BOP-ing On Up Small Businesses are Resilient. But is Their Coverage Keeping Pace? By Joyce Anne Grabel

The latest JPMorgan Chase Business Leaders Outlook survey, released on Jan. 6, reveals that three out of four small and midsize U.S. business leaders are expecting to experience continued growth despite a challenging economic environment. Companies are preparing themselves

to grow by implementing new technologies, creating teams to identify risk, and purchasing cyber insurance. They’re also seeking to ramp up hiring, despite the fact that a lack of qualified talent is creating risk. December 2019 data from Statista revealed that labor quality was the number one problem of small businesses.

As businesses grow, so does their need for good insurance. Indeed, the business owner policy (BOP) market in 2020 is highly competitive and growing rapidly, providing lucrative opportunities for agents and brokers who are current on changing risks, responsive to evolving needs, and flexible when it comes to offering customized solutions.

The small commercial marketplace, in particular, is “evolving at a feverish pace,” observes Behram Dinshaw, executive vice president and president of Small Commercial at Travelers. He sees a wide spectrum of businesses buying these policies, including sole proprietors who may be running their business from home, small businesses with a handful of employees, and larger ones with up to 50 employees.

Dollar Limits Increasing

“The biggest trend I’ve seen is that larger accounts are being written on BOPs than have been in the past,” says Heidi Strommen, CPL, MBA, president of ProHost USA, a division of Distinguished Programs.

She notes that in the restaurant niche, for example, accounts with total insured values more than $3 million or sales exceeding $2 million annually are being written on BOPs by some carriers. In the past, accounts of that size would have been moved to a package policy. “It used to be the case that restaurants with liquor exposure or sales over $2 million wouldn’t be eligible for BOP coverage,” she adds, “but that’s no longer always the case.”

BOPs continue to expand in terms of eligibility and business classes, notes Larry Chasin, CEO of PAK Programs: “BOPs are also expanding in terms of their ability to handle larger values and more comprehensive coverages.”

BOPs were originally designed for small risks, Chasin explains. Now, as a result of expansion of coverages and eligibility guidelines, BOPs can accommodate risks with millions of dollars in property, generating sales of $30 million and above.

BOP business owners with annual revenues from $1 million to $3 million typically purchase a business owner policy — however, Chubb BOP insures businesses with up to $30 million in revenue, says Michelle Shaver, senior vice president of Small Commercial Insurance for the company.

For accounts with annual revenue greater than $30 million, Chubb offers a package policy that is well-suited to larger and more complex risks.

“The types of businesses insured under the BOP vary but often include retail, wholesale, medical offices, office buildings, professional and personal services, restaurants, contractors, building owners, manufacturers, technology companies, and life science businesses,” Shaver says.“Business owner policies are evolving by expanding eligibility and adding coverage options.”

Furthermore, BOP eligibility is expanding by incorporating additional classes into the preferred and acceptable categories, she explains. New industry segments are being added, such as advanced manufacturers, contractors and other moderate hazard industries. Specialized additional and optional coverages are being offered to customers or embedded into the business owner policy.

Over the last few years, Chubb has observed several key trends regarding business owner policies, Shaver notes. “The marketplace is remaining competitive; current carriers are expanding their product offerings and new carriers are entering the market. Insurers are adding additional coverages to their core BOP forms Depending on the coverages, some are being added at no additional charge, some have an embedded charge, and some have an associated premium charge.”

Larger accounts — up to $30 million — in certain industries are now eligible to be covered under a BOP. “Appetite is expanding, meaning additional classes that were not eligible for a business owner policy in the past are now eligible,” she says.

Tech Improves Service

In addition to expanding their product offerings, BOP carriers, underwriters, agents and brokers are using technology to speed up service and enhance the client experience.

Shaver points out that carriers are introducing applications to create more intuitive and efficient user experiences, providing agents with the ability to quote, rate and issue a policy more quickly.

BOPs are evolving with the use of predictive analytics and the ability to source risk data from third parties, notes Chasin.“This adds a degree of precision to individual risk underwriting, speeds up quoting, and reduces rating errors.”

Dinshaw observes that agents in the BOP space are seeking to engage with carriers in easier and more seamless ways. “Agents tell us they are most interested in enhancing efficiency when it comes to quoting a business owner policy. They want quoting systems to be faster and more intuitive, and they want the ability to easily customize policies. They want to be able to quote and issue small policies themselves, while easily customizing policies to fit the needs of each customer.

“And when they need to engage with an underwriter, they want it to be quick and efficient, which is something that we have made a priority,” he says.

In response to extensive agent feedback, Travelers is rolling out a faster and easier BOP quoting experience through such measures as simplified screens, flexible product offerings, streamlined underwriting questions and third-party data prefills.

Competing for Rate

Stan Logan, partner and president at Logan Lavelle Hunt Insurance, notes that pricing and enhanced coverages are making the BOP market more competitive. “Business owner policies are becoming easier to quote, issue and deliver to the customer,” he says. “Also, eligibility is expanding.”

Observations about premium rates for business owner policies vary. According to Strommen, premium rates rose in 2019, particularly during the fourth quarter, when double-digit increases became more common.

