Small Business: Hot Market for Benefits Providers

August 2024

The small business market has experienced significant disruption over the past several years. The pandemic put many small businesses on the brink, with many closing either temporarily or permanently. However, since the pandemic, the number of small businesses has been growing, and those businesses are positioning themselves for success in a post-pandemic environment.

No different from other organizations, small businesses are competing for talent and looking to create value propositions to attract and retain the best workers. It is especially critical for small businesses to attract the best and the brightest, given the limited number of workers that any given small business employs. Each employee has a significant impact on the overall success of the business.

According to research conducted by LIMRA and EY, small businesses (defined in the study as having 10-99 employees and currently offering insurance benefits) look to workforce benefits as an important component of their talent management strategies:

• Almost 7 in 10 say that their company’s benefits package will be critical in order to attract and retain the best workers.
• Half indicate that they see themselves offering more benefits in five years than they do today; just 6 percent say they may offer less.
• Nearly half say their business will offer some or more insurance benefits to their freelance or contract workers in the future.

As such, small businesses present a significant opportunity for workplace benefits providers.

Compared to larger employers, fewer small businesses offer insurance benefits in general, and market penetration of specific insurance benefits such as life, disability and supplemental health is generally lower than is the case for larger employers. Yet, small businesses express high levels of interest in offering a range of benefits. According to the study, high utilization benefits, including medical, dental and vision, lead the way, while other insurance benefits such as life and disability insurance follow closely behind. Voluntary benefits such as hospital indemnity, accident and critical illness insurance are also of interest; more than 7 in 10 small businesses say their employees would value these offerings.

Many factors come into play as small businesses think about their workplace benefits strategy. Not surprisingly, the cost of benefits is cited by more than 7 in 10 small businesses as having a significant impact on their benefits strategy — rating it a 6 or 7 on a 7-point scale. Small businesses have been disproportionately impacted by supply chain, inflation and other disruptions, which increased their overall cost of doing business. This has placed added pressure on their ability to offer employer-paid benefits.

Small businesses are taking actions to manage their benefits programs, oftentimes to address the costs associated with providing benefits. These include negotiating with providers for better terms and implementing digital platforms for benefits administration, employee communication and engagement. Small businesses are also reviewing their offerings, ensuring that the benefit packages are aligned with the needs of their workers. More than 4 in 10 small businesses added one or more new benefits in the past two years, while 3 in 10 eliminated underutilized or ineffective benefits. More than 4 in 10 made changes in certain plan designs, including features, co-pays and deductibles.

Other actions taken to a lesser extent include outsourcing payroll and benefits administration to third parties (21 percent); outsourcing pension obligations and management, also known as pension risk transfer (15 percent); moving from defined benefit to defined contribution retirement plans (14 percent); and shifting benefits funding to contributory or voluntary arrangements, so employees share in all or part of the premium costs (13 percent).

As workplace benefits organizations look to connect with small businesses to address their benefits needs, there are different approaches that will resonate with them. Small businesses view different approaches to offering workplace benefits as having a significant positive impact on the success of their workplace benefits programs. These include:

• Offering financial, emotional and physical wellness programs
• Integrating and coordinating insurance, health and retirement savings offerings
• Offering workers personalized or customized benefits
• Bundling multiple benefits products with a single carrier or provider
• Bundling coverage types into one product (i.e., one product addressing multiple needs)
• Using company and employee data to inform strategy, enhance the employee experience and make data-driven benefits decisions
• Expanding voluntary (i.e., employee-paid) benefits and offerings

Many indicators point to small businesses as an opportunity to generate new sales of workplace benefits. To be successful, carriers, benefits providers, brokers and others must embrace the unique dynamics at play in the small business market and offer a personalized and tailored approach to understand and address the benefits needs of today’s small businesses.