Finding Their Niche
Independent insurance agencies that specialize in niches and focus on technological improvements are getting a leg up on their competition — and reaping greater profits, according to the 2013 Best Practices Study by the Independent Insurance Agents & Brokers of America.
By focusing on niches, agencies have increased their targeted leads and referrals, improved retention rates and boosted their competitiveness, according to a study of “best practice agencies,” chosen by the in Alexandria, Va.-based trade group and Reagan Consulting for their “outstanding management and financial achievement.”
Specializing in certain product lines or courting specific industry sectors has paid off: The average revenue growth rate in total commissions and fees was 9.8 percent for agencies with net revenue of more than $5 million, up from 4.5 percent in last’s year’s study. For agencies with net revenue less than $5 million, the growth rate was 9.4 percent, up from 2.1 percent last year.
Agency revenue was also boosted by the results of higher technology spend, including for search engine optimization and social media marketing, as well as by increased hiring and improved producer accountability.
Finding niches is key, said Madelyn Flannagan, the trade group’s vice president of agent development, research and education. Many agencies are adding personal lines such as auto insurance to their product mix, often bundling them with commercial lines to enhance offers to business clients.
Some agencies are also specializing in cyber liability insurance.
“Almost every business now has to safeguard information about their customers and employees, and they need to have the correct liability insurance for when security breaches occur,” Flannagan said.
Specializing for Assurance Agency, with offices in Schaumburg, Ill. and Chesterton, Mo., means focusing on particular industries, including temporary staffing companies, contractors, nursing homes, manufacturers, municipalities and school districts, said Jackie Gould, chief operating officer.
“The benefit of specializing in our clients’ industries is that it allows us to dig deeper into their business and understand the issues they are facing, so we can be better at solving their problems with special coverage they might need,” Gould said.
“We have the right carriers in place to handle their exposures, and our claims advocates and safety advocates know how to deal with claims and risk control issues,” she said.
M.F. Block in Paragould, Ark., concentrates on serving family farms, said partner Phillip Greer. Few carriers are in that market, so there is less competition.
“We understand family farms, so we can price the insurance right,” Greer said. “We also try to go above and beyond insurance, and offer other services to family farms, such as loss control and risk management.”
Firms cited for their best practices in the study also were noted for increasing their technology spend.
Agencies with annual revenues above $5 million invested more in agency management systems, while smaller firms spent more in Internet SEO marketing and social media marketing.
Agencies of all sizes devoted more staff time to social media marketing: On average, 1.3 employees spent 10 percent of their time marketing via social media.
“Social media is becoming more important to agencies as they try to get a leg up on their competition,” Flannagan said. “They use it to become more visible in their communities, which makes them more effective in selling and marketing in those communities.”
Assurance Agency has “a very big initiative around social media,” geared toward enhancing the firm’s relationship with its existing clients and attracting prospective clients by posting articles on topical issues, Gould said. The firm also uses social media to publicize its seminars and webinars on hot topics, such as on health care reform.
“We help hundreds of employers to figure out how to manage their benefits programs, and that can be very different, depending on the industry, such as the temporary staffing industry,” she said. “It’s a moving target, so we help employers by giving them a step-by-step playbook on what they can do now to prepare.”
Pierson & Fendley Insurance LLC in Paris, Texas, increased its SEO marketing spend to use on sites such as Google and Yahoo! to attract more clients, said partner Matt Frierson. Moreover, the agency has a Facebook page and its producers are encouraged to post topical information and helpful advice on their own Facebook pages, which are tied to the firm.
“Facebook is a great way to get your brand out for an inexpensive price,” Frierson said. “It’s a media that’s far more encompassing than anything the agency has seen before.”
The agency also encourages its producers to post updates on their LinkedIn profiles to trigger push emails to their connections.
But the company’s growth is mainly attributed to buying two other agencies as well as hiring additional producers, he said. In 2010, Pierson & Fendley had three producers; it now has eight.
Stuart S. Durland, vice president, operations at Seely & Durland Inc., said the Warwick, N.Y.-based company has been “consistently growing” due to IT implementations including imaging, eSignature, real time technology, consumer website ratings and a “sophisticated” website.
