➤ Business interruption coverage is likely to stay a "fairly nascent" product until more data can better determine pricing for severity and frequency, Coterie's CEO said.

➤ Coterie's top executive expects further advancements around business interruption, a product that can be difficult for many business owners to afford.

A few years before the COVID-19 pandemic started, CEO David McFarland co-founded Coterie, an insurtech that focuses on small business insurance. The company recently completed a $50 million series B financing round.

S&P Global Market Intelligence spoke with McFarland to discuss how small business insurance might evolve in 2022, Coterie's future plans and the impact COVID-19 had on the company's products and operation.

S&P Global Market Intelligence: How did the pandemic lead to an evolution in the products you offer?

David McFarland: Before the pandemic hit, we were pretty much at the beginning of the product, selling general liability policies and business owners policies, and our product was much more simplified.

COVID really kind of forced us to start expanding into other areas because we weren't really sure what was going to happen from a distribution standpoint. We were able to really buckle down and say, "Hey, we need to expand the appetite quickly to make sure that we can get the appropriate amount of revenue, as well as continue to build out more for these different channel partners."

What is the capacity like in the current market for your products?

So the capacity right now isn't too bad. You know, $1 million or $2 million limits are not too hard to come by. What we are seeing though is more of the business moving more toward non-admitted as opposed to admitted. This is not necessarily a bad thing, but we do not want to throw tons of business in the non-admitted space.

We want to offer the insureds an admitted product that offers a little bit more protection than non-admitted, just with the insurance regulators behind it. With respect to our products, we are able to offer some things that other folks cannot.

I'd say we do have a broader class appetite than most. Where some people are putting more into non-admitted, we actually put those into the admitted. We believe we have a pretty strong product for that.

Will it be possible for small businesses to get coverage for the risks they are most concerned about in the future, like business interruption?

Business interruption coverage is, at least due to pandemic, certainly not in the affordable category right now. I think we are probably going to see more advancements on that. Right now, we are dealing with a limited number of data points. The severity is ultra-high. So it is going to be a fairly nascent product for a while as we gather more data and try to figure out what we need to do from a pricing standpoint. Frequency is another component, and figuring out the frequency behind these things will be important as well. It's hard to say how long it is going to take the market to react to these types of things.

How do you tackle the complex needs that small businesses can have?

With the data that exists out there, it is not just a matter of an agent typing in a predetermined code into a search bar. What we can do now is we can pull data on these businesses and particular addresses, and say, "That's a venue that serves food, provides liquor and has live music from 11 o'clock at night until two in the morning." Businesses have all different types of exposures to risks that we need to be cognizant of. When we understand them more, we can provide a product that is commensurate with the risks we are taking on, and that that helps out the insured a lot more than just trying to cram in various codes. We are really excited about the data that's available right now, and we're going to be releasing some products toward the beginning of next year that's going to heavily utilize that information.

What are the biggest ways you think small business insurance will evolve in 2022?

Data and technology are going to continue to be big pushers in the evolution of insurance. The various types of aggregators that are out there that agents and brokers can use, like ValuePenguin and others, are going to be adopted more widely. People are going to be looking at the pros and cons and figuring out the best insurer to go with. That will be an interesting chapter in the evolution of small commercial.

Cyber is going to be an interesting component of what happens in 2022, as well as developments on business interruption insurance. I cannot say at all for certain where things are going to go either with cyber or business interruption, but I think we'll definitely see some evolution in those markets.