Shaver notes that BOP policy premiums are increasing in the mid-single digits on average upon renewal. “This is true for both Chubb’s insureds as well as for industrywide surveys such as the IVANS Rate Index,” she says.

However, Chasin sees rates as generally stable. “Expanded BOP capabilities often lead to more competitive pricing initially, followed by truing up of rates over the next few years,” he says. “Lower rates are out there but require jumping from carrier to carrier each year.”

In Logan’s experience, premium rates are going down.

Claims Severity Up

Claim frequency has stayed about the same and even decreased for some lines of coverage, but claim severity is increasing, particularly for liability claims due to legal, medical and other trends, observes Strommen. Leading claims in the business owner insurance space continue to be in the areas of property damage and liability.

“BOP industrywide data sources — for example, ISO — indicate that overall BOP claim severities continue to increase at a modest rate, mostly due to typical inflationary pressures,” Shaver points out.

Overall, in Chubb’s experience, the trend is for a majority of BOP claims to be related to property exposures, she explains. Examples include water damage and wind, hail, or storm damage. Other examples include slips and falls, and power outages.

These types of claims are common in the restaurant niche, notes Strommen. “On the liability side, we see claims related to slips, trips and falls. On the property side, we’re seeing a lot of water damage claims,” she reports. In recent years, extreme temperature fluctuations in the Northeast have led to an increase in water damage claims due to frozen pipes.

Chasin agrees with Strommen that claim frequency remains stable, while claim severity continues to increase. PAK Programs commonly sees slip-and-fall claims from its business owner clients.

“Parking lot potholes, snow and ice, wet floors, and changes in elevations all present liability hazards, which expose insureds to medical payments, loss of wages, and pain and suffering claims,” he says.

“Pot holes, snow and ice, wet floors, and changes in elevations all present liability hazards.” — Larry Chasin, CEO, PAK Programs

Fires are also a consistent, and increasing, cause of loss. “Extension cords used as permanent wiring, overloaded circuits, and animal damage to wiring all present fire risks. Fire loss has expanded with current wildfire patterns; the evacuation zones are growing larger. Even a small fire causes smoke damage, requiring business closure and leading to loss of income,” Chasin says.

Even without direct fire damage, loss-of-power claims are commonplace when wildfires strike, he adds. “Poorly maintained power-line infrastructure along with increasingly dangerous weather systems — fire, hurricanes, convective storms, and weight of ice and snow — have increased the frequency and severity of power outages. Businesses can’t operate without power, which affects heating, cooling, and refrigeration, internet connectivity, and point-of-sale systems.”

This is particularly risky for businesses in the food and beverage market, where spoilage losses occur, in addition to lost income.”

Logan is seeing an increase in claims for wrongful termination under employment practice and ransomware and phishing under cyber.

Cyber Risks — An Increasing Concern

According to the Principal Employer Well-Being Index, released in November 2019, a study of the top concerns of small and mid-size business employers (between two and 1,000 employees), cybersecurity was the number-one area in which employers said they needed advice from outside advisors, at 29%. Eighty percent of the employers surveyed were taking action to improve cybersecurity, starting with employee training — a critical move, because 76% of their employees have access to personal customer information.

With cybersecurity of such importance, it’s no surprise that more business owners are interested in cyber coverage. “The 2019 Travelers Risk Index found that nearly half of the small businesses surveyed worry about a security breach,” says Dinshaw. Travelers has been commissioning its Risk Index since 2014, and 2019 was the first year that cyber has been the top concern among businesses of all sizes.

As concerns about cyber threats increase, a higher percentage of businesses are taking proactive measures to safeguard against risks, including purchasing cyber insurance policies. More than half — 51% — of survey participants reported getting cyber insurance, up from 39% in 2018. However, a sizable number of businesses reported they had not implemented such preventive best practices.

Although more businesses are taking steps to prevent a cyber event, “it’s still alarming that nearly half don’t have the proper insurance coverage,” notes Tim Francis, enterprise cyber lead at Travelers. “With cyber risks continuing to evolve, there is much to consider when trying to protect a network.”

Having a well-protected computer network that can keep out bad actors is vital for a company that protects sensitive information, such as personal and financial data. “The costs of a data breach can be substantial,” Dinshaw warns. “Cyber insurance should be an important component of any good risk management strategy because the vast majority of companies, no matter their size, are vulnerable to a cyberattack and would benefit from the support and services that come with a cyber insurance policy,” Dinshaw says.

Shaver points out that more than half of Chubb’s BOP customers buy either a stand-alone cyber policy or an endorsement to their BOP that covers elements of data breach expenses and privacy liability.

Cyber has become a vital component of any business owner insurance program, stresses Strommen, of ProHost USA. “The risks are myriad and complex, and small businesses are vulnerable to attack.”

More BOPs are including at least some coverage for cyber, but the coverage limits and terms differ widely from one policy to the next, Strommen points out.

The better coverage options include pre-breach risk management resources, first- and third-party claim coverage, data breach response coverage, and more.

“Understanding the details of a cyber coverage component to a BOP is an excellent topic for discussion between business owners and their insurance advisors,” Strommen advises.