“Agencies have got to have an agency management system — and use it, as well as technologies that take advantage of marketing capabilities and those that enable us to work in real time,” Durland said.
“Instead of taking four hours to input information for a quote to four different commercial line carriers, we use our agency management system, Applied Systems, that enables us to input the information just once, and then send data to any of our real time carriers.
“That has significantly reduced the process, which not only saves us money, but frees up time to allow my [customer service representatives] to do more important things, like cross-selling and writing new business,” he said.
At Insure-Rite, a Norman G. Olson Co. in Evergreen Park, Ill., each generation of the family-owned business grows the enterprise by taking “it to the next level,” said Pete Olson, who works alongside his father and grandfather.
Over the past several years, processes have been turned “upside down” to improve producer accountability, he said.
“We’re focused on placing business where it belongs, not just how it could help our profits,” Olson said. “We place according to what’s best for the client, not on what’s best for us.”
The trade group’s study also showed that profitability improved at many best practices agencies over the past year.
While profit margins in the prior year’s study “remained stubbornly flat” due to waning contingent income growth, that trend has reversed — contingent income grew an average of 10.7 percent for those with revenue of more than $5 million, and an average of 21.8 percent for agencies with revenue less than $5 million.
Moreover, agencies did “a much better job” of controlling expenses so that operating profits grew faster than contingent income, according to the study. As a result, larger firms averaged 22.7 percent proforma EBITDA, and smaller to midsized firms averaged 29.3 percent.
Every three years, the Independent Insurance Agents & Brokers of America collaborates with Reagan Consulting to select “best practices” firms throughout the nation, nominated by either an affiliated state association or an insurance company.
The agencies are grouped into six revenue categories: less than $1.25 million; $1.25 million to $2.5 million; $2.5 million to $5 million; $5 million to $10 million; $10 million to $25 million; and more than $25 million. Financial and benchmarking information for the participating agencies are also reviewed and updated.
Sixteen insurance companies and four industry vendors provide financial support for the research and development of the best practices study: Agency Business Solutions/Amerisure Insurance, Applied Systems, Beyond Insurance, Central Insurance Cos., Chubb, CNA, EMC Insurance Companies, Encompass Insurance, Erie Insurance, Great American Insurance Group, The Hanover Insurance Group, Harleysville Insurance, Imperial PFS, InsurBanc, Kemper Preferred, Liberty Mutual Agency Corporation, Main Street America Group, Ohio Mutual Insurance Group, Travelers and Westfield Insurance.
Coping with Cancellations
Airlines typically can offset revenue losses for cancellations due to bad weather either by saving on fuel and salary costs or rerouting passengers on other flights, but this year’s revenue losses from the worst winter storm season in years might be too much for traditional measures.
At least one broker said the time may be right for airlines to consider crafting custom insurance programs to account for such devastating seasons.
For a good part of the country, including many parts of the Southeast, snow and ice storms have wreaked havoc on flight cancellations, with a mid-February storm being the worst of all. On Feb. 13, a snowstorm from Virginia to Maine caused airlines to scrub 7,561 U.S. flights, more than the 7,400 cancelled flights due to Hurricane Sandy, according to MasFlight, industry data tracker based in Bethesda, Md.
Roughly 100,000 flights have been canceled since Dec. 1, MasFlight said.
Just United, alone, the world’s second-largest airline, reported that it had cancelled 22,500 flights in January and February, 2014, according to Bloomberg. The airline’s completed regional flights was 87.1 percent, which was “an extraordinarily low level,” and almost 9 percentage points below its mainline operations, it reported.
And another potentially heavy snowfall was forecast for last weekend, from California to New England.
The sheer amount of cancellations this winter are likely straining airlines’ bottom lines, said Katie Connell, a spokeswoman for Airlines for America, a trade group for major U.S. airline companies.
“The airline industry’s fixed costs are high, therefore the majority of operating costs will still be incurred by airlines, even for canceled flights,” Connell wrote in an email. “If a flight is canceled due to weather, the only significant cost that the airline avoids is fuel; otherwise, it must still pay ownership costs for aircraft and ground equipment, maintenance costs and overhead and most crew costs. Extended storms and other sources of irregular operations are clear reminders of the industry’s operational and financial vulnerability to factors outside its control.”
