Small But Mighty

Independent agents command an 80% market share of all commercial property-casualty lines, with more than half of that covering small businesses.

But a daunting challenge lies ahead for those who aren’t prepared for competitive pressures, changing underwriting and servicing technology and shifting consumer preferences.

The industry generally considers a business “small” when annual premiums are $50,000 or less. The 2014 Future One Agency Universe Study, though, pegs small commercial at less than $15,000. That’s because tens of thousands of small agencies in suburban and rural areas are writing local clients that are just as small. The study shows that in every category of agency size except jumbo firms, small business makes up at least half of commercial lines revenue.

So how do you maximize the potential of this important business segment—without being swallowed by servicing it? Ask yourself these questions.

What’s our small commercial sweet spot?

Brian McNeely, a partner at Atlanta-based Reagan Consulting, says for most Best Practices firms, a $5,000 threshold is the “sweet spot” at which they “can make money on a full-service offering” while supporting it with resources and producers.

Smaller accounts generate only enough revenue for a group or service center environment, McNeely says. While the commission isn’t enough to pay a producer, Best Practices firms recognize the value: Many accounts start below the $5,000 threshold, but grow above it. “You have to nurture them,” McNeely explains.

Small commercial sales are also a good way for young producers to get their feet wet. That was true for Tyler Bartosh, who after just seven years in the business is already starting to see renewal business add up. Small commercial is “the biggest part of my book,” says the Top O’ Michigan Insurance producer. “It’s not the glorious $200,000 account, but you don’t write it one year and lose it the next.”

Bill Ryan, executive vice president of San Francisco-based Sweet & Baker, says a small unit of inside sales reps concentrates solely on new business. “We have to place the kind of business we understand—business that is close by in proximity,” Ryan explains. And the business must fit “the carrier’s appetite from day one. If it doesn’t fit, we’re willing to walk away.”

What are our most efficient carrier relationships?

Small commercial is a big opportunity with carriers that are duking it out—no firm has more than a 6% market share, says Clint Harris, a consultant with Hartford-based Conning, an insurance investment management firm.

Tech-savvy carriers, particularly larger ones, continue to purchase small business books of other insurers—as happened in personal lines, Harris notes. As agencies merge, they too “have significantly supported the shift to large and technically capable insurers as the larger agencies and brokers seek to reduce their service responsibilities and expenses and improve margins.”

Ryan sees carriers expanding appetites. “Ten years ago, only a couple of carriers were writing private schools,” he says. “Now, seven or eight want to look at our private school business.” Small technology accounts are another example, Ryan adds. Carriers see them as a growth opportunity and “want to write it before there is competition.”

On the flip side, though, some national carriers push standardization in smaller accounts. “We used to see carriers want to commoditize $5,000 accounts, and now $15,000 accounts will commoditize,” says Mary Sklarski, chief strategic development officer at San Francisco-based behemoth agency Woodruff-Sawyer.

Justin Barnaky, select business unit manager at Bouchard Insurance in Clearwater, Florida, agrees. “Carriers all want all the same plain-vanilla business. No one is getting outside the box,” he says, lamenting the industry’s increased reliance on computers rather than underwriters. “They don’t want to write anything risky—and by risky I mean even a small hangnail.”

Can we find the right coverage?

Beau Massengille, principal at J.M. Insurance in Lebanon, Tennessee, likes the BOPs he has with carrier partners, especially since they provide a specific, competitive wholesaler endorsement that includes a lot of key coverages particular to their businesses.

“The BOP has come a long way,” says Tom Greco, partner with UNICO in Lincoln, Nebraska. “They’ve added so many bells and whistles to the policy, it’s almost overwhelming. There are really good options that were never available before. You can put $10 million in property on them—it used to be a $1 million maximum.” BOPs are easier to rate than package policies, he adds, and electronic download with carriers works more smoothly.

While popular, BOPs sometimes aren’t enough. Even small firms need customization and total account solutions, agents say. “Those small accounts still have a lot of nuances that separate them,” Bartosh says, noting a client who owns a convenience store and a campground or a contractor who has a side business are more suitable to broader commercial packages.

Mike Keane, president of small commercial at The Hanover, sees a few larger carriers pushing the more “generic product that’s easy to write.” But that doesn’t really help the independent agent, who needs “a CPP-type product that allows for flexibility and tailored coverage,” he says. “You have to deal with carriers that are providing both, not just those cherry-picking the easy stuff.”

Can we improve our servicing process?

Bouchard Insurance works to improve efficiency. “We are operating about 20% more efficient than a year ago,”

Barnaky says. The agency management system now organizes all data in one place and prioritizes email requests so staff can respond more quickly to higher-value clients and focus “on future tasks, like being more proactive on our renewals,” he says.

Greco’s agency plans to grow small commercial 20–25% annually over the next few years. “We’re trying to streamline the entire workflow process,” he says. His firm segments accounts less than $15,000 in premium into a “family/business division.” A staffer handles account changes and certificates via a dedicated email address, while an account manager focuses on selling and avoids “getting inundated for service work,” Greco says. He envisions pushing more work to carrier-sponsored service centers.

Small accounts “have to be direct bill or premium-financed, period,” Greco adds, and carriers that “don’t do commercial lines download are on the backburner.”

Bartosh says his firm contacts small business clients 60–90 days prior to renewal. If there are no major changes, the management system takes over, generating a letter for renewal and getting the policy bound. “You definitely can’t sit down with them,” Bartosh says. “It’s a balance between [streamlining] service work so it’s still profitable but still providing what clients need and can’t get on their own.”

Peter van Aartrijk is an IA contributor.