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.”
What Is Insurance Innovation?
Truly innovative insurance solutions are delivered in real time, as the needs of businesses change and the nature of risk evolves.
Lexington Insurance exemplifies this approach to innovation. Creative products driven by speed to market are at the core of the insurer’s culture, reputation and strategic direction, according to Matthew Power, executive vice president and head of strategic development at Lexington, an AIG Company and the leading U.S.-based surplus lines insurer.
“The excess and surplus lines sector is in a growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said. “Tomorrow’s winning companies are those being built upon true breakthrough innovation, with a strong focus on agility and speed to market.”
To boost its innovation potential, for example, Lexington has launched a new crowdsourcing strategy. The company’s “Innovation Boot Camps” bring people together from the U.S., Canada, Bermuda and London in a series of engagements focused on identifying potential waves of change and market needs on the coverage horizon.
“Employees work in teams to determine how insurance can play a vital role in increasing the success odds of new markets and customers,” Power said. “That means anticipating needs and quickly delivering programs to meet them.”
An example: Working in tandem with the AIG Science team – another collaboration focused on innovation – Lexington is looking to offer an advanced high-tech seating system in the truck cabs of some of its long-haul trucking customers. The goal is to reduce driver injury and fatigue-based accidents.
“Our professionals serving the healthcare market average more than twenty years of industry experience. That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment. At Lexington, our relentless focus on innovation enables us to take on the risk so our clients can take on the opportunities.”
— Matthew Power, Executive Vice President and Head of Regional Development, Lexington Insurance Company
Power explained that exciting growth areas such as robotics, nanotechnology and driverless cars, among others, require highly customized commercial insurance solutions that often can be delivered only by excess and surplus lines underwriters.
“Being non-admitted, our freedom of rate and form allows us to be nimble, and that’s very important to our clients,” he said. “We have an established track record of reacting quickly to trends and market needs.”
Lexington is a leading provider of personal lines coverage for the excess and surplus lines industry and, as Power explains, the company’s suite of product offerings has continued to evolve in the wake of changing customer needs. “Our personal lines team has developed a robust product offering that considers issues like sustainable building, energy efficiency, and cyber liability.”
Most recently the company launched Evacuation Response, a specialty coverage designed to reimburse Lexington personal lines customers for costs associated with government mandated evacuations. “These evacuation scenarios have becoming increasingly commonplace in the wake of recent extreme weather events, and this coverage protects insured families against the associated costs of transportation and temporary housing.
The company also has followed the emerging cap and trade legislation in California, which has created an active carbon trading market throughout the state. “Our new Carbon ODS product provides real property protection for sequestered ozone depleting substances, while our CarbonCover Design Confirm product insures those engineering firms actively verifying and valuing active trades.” Lexington has also begun to insure new Carbon Registries as they are established in markets across the country.
Lexington has also developed a number of new product offerings within the Healthcare space. The Affordable Care Act has brought an increased focus on the continuum of care and clinical patient safety. In response, Lexington has created special programs for a wide range of entities, as the fast-changing healthcare industry includes a range of specialized services, including home healthcare, imaging centers (X-ray, MRI, PET–CT scans), EMT/ambulances, medical laboratories, outpatient primary care/urgent care centers, ambulatory surgery centers and Medical rehabilitation facilities.
“The excess and surplus lines sector is in growth mode due, in no small part, to the speed at which our insureds’ underlying business models are changing,” Power said.
Apart from its coverage flexibility, Lexington offers this segment monthly webcasts, bi-monthly conference calls and newsletters on key risk issues and educational topics. It also provides on-site risk consultation (for qualifying accounts), access to RiskTool, Lexington’s web-based healthcare risk management and patient safety resource, and a technical staff consisting of more than 60 members dedicated solely to healthcare-related claims.
“Our professionals serving the healthcare market average more than twenty years of industry experience,” Power said. “That includes attorneys and clinicians combining in a defense-oriented claims approach and collaborating with insureds in this fast-moving market segment.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Lexington Insurance. The editorial staff of Risk & Insurance had no role in its preparation.