CHICAGO, IL – Thirty-four percent of small businesses are underinsured or operating without essential coverage in 2025, up from 21% in 2023, as insurance premiums increase faster than business revenues, according to October 2025 data from small business surveys and insurance broker reports. The affordability crisis is forcing entrepreneurs to make dangerous choices: pay insurance premiums that consume 4-8% of revenue, or reduce coverage to save money while accepting catastrophic risk exposure.
The problem is particularly acute for small businesses with 5-50 employees—large enough to face significant liability exposure but too small to negotiate favorable insurance rates or absorb dramatic premium increases. These businesses face 18-25% annual premium increases across general liability, property, workers' compensation, and cyber insurance while revenue growth averages just 5-7%, creating an unsustainable cost spiral.
The consequences are severe: businesses operating without adequate insurance face bankruptcy from single claims, while the broader economy suffers as entrepreneurship becomes less viable due to insurance costs. Without intervention—either market corrections or policy solutions—the small business insurance crisis will accelerate, potentially eliminating millions of small businesses over the next decade.
The Numbers: How Bad Is the Affordability Crisis?
Premium increases outpacing revenue growth:
- Small business insurance premiums increased 18-25% average across all lines in 2024-2025
- Small business revenue growth: 5-7% average during same period
- Net impact: Insurance costs growing 11-18 percentage points faster than revenue
Coverage gaps expanding:
- 2023: 21% of small businesses underinsured or uninsured
- 2024: 28% underinsured or uninsured
- 2025: 34% underinsured or uninsured
Specific coverage lines seeing most gaps:
- Cyber insurance: 58% of small businesses have no coverage
- Professional liability (E&O): 44% have no coverage
- Employment practices liability: 67% have no coverage
- Umbrella/excess liability: 52% carry inadequate limits
Financial impact:
- Small businesses spending 4-8% of revenue on insurance (up from 2-4% in 2019)
- Businesses with 10-25 employees: Average $43,000 annual insurance spend (up from $23,000 in 2019)
What's Driving Premium Increases for Small Businesses
1. Loss Cost Inflation Across All Lines
Small businesses face same loss inflation as large companies but can't absorb costs:
General liability:
- Medical costs increasing 8-12% annually
- Social inflation driving jury verdicts up 15-25%
- Small businesses face $8-15k annual premium increases
Commercial auto:
- Vehicle repair costs up 40% since 2020
- Small fleets (5-20 vehicles) seeing 12-18% annual increases
- One bad accident can trigger non-renewal
Property:
- Replacement costs up 35-50% since 2020
- Catastrophe exposure forcing 20-30% increases in high-risk zones
- Small businesses can't spread risk across multiple locations
Workers' compensation:
- Medical inflation driving costs up 6-10% annually
- Smaller businesses have more volatile loss experience
- One severe injury can double premiums for years
2. Small Businesses Are Riskier (From Insurers' Perspective)
Actuarial reality: Small businesses have higher loss ratios than large companies:
Why small businesses cost more to insure:
- Limited risk management resources (no dedicated safety managers)
- Higher loss frequency per dollar of premium
- More volatile loss experience (one claim dramatically impacts rates)
- Less sophisticated HR and safety programs
- Higher employee turnover (less trained workforce)
Example: A large manufacturer with 1,000 employees has professional safety staff, formalized training, and statistical predictability. A small manufacturer with 15 employees has the owner managing safety part-time, limited training, and one bad accident represents 6.7% of workforce vs. 0.1% for large company.
Result: Small businesses pay higher rates per unit of coverage than large businesses, and rates are increasing faster.
3. Minimum Premiums Rising
Insurance carriers have minimum premiums below which they won't write coverage (not worth administrative cost):
2019 typical minimums:
- General liability: $500-750
- Commercial property: $750-1,000
- Workers' comp: $1,000-1,500
2025 typical minimums:
- General liability: $1,500-2,500
- Commercial property: $2,000-3,500
- Workers' comp: $2,500-4,000
Impact: Smallest businesses see 150-250% premium increases even with no claims, simply due to minimum premium increases.
Example: A small consulting firm with 3 employees had $650 general liability premium in 2019. By 2025, minimum premium increased to $2,200—238% increase—despite zero claims and identical coverage.
4. Carriers Exiting Small Business Market
Major insurers are reducing or eliminating small business coverage:
Why carriers exit:
- Small policies generate low premium but same underwriting/servicing cost as large policies
- Loss ratios often exceed 75-85% (unprofitable after expenses)
- Technology investments needed to profitably serve small businesses are expensive
Examples:
- Major national carrier stopped writing businesses under $25,000 total premium (2024)
- Regional carrier increased minimum premium to $15,000, eliminating 70% of small business customers (2023)
- Specialty carrier exited businesses under 50 employees in catastrophe zones (2025)
Result: Reduced competition = higher prices. Small businesses have fewer quote options, reducing bargaining power.
