Aim for the Bull’s Eye: Focus on Market Characteristics Improves Programs

By Fritz Yohn | July 7, 2005

The following article was published in Insurance Journal’s July 4 issue focusing on Target Markets Program Administrators Association and the program marketplace.

The value of specialization and target marketing in improved insurance performance has been well proven over the past 15-plus years. Ironically, however, a good many target market programs still ignore elements of success and leave real performance potential on the table.

How so? Because too often marketers are satisfied with a definition of a target market that’s as broad as the side of a barn, rather than digging in and doing the analysis necessary to hit the bull’s eye.

Drilling down
Program managers who make the effort to drill deeper into market characteristics can uncover:
• ways to avoid excessive distribution costs,
• market-distinguishing rating factors,
• loss prone sub-markets,
• clear loss prevention opportunities and underwriting considerations, or
• coverage and service needs that can translate into a competitive advantage.

The challenge to defining a target market, of course, is to strike an appropriate balance in the conflicting elements of premium potential and the homogeneity of risks. There must be sufficient available premium to support program costs and earnings, but not so much potential that the market is likely to attract too much competition. Additionally, if the targeted risks are too dissimilar, coverage and service needs will be less clear and less well met, or hidden segments of the market may yield adverse selection.

Below the surface
Consider the taxi cab market. On the surface this appears to be a pretty homogeneous segment. While there might be underwriting considerations specific to firms operating in major metropolitan areas, the exposures are pretty apparent. With more than 56,000 firms, 83,000 employees, nearly 300,000 vehicles, and revenues of $3.6 billion, the market sizing facts for the taxi segment look attractive.

Conventional targeting methods tend to focus on preserving the maximum available market premium. So, underwriting parameters are kept as broad as possible and the geographic “net” is widely thrown. Programs are filed in all 50 states, starting with the high potential states. In the taxi market, as expected that’s the large-population states like New York, Illinois, Texas, California, Pennsylvania and Florida.

Right off the bat, there are tremendous implementation challenges, both from territorial diffusion and the fact that the program is trying to gain traction in states that are inherently competitive. Instead of stopping here in the target market definition, probing market and demographic data more deeply helps unearth valuable insights into this segment that can improve prospects for a taxi program.

Fleet vs. non-fleet
A look at the size composition of the taxi industry, for example, is especially illuminating. Not all taxi operations are of the small, non-fleet variety. In fact, understanding the fleet versus non-fleet composition of the taxi cab market can be pivotal to designing and pricing a program that produces the desired performance.

Large fleet taxi firms are a bit thin on the ground to support the program aspirations. But middle market taxi accounts, firms with from 5 to 49 employees, comprise 35 percent or more of the available exposures in 10 states. Among those states some possible surprises emerge, such as Arizona, Wisconsin, Colorado and New Mexico. Not only are these states likely to be less well served by the competition, they are largely contiguous offering the potential of more cost effective servicing. A tighter geographic focus also means that it’s practical to match the program to the conditions in key states. A closer look at revenue forecasts reveals that these middle market accounts are expected to experience stronger growth over the next few years, another plus.

A productive niche
A more homogeneous set of risks, high geographic concentration and stronger projected growth—all these characteristics augur well for middle market fleet taxi accounts as a productive niche market program.

Of course, things still could go wrong. Incorrectly set rates, either too high or too low, could doom this budding niche market program. Actuaries say that the fleet/non-fleet relativity is one of the final pieces of the commercial auto pricing puzzle to be calculated, but in no way does that place in the sequence minimize its importance. In fact, getting it right on a program targeted to middle market fleets is critical since there are no countervailing non-fleet accounts to offset its impact.

Inadequate loss control is another potential pothole. There are 1,001 reasons to skip loss control on the smallest, owner operator taxi accounts. In mid-size fleet accounts, in contrast, adequate and aggressive loss prevention can make all the difference between a successful program and a money loser. Moreover, pattern loss frequency on these larger-sized firms is likely to be highly predictive of need. That predictability enables detection of problem accounts much earlier in the policy year, and application of loss control early enough to affect a turn around on at least some accounts.

While taking a deeper look at the market segments being considered for a program may not be a sure fire formula for a program bulls eye, it clearly is a means of tipping the performance scales decidedly in favor of the savvy program manager.

Fritz Yohn, PhD, is founder and CEO of MarketStance, a resource for business and insurance market demographic information and analytical services.

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