Bob Mann, an independent airline analyst and consultant who is principal of R.W. Mann & Co. Inc. in Port Washington, N.Y., said that two-thirds of costs — fuel and labor — are short-term variable costs, but that fixed charges are “unfortunately incurred.” Airlines just typically absorb those costs.
“I am not aware of any airline that has considered taking out business interruption insurance for weather-related disruptions; it is simply a part of the business,” Mann said.
Chuck Cederroth, managing director at Aon Risk Solutions’ aviation practice, said carriers would probably not want to insure airlines against cancellations because airlines have control over whether a flight will be canceled, particularly if they don’t want to risk being fined up to $27,500 for each passenger by the Federal Aviation Administration when passengers are stuck on a tarmac for hours.
“How could an insurance product work when the insured is the one who controls the trigger?” Cederroth asked. “I think it would be a product that insurance companies would probably have a hard time providing.”
But Brad Meinhardt, U.S. aviation practice leader, for Arthur J. Gallagher & Co., said now may be the best time for airlines — and insurance carriers — to think about crafting a specialized insurance program to cover fluke years like this one.
“I would be stunned if this subject hasn’t made its way up into the C-suites of major and mid-sized airlines,” Meinhardt said. “When these events happen, people tend to look over their shoulder and ask if there is a solution for such events.”
Airlines often hedge losses from unknown variables such as varying fuel costs or interest rate fluctuations using derivatives, but those tools may not be enough for severe winters such as this year’s, he said. While products like business interruption insurance may not be used for airlines, they could look at weather-related insurance products that have very specific triggers.
For example, airlines could designate a period of time for such a “tough winter policy,” say from the period of November to March, in which they can manage cancellations due to 10 days of heavy snowfall, Meinhardt said. That amount could be designated their retention in such a policy, and anything in excess of the designated snowfall days could be a defined benefit that a carrier could pay if the policy is triggered. Possibly, the trigger would be inches of snowfall. “Custom solutions are the idea,” he said.
“Airlines are not likely buying any of these types of products now, but I think there’s probably some thinking along those lines right now as many might have to take losses as write-downs on their quarterly earnings and hope this doesn’t happen again,” he said. “There probably needs to be one airline making a trailblazing action on an insurance or derivative product — something that gets people talking about how to hedge against those losses in the future.”
Buyers Beware: General Liability Outlook May be Shifting
The soothing drumbeat of “excess capital” and “soft market” to describe the general liability (GL) market is a familiar sound for brokers and buyers. Emerging GL trends, however, suggest the calm may not last.
Increasing severity of GL claims may hit some sectors like a light rain at first, if they have not already, but they could quickly feel like a pelting thunderstorm in others. A number of factors could contribute to the potential jump in GL prices for certain industry segments or exposures, possibly creating “micro” or niche hard markets in the short-term, and maybe even turning the broader market over the longer-term.
“There are trends we’re seeing that will play out slowly. Industries that carry more general liability exposure will and have been hit first and hardest, but it won’t apply across the board initially,” said David Perez, Senior Vice President and Chief Underwriting Officer, for Liberty Mutual Insurance’s National Insurance Specialty operation. “There is ample capital in the market today, which allows a poor performing account to move its policy frequently from carrier to carrier. Poorer performing classes, however, will likely face increased pricing for GL policies and a reduction in capacity.”
The good news for buyers is that they can take action today to lessen the impact these trends and the evolving market may have on their GL programs.
David Perez on the state of the GL market.
Medical and Litigation Trends Drive Severity
One factor increasing claim severity is the rising cost of health care, driven both by greater demand and by medical inflation that is growing faster than the Consumer Price index.
The impact of rising medical costs on commercial auto is well-known. Businesses with heavy transportation exposures are finding it more difficult to obtain coverage, or are paying more for it.
That same trend will impact general liability, just on a slower and more fragmented basis.