Real-World Impact: Small Businesses Making Dangerous Choices
Choice 1: Drop Coverage Entirely
27% of small businesses dropped at least one insurance coverage in 2024-2025 due to cost:
Example: Small marketing agency (8 employees) faced choice:
- Renew professional liability insurance: $8,200 (up from $4,100 in 2023)
- Or drop coverage and save $8,200
Decision: Dropped coverage. Owner's rationale: "We've never had a claim in 12 years. I can't afford $8,200 when that's 2.1% of our revenue."
Risk: One professional liability claim could bankrupt the company. Clients assume agency has E&O coverage—they don't ask. If agency makes an error costing client $200,000, agency has no insurance to pay claim. Owner's personal assets at risk.
Choice 2: Reduce Coverage Limits
41% of small businesses reduced coverage limits to save premium:
Example: Small contractor (18 employees) faced renewal:
- Current: $2 million general liability, $5 million umbrella
- Renewal: $14,700 (up from $9,400)
- Option: Reduce to $1 million general liability, drop umbrella, save $6,200
Decision: Reduced coverage. Owner: "I've only had one claim over $500k in 25 years. $6,200 savings is meaningful."
Risk: One serious jobsite injury or property damage claim could exceed $1 million easily. With no umbrella, company's and owner's personal assets are exposed.
Choice 3: Increase Deductibles Beyond Comfort Level
38% of small businesses increased deductibles to reduce premiums:
Example: Small restaurant faced property insurance renewal:
- Current: $5,000 deductible, $12,800 premium
- Renewal: $5,000 deductible, $19,200 premium
- Option: Increase to $25,000 deductible, reduce premium to $11,400
Decision: Increased deductible. Owner: "We don't have $25,000 in reserves, but we also can't afford $19,200 premium."
Risk: Next fire, water damage, or equipment breakdown will cost $25,000 out-of-pocket before insurance pays. If business doesn't have reserves, either delays repairs (losing business during closure) or borrows at high interest rates.
Choice 4: Operate Illegally Uninsured
Some small businesses operate without legally required coverage:
Workers' compensation: Required in all states (except Texas) for businesses with employees. Penalties for non-compliance:
- Fines: $1,000-$100,000 depending on state
- Criminal penalties: Possible jail time for owners
- Personal liability: Owner pays injury claims personally
- Inability to do business: Many clients require proof of workers' comp
Auto insurance: Commercial vehicles must carry liability coverage. Operating without insurance:
- Fines and license suspensions
- Personal liability for accidents
- Vehicle impoundment
Example: Small landscaping business with 7 employees faced $28,400 workers' comp renewal (up from $16,200). Owner couldn't afford it. Options:
- Pay $28,400 (17.3% of total labor costs)
- Operate without workers' comp (illegal, massive risk)
- Reclassify employees as independent contractors (illegal if they're truly employees, triggers IRS and DOL penalties)
Owner chose to operate without coverage illegally, risking fines, personal liability, and business closure if caught.
Why This Crisis Matters for the Broader Economy
Small businesses employ 47% of U.S. workforce—63.3 million people. The insurance affordability crisis threatens:
Economic Impact 1: Business Failures
Uninsured businesses that experience claims often fail:
- 60% of small businesses don't reopen after major fires (many uninsured or underinsured)
- 75% of businesses experiencing significant liability claims without insurance close within 2 years
- Estimated 40,000-60,000 small business failures annually due to insurance gaps
Economic Impact 2: Reduced Entrepreneurship
High insurance costs deter business formation:
- Startup insurance costs average $12,000-25,000 annually for small businesses
- Many entrepreneurs can't afford insurance plus other startup costs
- Result: Fewer new businesses launched
Economic Impact 3: Labor Market Effects
Small business employment declines:
- Businesses reducing operations or closing due to insurance costs shed jobs
- Estimated 200,000-300,000 jobs lost 2024-2025 due to insurance-driven small business failures
Economic Impact 4: Reduced Economic Growth
Small businesses drive innovation and growth:
- Account for 44% of U.S. GDP
- Create 2/3 of net new jobs
- Declining small business sector slows economic growth
Potential Solutions: What Could Address the Crisis
Market-Based Solutions
1. Insurtech innovation for small business:
- AI-powered underwriting (reduce underwriting costs)
- Parametric insurance (automated payouts, lower costs)
- Usage-based pricing (pay for actual exposure, not estimated)
Example: Insurtech startup launched small business cyber insurance with AI underwriting and usage-based pricing. Average premium 35% below traditional carriers by eliminating manual underwriting and accurately pricing actual risk.
