Competing for prospective clients costs money, with high advertising and marketing expenses taking a big chunk out of commissions. But some agencies are reducing or eliminating competition by entering niche markets. Companies often pay higher commissions for niche-market programs, and because there are few competitors-and in some cases, none at all-there are few wasted sales calls.
Niches are windows of opportunity. They often begin with a request for special coverages from a single customer. If the agent seizes the opportunity, that one request can blossom into a fertile market. In fact, the opportunities are so numerous and the rewards so great that some agencies have dropped their standard property/casualty lines entirely and replaced them with a smorgasbord of niche programs. Niche marketing is also a way to maintain aggressive markets since many carriers such as Chubb, AIG, and most recently,
St. Paul
are putting their emphasis on profitable target markets.
Of course, there are risks. Because niche markets are highly specialized, changes in market conditions, legislation or regulations can erase them quickly. And agents entering new niche markets must spend time learning specialized rules as well as the workings of the industry they are writing. Perhaps most important, there must be genuine need for insurance in the target market.
Still, with a little homework, agents can identify potential niche markets, find interested carriers, launch their own programs-and kiss competition good-bye.
Open Doors
For Ward Insurance Agency of Gatesville, opportunity did more than just knock. It walked in the front door and asked for an application.
'In about 1980, a controller from a construction firm office up the street walked in and asked if we had a contractor surety questionnaire,' recalls John Ward, one of two principals in the family-owned business. The contractor had messed up the form provided by an out-of-town agent and needed a clean version to fill out. 'I said I could provide the same service for him locally,' says Ward. 'We had never done surety bonds before and I thought it would be like writing a fire policy. It was a real learning experience.'
Today, due to a lot of hard work and a common sense approach, construction surety bonds-guarantees that contractors will complete construction projects-account for about 15 percent of the agency's $2.25 million in annual premiums. Three-quarters of the agency's business is in commercial lines, and about half of that is with construction businesses, Ward says.
'When I got in the business in 1979, no one in our immediate area was providing that service,' Ward says. 'But because of the defense construction boom and our proximity to
Fort
Hood
, it was a natural market to explore. It got down to just recognizing the need and doing something about it.'
To develop this new market, Ward set about establishing his agency as a good backup source for contractors. He approaches prospective contractor clients and asks for the chance to arrange their surety credit. If the prospect is happy with his or her current agent, Ward asks to act as a backup in case the current agent some time in the future is unable to set up the level of credit the contractor needs. Ward collects the information about the account and has a backup line of credit ready just in case. About half the time the contractor does run into a problem and Ward's agency has been able to step in with surety credit almost immediately.
Writing surety bonds is a time-consuming task that requires a working knowledge of the construction industry and financial analysis. Simply learning the intricacies of surety bonds took two or three years, while picking up construction industry terminology is an ongoing process, Ward says. 'You have to know what a CMU (concrete-masonry unit) is,' for example, says Ward.
The agency also spends a great deal of time issuing bid bonds for clients who are bidding on jobs-as many as 20 bid bonds for every successful bid. The agency receives no commission unless the builder wins the bid.
A final drawback: the agency is at the mercy of the same market forces that create dramatic swings in the construction industry. If contractors aren't working, then the agency isn't making any money on that line of business.
Still, the rewards can be substantial. Commissions are well above the average for commercial product lines -- 25 to 30 percent. Perhaps more important, writing surety bonds can help the agency win a contractor's property and casualty lines.
'Once you establish a contract surety account and provide good service, contractors are very loyal,' Ward says. 'As long as you're taking care of business, the retention rate is very high. Once you establish a relationship, it tends to be longer lasting than the standard business relationship.'
The ability to provide sufficient amounts of surety credit has traditionally been the major competitive factor among agents writing surety bonds. But that could change. Prices for surety bonds are no longer regulated and price-shopping may become an issue.
But regardless of what happens in the surety market, Ward will still be writing other types of coverage. 'In my area, we have to be all things to all people,' he says. 'We have to be everything from writing homeowners and BOPs to doing notary bonds.'
Identify Needs
The handwriting was on the wall, says Cynthia Regnier, CIC, president of Regnier & Associates in
Austin
. 'In 1983 and '84, everybody was talking about niche markets, and how an agency would need to develop niche markets to survive,' she says.
