane, is broken down into four major categories, including:

Critical findings
Specialized risks and needs
Evaluation and buying
Communication and management

Continue reading to learn more about the report’s findings based on the four categories listed above.

1) Critical Findings

As mentioned, most small business owners (68%) cite employee dishonesty as a significant risk area within their business. Examples of employee dishonesty are fraud, theft or embezzlement. However, only 54% of owners felt confident that they were protected from this risk.

Other concerns small business owners had were cyberattacks and data breaches. In fact, 61% of respondents cited those risks as concerning, but only 33% felt confident that they were protected from cybersecurity risks. It’s no surprise that small business owners fear cybersecurity risks — in 2021, 46% of cybersecurity breaches impacted small businesses.

The report suggests that these findings present an opportunity for insurance agents to discuss the proper protections with small business owners and ensure they have the right coverage. Seventy-nine percent of respondents believed that having the right insurance solutions is more important than the price of the insurance plan.

Many owners prioritize finding the right coverage, but most of them fail to review their policies regularly. According to Keane, it’s more important than ever for small businesses to stay connected with their independent agents and look to them for expertise to help navigate business risks.

“We’ve seen a lot of changes to businesses throughout the pandemic whether it was adding a new product or service or altering their operations — these changes oftentimes impact coverage,” said Keane.

“In addition, market dynamics such as increased cyber risk, rising building costs, and social inflation also have an impact on their insurance programs.”

Keane also recommended that businesses perform an annual comprehensive review of exposures, policies and coverages to ensure they have the insurance protection they need.

2) Specialized Risks and Needs

Many of the surveyed business owners (87%) believe that they have the right insurance protection. However, The Hanover suggests that owners may not be aware of risks that require specialized protections, such as professional liability or marine risks.

78% engage in activities that present a professional liability risk.
69% engage in activities that present marine risks.

According to the report, businesses must protect themselves from traditional risks, including property damage, general liability and worker’s compensation.

For example, companies must consider the most common work-related injuries, such as strains or sprains, contusions, inflammations, cuts or punctures and broken or fractured arms or legs. Because these injuries are so common, proper insurance coverage can prevent future lawsuits.

However, other specialized risks can emerge, so businesses must consider working with an insurance carrier that can offer specialty coverage. This makes their insurance policies all the more valuable.

3) Evaluation and Buying

Insurance brokers play a significant role in helping businesses find the right insurance coverage to suit their needs. According to the report, 90% of companies purchased some or all of their insurance from a local insurance agent.

Of this 90%, the majority (57%) ask their local agent for alternative quotes annually, and 83% expect to receive two or three alternative quote options.

One positive finding is that despite the statistics mentioned above, only 13% of small businesses changed their insurance companies in the preceding 12 months.

If businesses did change carriers, the price was the determining factor. The report found that 53% of companies changed insurance carriers due to price increases.

However, the leading factor for a carrier change was agent recommendation, highlighting the importance of agent knowledge and readiness to provide advice to customers.

Many small businesses prefer working with a local insurance agent to meet their needs, so maintaining a team of high-performing agents is critical.

4) Communication and Management

The last category, communication and management, focuses on how small businesses prefer to work with an insurance provider and how easy it is to manage their insurance policies.

Respondents agreed that they still prefer using traditional communication methods to discuss potential insurance options to meet their needs. Forty-four percent of respondents preferred email communications, and 30% agreed that their preferred payment method is electronic funds transfer from their business bank account.

Agents are critical in helping businesses manage risks — however, self-service options, as mentioned above, were also important. Compared to The Hanover’s 2020 report, 10% more small business owners said that the ability to view and download or print policy documents is very important or extremely important to them.

Modern professionals know that risk management has always been an essential component of operating a business. However, managing existing and emerging risks during the pandemic became more challenging for many business owners.

It’s expected that small business owners will need to prioritize risk management and address their top concerns to stay ahead of the curve.

Based on the report, they will likely turn to local insurance agents to address their concerns and find the most suitable coverage. Therefore, insurance providers should be prepared to work with local businesses and adequately train agents to handle these interactions. &

Shannon L. Flynn is a business tech and cybersecurity writer based in Philadelphia, Penn. She can be reached at [email protected].

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.

4 Key Insights from The Hanover’s Small Business Risk Report