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Finding Your Niche – Specializing could drive greater success in 2014
By Dave Willis – Interview with Susan Preston
Rough Notes Magazine – December 2013
As 2013 winds down, the P&C business continues to deal with issues—many ongoing, some new. “Concurrent challenges for our industry include climate change, low investment yields, unstable economic conditions and regulatory uncertainty,” says David Kaufman, president and CEO of The Motorists Insurance Group. “These factors have been a concern for the last several years.
“Weather-related claims add some volatility to the industry’s financial results,” Kaufman explains. “Low investment yields place more emphasis on underwriting profitability. And a slow economic recovery impacts commercial clients and contributes to more property losses and an increase in the number and duration of workers compensation claims.”
On the other hand, many market factors remain relatively stable. Rick Dennen, founder and CEO at Oak Street Funding, says, “The broad P&C commercial market is seeing small to moderate rate increases, personal lines is at a point of equilibrium, and the reinsurance market is generally favorable.
“Aggregators continue to grow and succeed in the general P&C marketplace,” he adds. “This is a good model and a solution for smaller independent agents and those desiring an administrative back room.”
The specialty lines segment is growing, according to Jeff Bair, CIC, head of merchandising and business development at Foremost Insurance Group. “There’s a reduced appetite among standard lines carriers, either related to geography, property age or even elements like customer credit,” he explains. “Another indicator of specialty lines growth is increased agency use of market access providers, as reported in IIABA’s last Agency Universe Study.
Some specialty lines sectors are doing better than others. “Economic improvements, especially in key segments like construction, are driving growth, and lower unemployment bodes well for payroll-based accounts,” explains Anthony Washington, president of Western Heritage Insurance Company. “Still, an economy that is not at full capacity continues to slow growth and puts a damper on new ventures, an E&S staple.”
He notes that the non-admitted surplus lines segment saw double-digit premium growth in 2012, outpacing the broader P&C market. “This indicates standard lines markets are turning down more traditional E&S risks to focus on their core business,” he explains. “At the same time, many surplus lines insurers posted their worst profitability years in recent memory.”
Performance varies from line to line. “Limits are tightening in employment practices liability,” says Andrew Robinson, president of specialty insurance and executive vice president of corporate development and strategy at The Hanover Insurance Group. “We see aggressive moves on wage-and-hour and considerably less capacity around that. In other segments, like D&O, we’re seeing upward rate movement, generally speaking, on the small account side.”
Across the spectrum of the E&O market, the biggest changes are in the lawyers market, he adds. “Several carriers have taken rate across the board,” Robinson says. “That’s a good indication for that market.” Demand for cyber cover is increasing. “It’s still a challenging and evolving segment,” he notes. “Customers are buying more, but are still probably overexposed.”
Health care, he adds, “has been a very interesting market, especially with the Affordable Care Act. Some segments have shown positive activity. For example, opportunities exist in the elder care segments, which traditionally have been underpriced. Health care has experienced liquidation of some risk retention groups, which is creating some opportunity in the market.” Allied health has seen increased activity as well.
Susan Preston, founder and president of Professional Program Insurance Brokerage, says health care offers interesting possibilities. “Many people are debating issues and problems around Obamacare,” she says. “We’re more interested in the insurance industry opportunities growing out of reform and we want to be first in line to seize them.”
A growing doctor shortage means many practitioners will no longer spend all of their time in direct patient care. “That creates a need for consultant coverage, medical director coverage and administrative coverage,” she explains.
“In addition, new products and services targeting a growing population bring with them increased need for products liability cover,” Preston adds. “For example, placenta harvesting, stem cells and foot detox units require innovation to properly insure,” she explains. “Also, as cannabis becomes legal in more states, we’re seeing development of marijuana-infused items.”
Other opportunities exist around weight loss and health care products—everything from colon cleansing to nutritional and weight loss supplements. “All of these require innovative brokers and carriers,” she notes. “Most of the new products and services require the non-admitted market to jump in.”
Dennen sees what he calls “timing opportunities” in certain specialty lines sectors. “Rating issues at certain carriers have created market disruption and opportunities in several lines,” he explains. “Competitors are cherry picking the opportunities and getting strong rate levels.”
Kaufman anticipates continued premium growth in the broad P&C market for 2014. “Pricing across all lines will continue to be more granular,” he explains, “and technological enhancements will give us the ability to continue to dial in pricing for each account.”
He expects general economic conditions to persist. “While there’s been some improvement in the housing market and some lift in manufacturing, the slow pace of hiring continues to be a drag on the economy,” Kaufman notes.
Dennen says 2014 specialty lines prospects vary by market and line. “For example, we’re seeing new product development in technology coverages and financial coverages,” he explains. “M&A activity in specialty lines continues to be steadily increasing, albeit slowly. Seller pricing expectations and buyer economics sometimes make it tough to find ‘win-win’ transaction prices and structures.”
Workers comp capacity is limited and selective, he adds, “and property capacity in CAT regions continues to be challenging. Product changes and coverage restrictions have partially addressed some CAT concerns and rate levels continue to be strong.”
Washington expects double-digit surplus lines premium growth to continue. “Growth will come from a combination of pricing increases and exposure increases,” he explains.
Bair suspects there will be more standard lines tightening in 2014. “However, as the industry bottom-line results improve, pressure for more top-line growth will increase,” he explains. “That could mean expanded underwriting in the standard lines market, potentially limiting opportunities for some specialty programs.”
