U.S. property/casualty insurers salivating for a market growth opportunity appear to have a clear target in sight: the small commercial sector.

It turns out that small commercial has enjoyed steady growth while many others sectors have stagnated, and it lacks a dominant player in the market, McKinsey & Company said in a new report.

“Almost 40 percent of sole proprietors in the U.S. do not carry small commercial coverage,” McKinsey said in its report. “Some may be covered under home-based policies or endorsements on their personal policies, but this finding raises the possibility of unexpected room for growth in the smaller business market.”

The U.S. small commercial market, which encompasses businesses with up to 100 employees and $100,000 in annual premiums, represents just over 1/3 of the commercial lines market, with between $99 billion and $103 billion in direct written premiums as of 2013. That’s up from $91 billion in 2011, McKinsey noted.

A major selling point is that unlike many other sectors, U.S. small commercial has dominant insurer. Nationwide holds the largest share at just 6 percent, McKinsey said. State Farm, The Hartford, Liberty Mutual and Travelers each carry about 5 percent. AIG, Cincinnati, Auto-Owners Insurance, Farmers, AmTrust and ACE USA each have just 3 percent of the market. After then, 14 additional insurers carrier a combined 18 percent, and the rest fill the remaining 38 percent, McKinsey said.

While McKinsey points out opportunity, the consultancy also asserts that the situation is a fast-evolving one. Market share is fragmented most at the smaller end of the market – businesses with one to 29 employees – but the biggest carriers are moving quickly to stake their claims, according to the report. The market share for carriers in small commercial that have more than $2.5 billion in direct written premiums has jumped by 12 percent in the last six years, McKinsey said, “suggesting that scale is an important driver of growth.”

U.S. small commercial presents opportunity to insurers who are otherwise struggling in a challenging market, McKinsey said.

“On the one hand, the personal auto insurance market has become increasingly commoditized. In the mid-commercial segment, carriers are struggling to deliver the level of service clients demand at premiums they are willing to pay. And in large commercial lines, competition for a limited client base is fierce, with large brokers controlling access and taking the lion’s share of revenue,” the report noted.

Small Commercial Clients More Receptive to Switching

What’s more, customers in small commercial who have insurance are receptive to switching to new carriers. McKinsey said that of the 94 percent who renewed with their existing carriers, 53 percent are actively loyal and would recommend their current carrier (similar to personal auto statistics). While 6 percent switched in the most recent annual shopping period, 17 percent shopped around and renewed. According to McKinsey, the 24 percent who stayed with their carriers did so “more out of inertia than true loyalty.”

In other words, if you add up the numbers, the pool of small commercial clients who could be persuaded to switch comes close to 50 percent of the market at any given time, McKinsey noted.

Targeting small commercial insurance clients isn’t all smooth sailing, however. That’s because clients in this sector appear to target non-agent purchasing channels in a big way. McKinsey said that nearly 70 percent start their purchase process using direct channels such as online shopping, and almost half use both agent and non-agent channels to purchase.

Other stats that showcase challenges in marketing to small commercial insurance clients: About 18 percent purchase their policy directly from the insurer, and 60 percent surveyed would consider interacting directly with a commercial insurer. Approximately 56 percent of these customers would consider binding direct, and nearly half said they’d consider interacting with a remote or virtual agent.

As McKinsey note, demand for agent alternatives in the marketplace exceeds supply.

The full McKinsey report – Small Commercial Insurance: A Bright Spot in the U.S. Property-Casualty Market – is based on a survey of over 1,500 small businesses in the U.S. across multiple industries. Interviews with dozens of customers and distributors also informed the McKinsey analysis. Company sizes range from one to 100 full-time employees.

Source: McKinsey & Company.