Competing for Small Business P&C Insurance Strategy for growth
Property and casualty (P&C) insurance for small businesses is a challenge in today s economy. Growth is slow, prices are falling due to a competitive, soft market, and agency consolidation is making it tougher to find shelf space. Cutting costs and waiting for the economic recovery is one strategy but at some point it will be necessary to focus on profitability and growth. When the time comes, acquisitions might be a viable approach. But non-acquisitive growth is an equally important path. To reach a favorable position for growth, insurers should focus their investments on three areas: distribution, products and platforms. These days profit over growth appears to be the prevailing sentiment across small commercial insurers. Despite past strategy playbooks that called for 6 to 8 percent annual growth rates, many insurers today are struggling to maintain flat premium levels in this soft market (see figure 1 on page 2). A number of macroeconomic and competitive issues are contributing to this growth challenge. Excess capacity built up since 2005 continues to support competitive pricing behaviors. The recessionary economy has significantly reduced exposure for small commercial premiums, offsetting some increases in renewal rates (see figure 2 on page 2). And rapid consolidation among independent agents and brokers has led to tougher competition for shelf space, which is often based on low price as a de facto new business acquisition strategy. For example, in 2000 there were approximately 37,000 smaller independent agencies (with $5 million or less in annual revenues). Today, there are about 17,000 and by 2015, this number is expected to be closer to 10,000. To make matters worse, a trend toward product commoditization is looming, probably to a lesser degree than in personal lines but arguably a key issue on the horizon. Could we see the competitive dynamics play out in small commercial insurance as it is in personal lines? Maybe. So far opinions are mixed but certainly the leading indicators would suggest it is a possibility. Consider the evidence: Pricing is becoming more uniform and the competitive price differential for given risk is getting smaller Service gaps are closing, as there is no large or sustainable advantage in technology or underwriting responsiveness Straight-through processing and increased appetite for risk are neutralizing any advantages companies had in speed or flexibility COMPETING FOR SMALL BUSINESS P&C INSURANCE A.T. Kearney 1
Figure 1 Small commercial net premiums (2008 versus 2010) US$ million $800 $600 $708 $702 $687 $637 Q1 2008 Q1 2010 $400 $200 $272 $238 $155 $141 $0 Source: A.T. Kearney analysis Travelers Hartford Chubb CNA Figure 2 Recession impact on small business payrolls (January 2008 to December 2008) Payroll (%) 4.0% 2.0% 2.53% 0.0% 4.0% 6.0% 8.0% 8.0% 10.0% 8.68% Construction 6.11% Manufacturing 3.40% Retail 3.93% Business services Healthcare Source: A.T. Kearney analysis If the market for small commercial insurance is and will continue to be challenging in the near future, what is an insurer to do? Belt tightening and a focus on profitability may be the choice for now, but at some point, it will be necessary to focus on growth again. When the time comes, will acquisitions be a viable approach? Perhaps. If there is sufficient capital. But few companies have proven that top-line synergies can be extracted in this business. 2 COMPETING FOR SMALL BUSINESS P&C INSURANCE A.T. Kearney
Figure 3 Key reasons for not winning business 100% 80% 60% 68% 58% 47% 40% 32% 20% 21% 0% Price not competitive Quoting too difficult Limited risk appetite Slow response by underwriters Poor claims service Source: A.T. Kearney survey of independent agents What then is the path for non-acquisitive growth? More specifically, where should insurers focus their investments to be favorably positioned for growth? Strategic Focus: Distribution, Products and Platforms The answer may lie in some of the winning strategies employed for personal lines and commercial lines. To begin, let s examine some of the key barriers to profitable growth and try to answer why insurers are not capturing more business. Studies among independent agents and small business owners suggest insurers have several growth challenges (see figure 3). The biggest challenges are based on two perceptions: not easy to do business with and priced too high. A deeper look reveals that overcoming these perceptions may require investment in three areas: sales and distribution management, product differentiation and efficient operating platform. We can draw some lessons from best practices in commercial lines in product differentiation. Likewise, we can draw lessons from personal lines best practices in efficient operating platforms. Furthermore, small commercial insurers may find relevance in the marketing and distribution trends currently affecting personal lines. The following discusses all three areas in more detail. 1. Sales and distribution management. While underwriting and pricing are important determinants of growth and retention, sales and distribution can also have a major impact. In many companies, the Pareto rule generally applies to distribution management: the top 20 percent of agents produce about 80 percent of business volume (and sometimes more of the underwriting profits). Moreover, in smaller agencies, the top three insurers sometimes command as much as 90 percent of the agent s book of business, leaving few opportunities for remaining competitors. Therefore, in doing business with thousands of independent agents, focus becomes imperative, assuming finite sales, marketing and compensation COMPETING FOR SMALL BUSINESS P&C INSURANCE A.T. Kearney 3