2. Alternative risk financing:
- Captive insurance arrangements for industry groups
- Risk retention groups (industry-specific member-owned insurers)
- Peer-to-peer insurance models
3. Government-supported insurance pools:
- Expand NFIP model to other challenging risks
- State-backed workers' comp funds
- Small business insurance purchasing cooperatives
Policy Solutions
1. Small business insurance tax credits:
- Federal or state tax credits for insurance premiums
- Target businesses with under 50 employees
- Cover 20-30% of insurance costs
Estimated cost: $8-12 billion annually (federal) Impact: Makes insurance affordable for 2-3 million small businesses
2. Tort reform:
- Cap non-economic damages in liability cases
- Reduce frivolous litigation
- Lower liability insurance costs 15-25%
3. Regulatory reform:
- Reduce compliance costs for insurers serving small businesses
- Allow more flexible coverage options
- Permit group purchasing across state lines
4. Minimum premium regulation:
- Prohibit minimum premiums above certain thresholds
- Require insurers to offer micro-business policies
- Subsidize carrier administrative costs for smallest businesses
What Small Businesses Can Do Now
Strategy 1: Shop Aggressively and Frequently
Get 6-10 quotes from different types of insurers:
- National carriers
- Regional carriers
- Surplus lines specialists
- Online insurers
- Industry-specific programs
Shop annually, even if happy with current coverage. Market dynamics change rapidly.
Example: Restaurant owner obtained 9 quotes for $60,000 general liability renewal. Quotes ranged from $48,000 to $94,000 (96% spread). Selected $48,000 quote, saving $12,000.
Strategy 2: Join Industry Associations for Group Coverage
Many trade associations offer group insurance programs:
- Better rates through group purchasing power
- Industry-specific coverage
- Often 15-30% below individual market rates
Examples: Restaurant associations, contractor groups, retail federations, professional associations
Strategy 3: Implement Risk Management to Reduce Premiums
Insurers reward risk reduction:
High-ROI risk management:
- Safety training programs (reduce workers' comp 20-40%)
- Cybersecurity measures (qualify for cyber insurance, lower rates)
- Video surveillance (reduce theft and liability claims)
- Driver training (reduce auto insurance 15-25%)
Example: Small contractor implemented formal safety program (cost $4,000 annually). Workers' comp premium decreased from $38,000 to $26,000 (32% reduction), netting $8,000 annual savings.
Strategy 4: Use Deductibles Strategically
Higher deductibles save premium but only if you have reserves:
- Only increase deductibles if you have 3-6 months reserves
- Consider aggregate deductibles (cap total annual deductible exposure)
- Balance premium savings against ability to fund deductibles
Strategy 5: Understand Must-Have vs. Nice-to-Have Coverage
Core essential coverage (don't compromise):
- General liability (protects against third-party claims)
- Commercial property (protects business assets)
- Workers' compensation (legally required, protects employees)
- Commercial auto (if you have vehicles)
- Professional liability (if you provide advice/services)
Coverage to consider reducing if necessary:
- Business interruption (if you have strong cash reserves)
- Inland marine (if you have limited equipment)
- Crime coverage (if you have strong financial controls)
Never eliminate:
- Required coverage (workers' comp, auto liability)
- Coverage protecting personal assets (general liability, umbrella)
The Path Forward
The small business insurance affordability crisis won't resolve without action:
Market forces alone won't solve it: Consolidation, risk inflation, and loss trends will continue driving premiums up faster than small business revenues can support.
Policy intervention is needed: Tax credits, tort reform, regulatory changes, or government-supported insurance pools are likely necessary.
Innovation helps but isn't sufficient: Insurtechs are improving efficiency but can't fully overcome the underlying economics of small business insurance.
Timeline: Without intervention, expect 5-10 years of worsening crisis before market dynamics shift or policy solutions emerge.
What this means for small businesses: Plan for insurance costs to continue growing 2-3x faster than revenue. Budget accordingly, shop aggressively, manage risk actively, and advocate for policy solutions.
The survival of millions of small businesses—and the jobs they provide—depends on solving the insurance affordability crisis.
Struggling with small business insurance costs? Finding affordable coverage while maintaining adequate protection requires understanding market dynamics, accessing specialized programs, and implementing strategic risk management. Work with brokers who specialize in small business insurance and understand cost optimization strategies.
Sources: NFIB Small Business Insurance Survey, Insurance Information Institute, Small Business Administration, NAIC, Hartford Small Business Index, Insureon Small Business Report