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.”
A Wake up Call for Any Company That Touches Food
It’s not easy to be in the food industry these days.
First, there is tougher regulation. On August 30, 2015, the Food Safety Modernization Act (FSMA) required companies to file planning paperwork for Preventive Controls for Human Food. The final FSMA rules take effect on August 30, 2016.
Next, increases in food recalls, some deadly, are on the rise. In early September, 9,000 cases of frozen corn were pulled from shelves after a listeria scare. A few days later, a salmonella outbreak in cucumbers imported from Mexico resulted in one death, while sickening hundreds of consumers nationwide.
Courts are getting tougher, too, as owners/executives in particularly egregious cases involving consumer deaths have been prosecuted criminally, with one receiving a recommendation for a life sentence.
Finally, advances in science – including whole-genome sequencing technology, which maps DNA of microbes to more easily pinpoint precisely where contamination occurs – can expose every player in the supply chain to potential losses and lawsuits.
“Few companies have the balance sheet or brand loyalty to survive a serious recall. Outbreaks, new regulations, prosecutions and science have made purchasing product recall and contamination insurance literally an act of survival for companies of all ages and sizes,” said Jane McCarthy, Senior Vice President of Global Crisis Management at Liberty International Underwriters (LIU), who has over 30 years of industry experience.
Working with growers, processors, manufacturers, importers, shippers, packagers, distributors, wholesalers or retailers, LIU’s policy provides indemnity to pay for losses a company might incur from a recall, including logistic expenses, lost income and access to crisis management and public relations consultants.
Legislation tightens on food-related companies
Passed in 2011, the FSMA gives the Food and Drug Administration a far more proactive weapon in the war on tainted food, as the focus shifts to prevention combined with the FDA’s newfound authority to close businesses that aren’t complying with FSMA rules and regulations.
In addition to the August 30, 2015 deadline for filing paperwork for preventive controls, as part of the law, all companies need to be registered if they do anything with food in the United States, or a company is a foreign entity bringing food into the U.S.
“It’s the law and every regulation and benchmark has to be met,” McCarthy said. “The FDA will shut someone down if they don’t think a company is handling a food product properly. With these new rules and regulations, the whole industry has to change.”
With LIU’s product contamination policy, companies have 24/7 access to pre-loss consultancy through red24, one of the world’s leading security consultants and global crisis management consultancies. For example, they’ll work with clients to best prepare them to meet the FDA’s 48-hour response deadline should a food contamination or product recall incident occur.
Costly outbreaks on the rise
According to a Wall Street Journal article, food recalls from 2012 to 2014 increased more than five times compared to the total number of recalls from the prior eight years combined. The Journal also reported that foodborne illness is often never formally reported, so about 48 million Americans, or one in six, get sick each year from food. The CDC estimates 128,000 hospitalizations and 3,000 deaths from tainted food.
Food contaminations happen in two main categories: allergens (peanuts, etc.) and pathogens (bacteria). There were four listeria outbreaks in 2014 alone, compared with one in each year from 2011 to 2013. Listeria is a particularly tricky and virulent pathogen that continues to survive and blossom, even in refrigerated environments. Listeria does not impact the appearance, taste or smell of food it invades, so a company in the food industry can only confirm contamination through testing or, unfortunately, once a customer becomes ill.
“Listeria is one of the worst nightmares. Not only is it deadly, but once it gets into a plant, it’s very difficult to eradicate,” said industry veteran Meg Sutton, LIU’s Senior Claim Officer. “It sneaks into drains and crevices that you thought were clean. Attempts to clean those drains and crevices, if done improperly, can result in aerosolizing the listeria and spreading it throughout the facility. In some cases, companies are forced to shut down the plant for extended periods of time, resulting in significant business interruption and loss of revenue.”
Courts get tough on deadly cases
With the increase and severity of food contamination recalls rising, the courts are getting tougher too. The food industry was rocked last month by a recommended life sentence for the ex-CEO of a peanut manufacturing company following a multiple-felony conviction for knowingly selling tainted peanut butter that ended up killing nine people.
“The judge ended up sentencing him to 28 years in federal prison, still the harshest penalty ever in a case of food contamination. While our policy won’t cover your defense if you’ve committed a crime, the penalty is another wake up call for the food industry that executives at the highest levels will be held accountable,” McCarthy said.
Science boosts detection, transparency
By using today’s scientific methods to trace back to the source (grocery store, restaurant, wholesaler, etc.), experts can determine the production facility or farm that originated the food or food additive. They can swab the facility for DNA matches and pinpoint the contamination.
Considering those four prime drivers, it’s not surprising that interest in food product recall and contamination coverage from companies of all sizes is gaining momentum.
“We don’t want them to just buy our insurance,” McCarthy said. “We want them to be better for it with us as their partner by making sure they have the right coverage in place and improving their business from a health, safety and compliance standpoint.”
Liberty International Underwriters is the marketing name for the broker-distributed specialty lines business operations of Liberty Mutual Insurance. Certain coverage may be provided by a surplus lines insurer. Surplus lines insurers do not generally participate in state guaranty funds and insureds are therefore not protected by such funds. This literature is a summary only and does not include all terms, conditions, or exclusions of the coverage described. Please refer to the actual policy issued for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty International Underwriters. The editorial staff of Risk & Insurance had no role in its preparation.