Regnier, who had just opened her agency in 1982, heeded the warning. She just recently turned her existing commercial and personal clients over to another agency and concentrated on niches. 'It was an absolutely, fantastically wonderful thing to do,' she says. 'I'm not sure where we'd be today if we hadn't done that.'
In 1985, Regnier purchased Volunteer Firemen's Insurance Services (VFIS) of
Texas
, which operates as a Regnier & Associates dba. In the first eight months, the agency doubled its premiums.
Regnier & Associates has an exclusive marketing agreement with the national VFIS organization, a subsidiary of the Glatfelter Insurance Group of York, Penn. CIGNA underwrites VFIS programs.
'The secret to any niche is to identify what people need and want,' says Regnier. 'No one was doing that for volunteer fire departments over 20 years ago, before Art Glatfelter went to bat for them.'
VFIS writes 'all lines of business except workers' compensation' for volunteer fire departments and emergency service organizations. Available coverages include injury-to-firemen liability, accident and sickness, vehicle agreed value for engines, errors and omissions liability, pollution liability, medical malpractice, bonding and others.
VFIS currently insures more than 500 Texas volunteer fire departments and emergency service organizations, Regnier says, primarily in Houston,
Dallas
and San Antonio/Austin regions. The average premium is about $9,000, with some departments paying as little as $3,500 and a few anteing more than $100,000. The Company estimates that about half of the state's 1,300 VFDs are target customers; the others are too small or are required to carry coverage through their city or county.
The agency writes about two-thirds of its volunteer fire departments and emergency service organizations directly, with the remainder handled by a network of more than 70 agencies peppered across the state. Regnier refers potential clients to one of these agents if the client is too far away for her office to provide adequate service. 'We don't have contracts with any agents, but we do have underwriting guidelines that they must follow,' explains Regnier.
Niche markets require special training, she says, so it takes about twice as long for a producer or customer service representative to become 'seasoned.' Travel and advertising expenses are greater than they are for more conventional property and casualty lines, too. One added expense is industry conventions.
'Seven years ago, I had no idea what a convention expense was,' Regnier says. 'Now, we attend several firemen's and
EMS
conventions a year. We generally take three people-myself and two other producers-and that's very expensive. But we've seen a good return on that investment. The people in this field like to see you, slap you on the back and buy you a beer. The best advertising is word-of-mouth, and the conventions are one way to get that.'
Regnier recently added two more dbas to her agency-Municipal Services Agency of
Texas
and Ambulance Insurance Services of Texas-after CIGNA opened two new markets: municipalities with less than 10,000 people and privately owned ambulance companies.
'Nobody wants to mess with small municipalities, but after Glatfelter designed a program for them,' she says. 'We think this will let us pick up a few of the fire departments and emergency organizations that have to be insured through their municipalities, too. That is where our network of agencies will help. We need people in these small towns who know the firefighters, who know the mayor, who can rub elbows with these people. Cities want to do business with a local agent.' So far, the agency has only signed about a dozen municipalities and a few private ambulance companies. But Regnier says the agency is receiving so many inquiries that it will be adding more staff by the end of the year, and she expects annual premiums to double within the next two years as a result of the new markets.
Bigger Profits
John Everhart says there is one compelling reason for pursuing niche markets: money. 'It's more profitable to do niche marketing programs than general insurance programs,' says Everhart, CPCU, owner of J.P. Everhart & Co. of Dallas. 'Normally, an agency is happy with $75,000 to $80,000 a year in revenue per employee. We do 50 percent per employee higher than a general agency.'
In fact, 'target marketed' programs, as he calls them, are so profitable the Everhart has abandoned more conventional lines of business. Two of his four niche programs-notary public bonds and used-car dealer bonds-are marketed solely within
Texas
. The others-personal watercraft (jet ski) insurance and hole-in-one coverage-are marketed outside the state as well.
When Everhart started his agency on April's Fool's Day 1970, he handled standard fire and casualty lines and specialized in the trucking industry. But he quickly found that he was spending most of his time convincing carriers to underwrite programs instead of selling products to potential customers. That seemed like a waste of time. So he dabbled in niche markets, enjoyed the change of pace and eventually dropped his other lines of business.
From that early experience, Everhart developed three agency rules for any potential niche market: there should be little or no competition, little or no underwriting activity, and little or no service after the sale.
Minimum competition is guaranteed by the small size of many of the products that Everhart sells. Notary publics, for example, pay $50 for a four-year, $2,500 bond. Most agencies aren't interested in such small premiums and only write the coverage when an existing client, such as a bank, asks for it, Everhart says.
