Niche writing and the soft market

Program diversification helps to lighten the effects during increased competition

As the property casualty market softens, insurance carriers will strive to figure out new ways to maintain recent levels of profitability. While many carriers are already writing and reaping the rewards of niche programs, other carriers seeking to reinforce their margins are expected to join in.

Studies tell us that niche marketers typically enjoy twice the return on investment than those operating in large markets. While these studies are not based on the insurance industry, their relevancy to insurance is confirmed by the successful partnership of many insurance carriers and general agencies that have built significant portfolios of highly profitable niche programs.

Identifying a niche is a relatively easy task in insurance since many businesses have exposures in unique combinations. Often, it is these combinations that drive the niche program writer and their profits. Since significant resources are dedicated to finding a customer you want to write, it makes sense to package policies to reduce upfront costs to the nicher.

However, niches are not driven exclusively by packaging coverage, at least not from the insurer’s perspective. Agents can package coverages to the extent a given insurance carrier has the appetite, but they can also write each line of business with carriers or general agents who specialize in those lines.

Niche marketers
Although it is agencies that appear to be the sole niche marketers, carriers and general agencies have formed partnerships with these producers to address the specific needs of their niche. Not only are these carriers customizing coverage forms for each targeted market, but underwriting teams have been formed to specialize in these areas. As underwriters become experts in their niche, they become aware of its peculiarities and are able to ask the right questions to select and price their book in a way that can generate above average returns.

In some instances, policyholders are willing to pay premium prices for the level of service and customization of coverage that they are offered. This too results in above average returns for all parties in the supply chain.

The agent, the general agency (if there is one), and the carrier also benefit from above average renewal rates that are typical of niche programs. This further reduces upfront costs for the agent and tends to result in better loss ratios for the carrier.

Relationships developed between the general agency and the carrier also tend to have longer life-spans if they are based upon niche programs. While many carriers and general agencies value heterogeneous programs for their size, these programs often result in undesirable underwriting results because of a lack of personnel expertise and controlled risk selection, especially in soft market conditions. In contrast, the homogenous (niche) program is usually backed by segment-specific underwriting guidelines and expertise that results in better risk selection and pricing.

Building programs in market cycles
Building a niche program from scratch can be difficult without an already well-developed distribution channel, which is why these programs are generally created by wholesale brokerages and general agencies that have widespread retail contacts.

Another source of niche writing comes from industry-specific trade or professional associations such as the Organic Trade Organization or the State Bar of California that offer their members several services including preferred insurance placement.

Successful niche programs involve not only addressing the customer’s particular needs with a custom insurance program or package, but follow-through and value added service such as additional customization based on policyholder feedback.

While creating a niche program is indeed commendable, only the truly marketing savvy understand the need to select a niche that can generate growth and be protected from raiders.

The wise program manager takes yet another step forward and commits their organization to multiple niches. This accomplishes some of the diversification needed to further lighten the effects of a soft market and enables the niche writer to survive should one of its niches be taken by competition or disappear due to changing customer needs or converging markets.

Many general agencies that began as monoline niche writers have gainfully followed this tactic and added other specialty programs not just for growth, but to minimize the effects of the market cycle. Large carriers such as Berkshire Hathaway and The Hartford have proven the lucrative nature of diversified niche writing with countless successful niche programs and custom coverage packages.

This soft market will see an increased utilization of niche writing and customer type specialization. Although it is expected that some niche programs will fail, wholesale brokerages and general agencies have become adept at identifying and building niches since many of them have been doing it for upwards of two decades. Carriers eager to fortify their margins will look to these organizations to lead the way to new niche markets.

Tyler Hamilton, CPCU, ARe, is a program analytics manager at Arrowhead General Insurance Agency Inc. and also serves as a board member of the San Diego Chapter CPCU Society. Contact: hamiltontyler@cox.net.

Topics Carriers Agencies Pricing Trends Market