Assessing the Signs and Strategies for Hitting the Niche Target

To specialize or not to specialize, that is the question. The answer is, given the right set of circumstances—absolutely. Finding the proper alchemy is the challenge, and part of that is realizing that a good idea alone does not necessarily constitute a niche.

According to Andy Barile, president of Arrowhead’s commercial division, many niches are created as a reaction to the marketplace. A situation arises that causes a standard insurance company to discontinue writing a particular class of business, and, like dominoes, other companies follow suit, creating a void in the marketplace. That’s the time when a savvy company can step in and design a program to fill that void.

“When you’re a niche player like we are, and you’re only focusing on niches, you don’t do the other parts of the coverage,” Barile said. “For instance, I don’t write the property coverage on artisan contractors, because that’s not a niche…Everyone wants to write that. We give that class of business to everybody [else] and let them compete for it and drive the prices down and write it at cheap prices.”

Legal decisions unfavorable to the insurance companies can be the genesis of a niche. For example, when the Montrose decision came down in California in 1994, it created a problematic situation for companies writing general liability insurance for contractors, whether general or artisan. That in combination with construction defect litigation resulted in many insurers deciding to stop writing general liability on contractors.

An “act of God” can also result in the creation of a niche. “You couldn’t write a homeowners policy in California after the Northridge earthquake,” Barile explained. “A simple homeowners policy becomes a specialty niche market. Nobody wants to write them because they’ve all had such humongous catastrophe losses…[and] didn’t buy enough reinsurance. Consequently, they withdraw from the market.”

From a retail perspective, Steve Reeves, senior vice president of Acordia of California in Lodi, said a niche may be created when a producer has an “in” to an association. The producer then makes a presentation to the association to represent it on an insurance program. Or the association may be unhappy with the services of its current broker.

“We have one individual who does a program for car washes,” Reeves explained. “That program got started because he had friends that were on the board of directors of the association. He was a generalist; now he’s one of the most successful producers in our office [specializing in car washes].”

In another scenario, a producer may start to write a fair amount of a certain type of business, and it snowballs, which encourages the producer to put it into a group program.

“[The producer] gets invited to a meeting of an association or a group,” Reeves said. “He gets enough business in that group to either market what he’s got as his own group or to go to that group and say, ‘Have you ever thought about an insurance program?'”

Reeves added that, “Once you get that book of business, if the company you’ve been doing the business with no longer wanted to do that, you could certainly take that…group and probably market it as a whole, whether it’s an association-based program or just a group that you put together on your own.”

Once a bona fide niche has been carved out, what are effective strategies for getting the word out?

“When desperation sets in…word doesn’t have to get out when you have a product that people have to buy,” Barile said. He described how, post-Montrose, there was almost a march on the government of California by the building industry because it perceived that its existence would be threatened if contractors could not buy insurance. “When things get to that kind of a crisis…you more or less don’t have to be a great salesman to advertise that you have a product that fits that need,” he said.

Reeves described several ways in which those who need a certain coverage are apprised of its availability. “If it’s an association, you’ve got the basic membership of that association,” Reeves explained. However, if it’s a self-made program where the producer is running the show, that producer’s individual marketing prowess or emphasis should come to the fore.

“He creates his own list of accounts or businesses that he doesn’t write,” Reeves said. “It’s up to him or his staff…to go out and look at those accounts and say, ‘We write x-millions of dollars on the golf courses all around Northern California. Here’s a short list of some of clients we have.’ Things like that—that’s not truly a association program, but it’s certainly a large enough book of business in a single class that you could move that business from company to company and keep them viably competitive.”

With the right resources and research, one can hit a bonanza. But again, the question which arises is one of how to be sure that the time is ripe to move forward with a particular idea for a niche.

Reeves said in the case of approaching an association about putting together a program or improving one they already have, the right time could be when the association is ready to fire its existing brokerage or agency. Or it could be when a producer has individual personal contacts within an association that would be enough to carry a vote at its board to let the producer move forward.

“In the case of a producer that just produces the book of business, that’s hard to say when the time is right,” Reeves continued. “Before you go talk to somebody about a program, you’ve probably got to have maybe as much as a half a million dollars of business, of premium, in that group and…at least be able to prove that the insurance company could make money out of it.”

While no real magic time to move forward with an idea may exist, Reeves said that most companies are at least willing to listen.

“The self-made group we have with the golf courses, that individual over the past five to 10 years has changed companies three or four times,” Reeves explained. “One company will get in a non-competitive mode and he has to make a change. He also has to stay ahead of his competition. The downside is if your market goes south, you’ve got to peddle your whole book of business.”

With the product developers and the rate filings and the buying of reinsurance and all the other things that go into developing niches, how much money should be spent chasing a niche? How big is the opportunity?

Barile strongly advises hard investigation into all the component parts. “You need the forms, the rates, the underwriting strategy,” he said. “How are you going to structure reinsurance? What kind of prices? How did you come up with the price? How many insureds in the database? What’s the distribution philosophy?”

Barile describes the process as zeroing in closer and closer to the particular needs for the product. Another decision parameter to look at is time frames, allowing approximately six to eight months of research work before even deciding to go forward.

“At the beginning you start saying, ‘Nothing’s happening,'” Barile said. “Some companies have a philosophy if nothing happens in three months, they pull the product. Some companies wait six months. We’re a little bit more patient.”

When Arrowhead structured the general liability policy on an artisan contractor, that was the niche concept, according to Barile. But also involved were lawyers to worry about coverages; a person who knew how to handle a claim for an artisan contractor; an insurance company with expertise with underwriting an artisan; a reinsurance intermediary to explain it to reinsurers to avoid tying up the market with a big exposure; five or six reinsurers—in other words, a major team effort.

Barile summed it up: “You really have to have a good linebacker and a good quarterback and everything else to win the Super Bowl—the same thing with a successful niche.”

Topics California Reinsurance Contractors