Preston sees interest in—and opportunities for—new or expanded specialty products. “Privacy and medical billing issues are two categories that are getting more interest, and therefore more players,” she explains. She sees the same for increased limits. “There’s a growing need for higher limits of liability,” she says. “People used to be happy with million-dollar limits for their businesses, but we’re getting more requests for something higher. Not enough carriers seem willing to offer excess limits for specialty programs.”
Moving forward, agents and brokers will have to deal with a number of issues, as will insurance providers. “Everyone is looking for markets where growth opportunities exist and risk characteristics are favorable,” explains Kaufman. “The challenge will be to differentiate in order to attract and retain the best-performing accounts.”
Dennen says staffing issues will affect agents and brokers. “Talent continues to be a significant challenge,” he says. “Finding qualified producers and key staff employees is time-consuming and competitive.” Succession also is an issue. “Many agency owners and their staff are nearing retirement age and do not have perpetuation plans in place,” says Washington.
Marketing presents challenges, as well. “Certain niches are very competitive and require constant evaluation of the best marketing approach,” Dennen says. “It’s a challenge to prioritize the right blend of marketing from print ads to social media. Agents need to really understand what is most effective and what will drive the greatest return.”
Generational differences come into play—in marketing and in other facets of agency operations. “Five generations are in the agency workforce,” notes Washington. “They have significantly different expectations about everything from work to how they engage with customers and insurance providers.”
Bair sees a two-fold challenge. “First is making sure that agents and brokers have the markets available to meet not only the changing appetites of their core carriers, but also the changing needs of different customer segments,” he says.
“Second,” Bair notes, “agents need to do a good job of consultative selling—learning customer needs from a lifestyle and asset ownership standpoint—and not just price quoting.”
Preston encourages retailers to “understand the industries they want to insure and think outside the box—something often not done in the insurance industry. If you don’t bring something special to the table or seek out something different, someone will get in ahead of you.
“Information is easy to find,” she adds. “Good brokers have an edge if they can help clients understand risk and how to handle it. Plenty of people still buy on price, but it’s up to the retail broker to explain his or her value and the value of the program.”
Robinson concurs. “As industries evolve and become more complex, business owners need specialized insurance solutions,” he says. “They want to work with agents and brokers who offer unique knowledge and customized products and who can lead broader business conversations about trends and emerging exposures their businesses face.”
He says the best agents and brokers are very close to their markets and really understand what’s happening in those markets. “They know the risks their clients face and work with specialized carriers to find and offer the best possible solutions,” he explains. “Agencies that commit to and invest in specialty markets are winning. In fact, a recent Reagan study found that agents who specialize grow more quickly than those who don’t.”
Washington points out that some wholesale agents face increased competition from standard market producers and direct channels. “Many wholesale channels are challenged to remain relevant in the value chain, causing carriers to re-examine their value proposition,” he says. “The bottom line is markets need to be easy to do business with.”
Finding and keeping clients
More and more, specialization drives agent and broker success. “Specializing is a great way for agents to not only serve their existing customers going forward, but also to help grow their business,” says Bair. “Specialists clearly have more insight into specific areas of coverage their customers might need.”
“The best agents and brokers leverage and showcase their expertise and stay close to customers and prospects,” explains Robinson. “They educate customers about risks and how to help mitigate them.” He also shares a path to specialization: “Winning agents and brokers often leverage areas in which some segmentation or concentration already exists,” he says, “and then they focus small, dedicated teams on those segments.”
Preston encourages agents and brokers to make use of partner relationships to bolster expertise and market success. “We treat our Lloyd’s people as partners,” she says, “and they treat us the same way. Many brokers consider carriers to be ‘the enemy.’ That doesn’t help either group succeed. Find outlets you enjoy working with and understand how to place the business with them.”
Washington suggests that retail agents and brokers work with wholesalers to find a home in the specialty lines market. “While retailers may not be comfortable writing the more difficult risks, wholesalers are extremely knowledgeable and we pride ourselves on having technically sound underwriters on the wholesale and company side,” he explains.
Robinson says agents and brokers should plan for specialty lines success. “Take the time now during the planning season to strategically assess where you are and where you want to be in the next three years,” he says. “Then work with a handful of partner carriers to build plans that advance your specialization and penetration into your chosen specialty markets.”
“Continue to do a good job of consultative selling,” adds Bair. “Keep the notion of cross-selling specialty products top of mind and align yourselves with specialty companies that are leaders in their field, so you can keep providing customers with the best combination of products and service.”
“Don’t just learn about the insurance you are seeking to sell,” advises Preston. “Learn about the needs and issues that relate to the clients you’re trying to work with. Just knowing insurance is not enough.”
Dennen encourages agents and brokers to manage renewals and rate expectations so they can keep good business on the books. “Customers appreciate communication on possible rate increases, coverage changes and other market issues,” he explains.
Kaufman notes, “We are in the people business and we sell a value proposition. Agents and brokers who understand the value of strong relationships and who can differentiate themselves will ultimately be more successful. Carriers will need to collaborate with agents to create a special customer value proposition, a trusted experience for personal lines and commercial lines consumers.
“We believe that strong books of business are built on strong relationships,” he adds. “Business growth will be built by looking for ways to deepen relationships with existing clients, maximizing the revenue stream and looking for opportunities to add to their existing book.”
The author – Dave Willis is a New Hampshire-based insurance freelance writer and regular contributor to Rough Notes.