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The Right Mix: How Diversifying Your Book Leads to Long-Term Survival

Many may think product diversification is optional, but it can be key to long-term survival and profitability. Here’s how agencies can diversify their commercial lines book.
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the right mix: how diversifying your book leads to long-term survival

The media landscape is full of articles and discussions about the need for and advantages of diversity in the workforce. While there may be a cultural and business imperative for this, business owners must base decisions on business survival, growth and profitability. As you will read elsewhere in this issue, diverse teams can help your agency achieve those goals, but what also drives those metrics is diversification in your agency's core business offerings.

You may be thinking that survival isn't dependent upon product diversification in a typical commercial insurance agency. I would argue that it is.

I knew a producer principal who owned a third of the agency's book of business but only wrote business in one industry. Not surprisingly, when that industry suffered significant reversals, the owner lost virtually their entire book. Combined with audit-refund-generated commission givebacks, the downturn nearly bankrupted the agency.

The lesson? Many may think of product diversification in a commercial agency as optional, but it can be key in assuring long-term survival and profitability.

Here are four reasons agencies should consider diversifying their commercial lines book:

1) Diversification strengthens the book of business. Spreading your book of business across diverse industries or market segments not only protects the downside risk in the agency, but it also allows the agency to participate in the growth of the economy during positive market cycles. Well-chosen niches can pave the way for agencies to accelerate above-average growth when those market segments experience success.

For example, despite slowing growth in U.S. health care costs, health care-related business growth continues to reliably outstrip gross domestic product (GDP). For agents, specialization in this segment could translate to a higher growth rate in liability and workers compensation premiums, as well as commissions via a solid, recession-resistant growth area in any community.

2) Diversification strengthens your agency's bench. As an agency develops expertise in a niche market, that expertise is showcased by its staff. As the staff becomes more embedded in the specialty, they will naturally attract other professionals who want to participate in a strong, winning team with real expertise in selling and servicing that specialty. Existing team members will also see more opportunities for success in an agency with a diverse book of business, as well as job security.

3) Diversification strengthens your agency's margins. Diversification could potentially mean less exposure to volatile losses overall, which may increase both the amount and consistency of contingent payments. Strong capability and performance in specialized, targeted markets can also lead to higher commissions and bonus payments.

4) Diversification brings more opportunities for new business. Carriers that want to increase their market presence, particularly in niche markets, tend to turn to agencies with well-rounded market experience and expertise. Business owners are also naturally attracted to working with organizations that can serve as true partners that recognize the unique needs of their industry.

Pick Your Partner

Building any business—let alone a successful commercial-focused independent insurance agency—requires careful planning. As principals think about how to build and execute a solid plan for diversifying the agency, they should begin with a thorough analysis of their capabilities.

A natural starting point is to examine the agency's current suite of insurance carriers and ask:

What are the carriers' historical strengths? Many carriers seem to chase the opportunity of the moment. While they may have a hot product or low prices designed to attract new business, do they really have the underwriting and claims experience to be successful in a specific niche over a long period?

Years ago, I remember meeting with a well-known carrier's regional leadership team and being told they were exiting the restaurant business after three years due to losses. They then told me they had an exciting new product suite for nursing homes. This isn't the kind of carrier you want to build a future with.

Does your agency have more than one or two carriers for your niches? Building a diverse book of business means you need a diverse company mix that provides you with choices. After all, that is a key strength of an independent agency.

How will diversification impact your ability to attract new carriers? Insurance companies love to do business with agencies with strong growth plans and diverse books of business coupled with niche expertise. However, the markets you want to go after may be better served by carriers you don't yet represent.

Building a Niche With the Right Team

Another aspect to consider as you think about building a more diverse book of business is your team. So, what strength does the agency have now, and how does the staff align with the diversification plans?

You may have people with great experience—gained from another agency or even in their pre-insurance career—in a market segment that presents an attractive opportunity. You may also have people who are personally fascinated with a niche and would welcome the opportunity to have more resources and the freedom to pursue it.

Once you've assessed who you already have on your team, ask yourself who you're missing. In “Who Not How: The Formula to Achieve Bigger Goals Through Accelerating Teamwork," Dan Sullivan, the founder of The Strategic Coach Program, and Dr. Benjamin Hardy, an organizational psychologist, point out that it's faster, easier and cheaper to find someone who already knows how. They state that almost any problem can be solved quickly by focusing on “who not how."

According to the Big “I" 2021 Best Practices Study Update, around 40% of new producers in Best Practices agencies across all revenue categories come from outside our industry. So, who do you need to recruit to your agency to accelerate the implementation of your plan?

Decision Time

As you think about how to diversify your agency while building strong expertise and financial success, critical factors to consider are what I call “diversity deciders." In combination with your analysis, people and carrier resources, diversity deciders will point you and your agency in the right direction:

Timeline. How quickly does a niche need to grow to be worth the investment of time and money? If you have the answer to that question, and you know what your revenue goal is for the end of that period, you can determine how many niches you want to pursue. It's a simple math problem: future revenue goal minus current revenue divided by niche size equals the number of niches to pursue. This will help you evaluate not only your carrier and people needs, but also working capital as you determine how to front-load the investment to meet your goal growth rate.

Niche size. COVID-19 has opened the door to remote work. As a result, it provides an opportunity for agencies to expand their geographic footprints, regardless of their size. In turn, this gives agencies the opportunity to define how narrow they want their niche to be. Some agencies may choose to niche narrowly and market broadly. Others may prefer the greater customer intimacy that comes from more frequent, in-person communication and want to build more locally. Also, there are those that may choose to do both.

Investment. Your plan to build a more diverse set of products and services will certainly require investment but perhaps in ways you may not have expected. You may, from choice or necessity, decide you aren't going to invest a significant amount in diversifying. Instead, you may choose to redeploy human, carrier and financial assets into new focuses. This could mean abandoning old habits, business practices or even customers in favor of new business processes designed to create greater efficiencies, higher profits per account, and a more diverse book of business. Alternatively, you may choose to redirect or refocus cash flows, borrow or invest additional capital in the agency to fuel the diversification plan. The question is: How much will you need to accomplish your goals?

Measurement. Entrepreneurs are endlessly optimistic. We believe in ourselves, and we believe in our plans. However, not everything works as we expect. Often, when we aren't finding the success we hoped for, we are unwilling to admit defeat and press on. Unfortunately, we not only continue to fail but miss the opportunities that pivoting could have presented. To counterbalance this tendency, it's useful to decide in advance how you will measure success and when that measurement will take place. There are many ways to do that, but the acid test is the bottom line. Any new venture is likely to lose money initially, but if you aren't returning profits equal to your core business after three years, you likely need to cut your losses and try something else.

If you believe, as I do, that an agency with a diverse book of business is safer, stronger and more profitable, you also likely believe you are increasing its value. If this kind of agency and agency journey is compelling to you, then asking yourself these questions is a worthwhile exercise. You will come away with an enhanced understanding of your current agency and its capabilities. You will also have a compelling vision of your agency's future that is stronger because of the diversity in its book of business, carrier mix and human talent. You'll also have the building blocks for a successful execution of that vision and milestones to look for on the journey. The result will be a more consistently profitable, growing and valuable business.

Survival as a success metric will never be in doubt, just as it was for my friend years ago. Diversity is a key challenge in many ways for us today, but facing it will create strong, successful and valuable agencies of the future.

Tony Caldwell is an author, speaker and mentor who has helped independent agents create more than 250 independent insurance agencies. Learn more on his website or by contacting him via email.

Thursday, September 1, 2022
Commercial Lines