“In light of these trends, brokers and buyers should seek to understand how effectively their current or potential insurers defend GL claims, particular in using evidence-based medicine to assess and value the medical portion of a claim, and how they can provide necessary care to claimants while still helping clients control their total cost of risk.”
— David Perez, Senior Vice President & Chief Underwriting Officer, National Insurance Specialty, Liberty Mutual Insurance
“It takes longer for medical inflation to register through the tort system in general liability than it does in auto liability (AL) because auto claims are generally resolved more quickly,” Perez said. “But the same factors affecting severity in AL also exist in GL and as a result, it’s foreseeable that we will not only see similar severity trends in GL, but they may in fact be worse than we’ve seen in commercial auto.”
Industries with greater exposure to severity in general liability claims should be the first wave of companies to notice the impact of medical inflation.
“Medical inflation will drive up costs across the board, but sectors like construction and product manufacturing have a higher relative exposure for personal injury lawsuits.”
The impact of medical inflation on the GL market.
Beyond medical inflation, two litigation trends are increasing GL damages. First, plaintiffs’ lawyers are seeking to migrate the use of life care plans—traditionally employed only for truly catastrophic injuries—to more routine claims. Perez recalled one claimant with a broken thumb and torn ligaments who sought as much as $1 million in care for the injury for the rest of his life.
Second, the number of allegations of traumatic brain injuries (TBI) in GL claims is growing. It can be difficult to predict TBI outcomes initially and poor outcomes can be expensive and long tailed.
“In light of these trends, brokers and buyers should seek to understand how effectively their current or potential insurers defend GL claims, particular in using evidence-based medicine to assess and value the medical portion of a claim, and how they can provide necessary care to claimants while still helping clients control their total cost of risk,” notes Perez.
Changing Legal Landscape
Medical inflation and litigation trends are not the only issues impacting general liability.
Unanticipated changes in court interpretations of policy language can throw unexpected pressure on GL pricing and capacity.
Courts sometimes issue rulings interpreting policy language in a manner that expands coverage well beyond the underwriter’s original intent. Such opinions may sometimes have a retroactive effect, resulting in an immediate impact on not only open, but also closed cases in some circumstances.
Shifts in the Marketplace
In addition to facing price increases, GL brokers and buyers will be challenged by slightly shrinking capacity due to consolidation and repositioning among carriers in the marketplace. “Some major carriers have scaled back their GL writing, resulting in a migration of experienced senior management. As these executives leave, they take their GL expertise and relationships with them, resulting in fewer market leaders and less innovation,” Perez said.
“Additionally, there are new carriers coming into the business that may not have the historical GL loss data to proactively identify trends or the financial strength and experience to effectively service their GL customers and brokers. Both trends make it important for brokers and buyers to work with an insurer that is committed to the GL market and has the understanding and resources to help better manage risks impacting customers.”
Last year saw a high level of mergers and acquisitions in the insurance industry. Buyers should take advantage of that disruption to re-evaluate their needs and whether their insurers are meeting them. Or better yet, anticipating them.
What’s a Buyer to Do?
Buyers—and their brokers— should look to partner with insurers that can spot emerging trends and offer creative solutions to address them proactively.
What should buyers and brokers do, given the trends facing the GL market?
“Brokers and buyers should value insurers that have not only durability and a long history in the general liability business, but also a strong risk management infrastructure,” Perez said. “Your insurer should be able to help you mitigate your specific risks, and complement that with coverage that works for you.”
Beyond robust GL claims and legal management, Liberty Mutual also provides access to one of the insurance industry’s largest risk control departments to help improve safety and mitigate both claim frequency and severity.
In addition, notes Perez, “Even if a company has a less than optimal loss history in general liability, there can be options to provide adequate coverage for that company. The key is to partner with an insurer that has the best-in-class expertise, creativity, and flexibility to make it happen.”
By working closely with their insurers to understand trends and their potential impacts, brokers and buyers can better prepare for the possible GL storm on the horizon.
To learn more about Liberty Mutual’s general liability offering, visit https://business.libertymutualgroup.com/business-insurance/coverages/general-liability-insurance-policy.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.