You've done your research and have assessed the potential of a niche insurance marketing program thoroughly. Now it's time to find a market.
The first step: Write a business plan consisting of two or three pages of specific underwriting/market information. Keep in mind that the downsizing of carriers has reduced the size of the staff drastically, to the point that very few underwriters have the chance to read voluminous proposals, particularly in the initial part of the discussion.
The following outline has been used successfully to design and implement specialty niche insurance programs in both Personal and Commercial Lines:
Specialty Program Q & A
Q. What is the class of business and target market?
A. A narrowly defined target market is crucial to understanding the type of risk. Some underwriters also call this the 'class of business.' A short description of your niche will suffice. For instance, say you're interested in writing artisan and specialty contractors, security guards, general contractors that do residential construction, dwelling policies, or drivers with four accidents in the last three years.
Q. What lines of insurance will be offered and at what limits?
A. The approach here would be to state that you are interested in writing the Professional Liability for a home inspector or the General Liability for an artisan and specialty contractor.
Retail producers should pay careful attention to the line of business and type of coverage required. Also of significance is the amount of the policy limits. Policy limits obviously will vary by class of business. It might be $1 million combined single limit for an independent trucker, or statutory limits for a Nonstandard Auto policy. Producers must do their homework to find out what the policy limits should be.
Q. Who are your major competitors?
A. The Property/Casualty industry is highly competitive, with many insurance companies operating through independent agents. And since agents represent more than one company, carriers face competition within each agency. Insurers compete with underwriting criteria, pricing, automation, service, and product design. Competition in the Surplus Lines market has stiffened in recent years as standard market capacity increased and prices decreased.
Specialty niche insurance programs are equally competitive. When putting together your business plan, be aware of what the competition is doing. Admitted carriers file their programs with the department of insurance. These filings are then made public, but be warned: Merely duplicating another carrier's product by no means guarantees a profitable program.
Q. What is the program's main point of differentiation?
A. You need to outline how your product differs from others on the market. For example, when I was working on a purchasing group for owner-operator delivery trucks, we established that truck owners are more conscientious than non-owners when driving their vehicles, so this type of risk deserves a lower rate than that in the rating manuals. On this simple basis, the purchasing group had successful underwriting results.
What sets your niche program apart? Perhaps you want to write the General Liability for start-up artisan contractors, whereas other companies avoid start-ups altogether. Another important feature of a specialty program could be the billing plan or the amount of the down payment.
Knowledge of other niche insurance products is essential. If you can't find something that makes your product special, go back to the drawing board before you approach an insurance company.
Q. How will you access the niche market?
A. A great deal has been written about distribution channels. You, as the retail producer, have direct access to the niche market-the insured-and must take every advantage of it. You know your insureds' coverage needs intimately and are in the best position to craft a specialty policy to meet them.
Associations are another area that has produced many successful specialty programs. Here you have a group of homogenous insureds with similar insurance needs: Your niche. There's an association for anything imaginable, whether it's the Independent Pool & Spa Service Association or the U.S. Personal Chef Association.
If there's not an association, start one for your homogenous insureds. There are benefits and opportunities that go along with membership in an association that your insureds might appreciate.
Q. Will the program be on admitted or nonadmitted paper?
A. Most insurance company groups can offer their managing general agency either admitted or nonadmitted paper, based on the type of risk. The drawback of an admitted program is that the filing is public and the details of your program will be in the hands of your competitors in a very short time.
Going the nonadmitted route gives you rate and form flexibility, which can be advantageous at the outset of a new program. Many start-up niche insurance programs had their birth in the Surplus Lines market.
Q. How much premium volume will it generate?
A. Retail producers should spend more time trying to determine realistic premium volumes for their specialty niche programs. Although the variability of competitive conditions makes it difficult to forecast premium volume accurately, you can still come up with workable estimates. Multiply the number of potential insureds by the average premium per policy to estimate the total premium volume the program will generate.
In the past, I've been unsuccessful in securing insurance company markets because the average premium size was too low or the potential premium volume wasn't high enough.
Even the argument that there's less pricing volatility in small premiums didn't change the underwriting philosophy of some carriers. The attitude that small accounts are a waste of time will change as technology becomes more sophisticated.
Do your homework
Before you find a market, the first step is to assess the potential of a specialty program. I cannot stress enough the importance of market research. Start by finding out how many insureds fit your niche program.
How many tow truck operators do business in Arizona? What's the number of landscapers working in California? How many nonstandard auto drivers are there in Washington? How many accountants are there in California who need Professional Liability insurance? What about the number of new-car franchised auto dealers compared with the number of used-car auto dealers?
The next questions you should ask: How much effort will go into putting the program together? What are your expectations for it? How much will it cost? How much premium volume will it generate? What is the average premium volume per insured?
There are many factors that go into quantifying the premium volume of a specialty niche program. Some insurers have declined to write a program because the average premium per insured is too low.
Many carriers won't consider underwriting a program unless it has a potential first-year premium volume of $1 million. Figuring a 12.5% commission rate, producers can estimate how much commission income can be generated on a program of this size.
Other considerations are coverage and form design, regulatory filings, and access to reinsurance support. Finally, in assessing the potential of a specialty niche insurance program, retail producers should not underestimate the impact of technology.
Carrier Commitment
In recent years, management of most of the 2,600 Property/Casualty companies in the United States have all advocated that they are specialty niche insurers. Carriers continue to search out market niches to exploit. They have formulated program departments with specific expertise in various types of insurance products, in both Personal and Commercial lines.
Specialty niche programs have given these carriers a greater return on capital, thus raising their market value. And reinsurers have been willing to follow these carriers on a quota share basis.
Aggressive reinsurance market support has helped create the success of specialty niche insurance programs, originally conceived by retail producers and their MGAs.
On this basis, retail producers will continue to profit from newly created specialty niche insurance programs.