resources. A smart insurer knows which agents are the most valuable, how the tiering of agents trends and shifts over time, and how finite sales, marketing and compensation resources are allocated against the thousands of appointed agents. Our experience suggests that doing this well is better for growth than appointing more agents. Sales and marketing effectiveness is also important. The perception is that insurers products all seem the same and agents generally seek the path of least resistance for example, getting quotes from insurers they know and regularly use, or auto-renewing with a current insurer unless compelled to remarket. Furthermore, based on surveys of independent agents, many believe there are numerous ways to improve sales calls, both in how they are managed and in how discussions are supported across the insurer s various organizations. After all, responsibility for effective sales and marketing is not only in the hands of sales and marketing reps but also in the hands of underwriters, risk-control specialists and claims specialists, among others. Yet, many agents believe the various organizations within an insurer are disconnected and deliver an inconsistent experience, thus contributing to sales leakage. Also, alternative distribution could be an important means of growth for small commercial insurers. Beyond the managing general agent (MGA) and wholesaler distribution channels, other means such as business associations, accounting firms and direct-to-small-business may play a bigger role in the future, as products become more standardized, underwriting becomes more automated, and pricing becomes more transparent. While the vast majority of small business owners still may rely on independent agents for purchasing insurance, we believe the marketing points of influence will expand, particularly as the advertising surge in personal lines (now surfacing in small commercial) continues and affects how consumers and business owners recall brands and shop for insurance. 2. Product differentiation. A BOP is a BOP is a BOP, referring to a business owner s policy, is a common response by industry observers when asked about their perspectives on insurance products and differentiation. And yet, the behaviors in In smaller agencies, the top three insurers sometimes command as much as 90 percent of the agent s book of business. the industry, by agents and in particular by client service representatives (CSRs), seem to suggest that certain products and their insurers are a better fit for certain classes of business and types of risk. So, is product differentiation a myth? Certainly an argument can be made that products are distinguishable, simply based on technical differences in forms and endorsements. But we believe the real differentiation, as perceived by agents and CSRs, lies in underwriting appetite and in cross-product line packaging. Underwriting appetite. From a forms perspective, one insurer s product may seem similar to another s. But, in many cases, the underwriting guidelines and the underwriter response to submission often varies and therefore creates the 4 COMPETING FOR SMALL BUSINESS P&C INSURANCE A.T. Kearney
lasting impression that one insurer s product is better than another s. This is particularly evident in specialized classes and high-hazard risks. As such, agents sometimes identify or define insurers according to which classes and risks exhibit a consistent appetite. And subsequently, these insurer s products become perceived as competitively differentiated. Cross-product-line packaging. Another way to create product differentiation is through crossproduct-line packaging. Programs business is an example of where this strategy works, but this concept can be applied even in heterogeneous risk underwriting. From an agent or CSR point-of-view, how integrated and uniquely tailored a product is makes all the difference. Sometimes, a simple, loose hanging set of BOPs, workers compensation and auto is all that is needed (presuming the underwriter exhibits appetite for all three lines). But, in certain situations, the seamless integration of BOP and other lines (for example, EPLI and inland marine) could make a lasting impression about a product, or product package differentiation. 1 3. Efficient operating platform. When asked about why certain insurers get quoted and others do not, many CSRs respond with three words: efficient operating platform. Deeper analysis suggests that among the capabilities necessary to achieve this impression, two stand out: technology and underwriter responsiveness. Technology. To compete in small commercial insurance, fast, easy-to-use technology is a must. Simply put, CSRs are too busy processing volumes of transactions to deal with technology that is slow, incomplete, cumbersome to use, and most importantly, duplicative to their workflow. 1 EPLI is employment practices liability insurance As a result, they will opt out and the insurers may not get the opportunity to quote. By technology, we mean both the proprietary website of the insurer and what is necessary to integrate with agency management systems. Some CSRs prefer to work within their agency management system while others are willing to work via insurer websites. Regardless of preference, insurers need to provide a fast, easy-to-use technology for getting a quote, binding a policy and getting all Is product differentiation a myth? No. The real differentiation is in underwriting appetite and packaging. the information they need. Furthermore, the technology needs to be complete. CSRs talk about a number of common frustrations: The technology does not support more than a few lines of business, it does not support straight-through processing, or it requires access to multiple systems to complete a process. Underwriter responsiveness. While technology is important, so is underwriter responsiveness. The two capabilities must create a seamless experience for CSRs. Because not all quotes and new business can be completed via the technology, underwriters must respond quickly to submissions that require exception processing and work as a seamless, integrated extension of the technology, as opposed to making the CSRs start over. A common complaint among CSRs is that COMPETING FOR SMALL BUSINESS P&C INSURANCE A.T. Kearney 5