Minimum underwriting activity is guaranteed by the nature of each line of business. It's not too difficult to obtain notary public and used-car dealer bonds or hole-in-one coverage because they involve no public liability, Everhart notes.
Avoiding areas that could involve legal or medical entanglements are an additional 'desirable' for new niche markets, he adds. Other desirables: the niche should lend itself to automation, it should be an easy target for direct-mail campaigns and it should produce cash payments in advance.
Finally, each of his current product lines requires almost no after-the-sale service-there are no change-of-address or lengthy claims-adjustment forms to process, for example.
These three rules helped Everhart's agency record $4.5 million in revenue in 1991, and he projects more than $5 million in revenue this year. The agency currently has 75,000 customers and 40 employees. Everhart says hole-in-one coverage is his most profitable line of business. About 15,000 golf tournaments in the , and the carry hole-in-one insurance through and Everhart agency subsidiary, the National Hole-In-One Association. The tournaments offer prizes for holes-in-one ranging from a few thousand dollars cash or a new automobile to $1 million cash, and buy insurance to cover the award if somebody actually records an ace. Premiums normally are about two to five percent of the prize value. Aetna Casualty and Surety Co. is the carrier for the hole-in-one coverage.
Everhart created the association to allow him to report all of his premiums in
Texas
instead of each individual state. The association, which has captured about two-thirds of the hole-in-one insurance market in the , also sells promotional materials, merchandise and consulting services.
Niche marketing can have its drawbacks, however. 'If you don't produce a profit for the underwriter, it's liable to pull the whole book of business,' Everhart says. 'A few years ago, I started a program to insure Corvettes. We had a large client base. But then the carrier doubled its sports car rates and practically put me out of business.'
Also, his lines of business are sensitive to changing legislation. 'The notary public bonds and used-car dealer bonds are required by the state,' he explains. 'If the Legislature changes the law, it could put us out of those lines of business overnight.'
Despite the potential problems, Everhart continues to look for niche markets. His most recent product line, personal watercraft protection, is almost five years old-so it's time to develop a new one. 'It's just a matter of finding the market where I feel most comfortable,' he says.
Happy Campers
Look for challenges. Be creative. Show carriers that you can put money in their pockets. Robert Monaghan, AAI, senior account executive with Hibbs-Hallmark Co. in
Tyler
, says that if an agency follows these three commandments, it can create its own niche markets that can develop millions of dollars in premiums every year.
'We think niche markets are more lucrative' than conventional accounts, says Monaghan, who manages one of the several Hibbs-Hallmark niche programs. 'The hit ratio is a lot better. There's less wasted time. Before I got into the niche markets, I might quote ten customers and get three. Now, I quote ten and get nine or ten. It's a lot more efficient.'
The agency, which wrote $23 million in premiums in 1991, expects $37 million this year. The agency's niche marketing program include self-insured workers' compensation for Texas school districts and other governmental bodies, and a variety of coverages for children's summer camps and plant farms. These target markets account for a significantly higher profitability ratio than the agency's regular business, Monaghan says.
Expanding programs to a statewide operation also requires a great deal of homework, Monaghan adds.
'You need to put together a lot of information to build programs like these,' he says. 'You need to look at the number of prospects that are available, do a realistic estimate of the percentage you'll underwrite, estimate premiums, and break the premiums down into different underwriting categories. Basically, you have to show a company that you can make money for them. They have to have confidence in you.' The summer-camps program, which began five years ago, is less labor intensive than the workers' compensation program, although it, too, required solid market research. The agency found that most companies were reluctant to handle summer camps because of the large number of children involved and the high risk of injury. It also found that camp operators were frustrated by wild fluctuations in premiums, last-minute restrictions and other aggravations that left them unable to prepare adequate budgets or schedules.
Hibbs-Hallmark wrote its own stringent underwriting guidelines (requiring one counselor for every four students, written safety plans, sexual abuse policies and safety evaluations of equipment and facilities, among other things) and arranged an exclusive contract with a carrier. Today, it insures about 60 camps in Texas, Arkansas and
Missouri
, with $1.5 million in annual premiums.
'We don't insure every camp,' says Monaghan. 'We just look for the cream of the crop. That gives us a good loss ratio, and keeps our companies happy, because they make money.'