Why Small Businesses Get Screwed on Commercial Insurance

Let's talk about a market failure that nobody wants to discuss because it implicates too many people who wear nice suits.

Commercial insurance is a $850 billion industry built on information asymmetry. The carriers have actuaries, underwriters, claims adjusters, and legal teams. They have data on every claim filed in every industry in every state for the past fifty years. They know exactly how likely your business is to file a claim, what that claim will cost, and how to structure your policy so they pay as little as possible when it happens.

You have a PDF you never read and a broker who returns your calls maybe 60% of the time.

This is not a fair fight. It was never designed to be.

The Broker Problem

Here's how commercial insurance actually works for small and mid-sized businesses:

You contact a broker. The broker shops your coverage to multiple carriers. The carriers provide quotes. The broker presents those quotes to you with a recommendation. You select a policy. The broker earns a commission, typically 10-15% of your premium, paid by the carrier.

Notice anything interesting about that compensation structure?

The broker gets paid by the insurance company, not by you. Their commission is a percentage of your premium—so higher premiums mean higher commissions. And they only get paid if you actually buy a policy, which means their incentive is to close the sale, not to spend three hours explaining why a particular exclusion might devastate your business.

I'm not saying brokers are corrupt. Most aren't. But incentives matter, and the incentives here are misaligned in ways that systematically disadvantage the buyer.

The Expertise Gap

Large corporations have risk managers. These are full-time employees whose entire job is understanding insurance. They negotiate directly with carriers. They review every policy line by line. They know exactly what coverage they need because they've spent years studying it.

Small businesses have an owner who handles insurance the same way they handle HR, accounting, IT, legal, and facility management—poorly, reluctantly, and in whatever fifteen-minute window they can carve out between actual business operations.

This expertise gap is the primary mechanism through which small businesses get suboptimal coverage at premium prices. Not through fraud or deception, but through simple information asymmetry. The carrier knows what they're selling. The buyer doesn't know what they're buying.

A 2019 study by the Insurance Information Institute found that 75% of small businesses are underinsured. Not uninsured—underinsured. They're paying premiums for coverage that won't actually protect them when they need it.

That's three out of four businesses paying for something that won't work.

The $400 Tax on Being Small

Professional policy review—the kind that a large corporation's risk manager does internally—costs about $400 per policy on the open market. For a small business with a standard insurance package (general liability, property, workers' comp, commercial auto, umbrella), that's $2,000-2,500 total.

Most small businesses don't pay it. They trust their broker, sign the policy, and hope for the best.

Here's the economic math: small businesses pay this "ignorance tax" in the form of coverage gaps, unnecessary endorsements, and premiums that don't reflect their actual risk profile. A business that understood its coverage could negotiate better terms, identify unnecessary coverage, and ensure that essential coverage is actually present.

But they don't understand their coverage. So they pay more and get less.

The Technology Disruption That Isn't

There's a narrative in insurance technology circles that AI will democratize policy review. Make it faster, cheaper, accessible to everyone.

I'm skeptical of narratives that conveniently benefit the people telling them. But the underlying economics here are real: reading and understanding a commercial insurance policy requires domain expertise and focused attention. Those are both things computers are increasingly good at providing at scale.

The question isn't whether technology can read an insurance policy—it obviously can. The question is whether it can read a policy well enough to identify the specific gaps and issues that matter for a specific business.

That question is still being answered. But the market need is real and substantial. We're already seeing innovative platforms like TrustLayer transform how businesses manage third-party insurance verification. The next frontier is helping businesses understand what that verified coverage actually means.

What This Means For You

If you run a small or mid-sized business, you're probably operating with insurance coverage you don't fully understand, purchased through a process that doesn't serve your interests, from companies that know far more about your risk profile than you do.

This isn't because you're stupid. It's because the entire system is designed to maintain information asymmetry. Your ignorance is profitable for everyone except you.

The solution isn't complicated: understand what you're buying before you buy it. Read your policy or pay someone to read it for you. Ask your broker uncomfortable questions about specific exclusions. Get a second opinion on your coverage from someone who doesn't profit from the sale.

The insurance industry would prefer you didn't do any of these things. That preference should tell you something.