the process has to be re-started when the technology kicks them out and underwriters have to intervene. This creates the impression that the entire underwriting operation is inefficient, not just the technology. Investing in Strategic Capabilities While we believe organic growth requires focused investments in sales and distribution, products, and technology capabilities, this is not to say that Client service reps are too busy processing transactions to deal with technology that is slow, incomplete, cumbersome, and duplicative to their workflow. investments in other areas are less important. Rather, our experience suggests that these three areas have a more direct impact on growth. Determining specific capabilities and investments within these areas depends on the insurer s unique situation vis-à-vis competition. However, there are several common capabilities that all companies should invest in: Sales and distribution capabilities Data, reporting and analytics to accurately account for how sales, marketing and distribution resources are allocated against distribution partners and measurements of ROI Sales management disciplines and salesforce talent development Marketing to alternative distribution channels Product capabilities Product marketing and training of agents and underwriters Flexible product development platform and speed to market Technology capabilities Real-time, straight through processing for quotes and new business Systems integration with leading agency management systems Common platform across agents, marketing and underwriting Before deciding which capabilities are most important to their organizations, insurers should have a comprehensive understanding of their current competitive situation, critical analysis of agent and CSR feedback, and crossorganizational alignment on specific focus areas. Framing the Approach Prior to embarking on a capabilities investment strategy, it is a good idea to answer several fundamental questions. In many cases, getting candid answers requires challenging organizational biases, conventional wisdom and status-quo thinking. Agent perspective: Why or why not are the agents or CSRs quoting us for new business? Why do we win new business and why do we lose? Why do we win or lose on renewals? And is it really about price? Competition: Who is our true competition for the lines we want to grow and for the agents 6 COMPETING FOR SMALL BUSINESS P&C INSURANCE A.T. Kearney
book of business? Where is our competition making investments and creating competitive performance gaps? Commitment: Do we have firm commitment across the organization to grow the business or do we have more pressing profitability issues? Do we have cross-organizational alignment about which lines and business segments need to grow and therefore get the investment? Finding answers to these questions not only requires researching facts but also critically testing agent and CSR feedback, and aligning management incentives. Structured research and management workshops can be useful in establishing a baseline and in framing a sound investment strategy. Author Michael Kim is a partner in the financial services practice. Based in the New York office, he can be contacted at michael.kim@atkearney.com. COMPETING FOR SMALL BUSINESS P&C INSURANCE A.T. Kearney 7
A.T. Kearney is a global management consulting firm that uses strategic insight, tailored solutions and a collaborative working style to help clients achieve sustainable results. Since 1926, we have been trusted advisors on CEO-agenda issues to the world s leading corporations across all major industries. A.T. Kearney s offices are located in major business centers in 37 countries. For information on obtaining additional copies, permission to reprint or translate this work, and all other correspondence, please contact: AMERICAS EUROPE ASIA PACIFIC MIDDLE EAST & AFRICA Atlanta Boston Chicago Dallas Detroit Mexico City New York San Francisco São Paulo Toronto Washington, D.C. Amsterdam Berlin Brussels Bucharest Copenhagen Düsseldorf Frankfurt Helsinki Kiev Lisbon Ljubljana London Madrid Milan Moscow Munich Oslo Paris Prague Rome Stockholm Stuttgart Vienna Warsaw Zurich Bangkok Beijing Hong Kong Jakarta Kuala Lumpur Melbourne Mumbai New Delhi Seoul Shanghai Singapore Sydney Tokyo Abu Dhabi Dubai Johannesburg Manama Riyadh A.T. Kearney, Inc. Marketing & Communications 222 West Adams Street Chicago, Illinois 60606 U.S.A. 1 312 648 0111 email: insight@atkearney.com www.atkearney.com Copyright 2010, A.T. Kearney, Inc. All rights reserved. No part of this work may be reproduced in any form without written permission from the copyright holder. A.T. Kearney is a registered mark of A.T. Kearney, Inc. A.T. Kearney, Inc. is an equal opportunity employer. A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea.
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