Against the Grain: When Industry Trends Don't Apply

Personal lines is the bread and butter of the insurance industry. But to succeed, you need to sell a high volume of policies, often at a small reward in terms of commission.

This may make personal lines seem like a less profitable line of business—particularly when compared to commercial lines, where commissions are much higher.

It may come as no surprise that larger agencies are more likely to focus on commercial lines, while smaller agencies are more likely to be personal lines-dominant, according to several years of research from the Future One Agency Universe Study. And compared to longer-established agencies, the 2018 study shows that agencies founded in 2014 or later are more likely to be personal lines-dominant, as well.

Due to the overhead costs and required expertise associated with writing commercial insurance, agencies looking to gain a foothold in the industry must often conquer personal lines before turning to more lucrative commercial side of insurance.

The Trend

Aaron Ohlensehlen, president of Vibrant Insurance in Moline, Illinois, fits the trend almost down to a tee. After a conversation with his now business partner in a bar, Ohlensehlen helped map out a plan on a bar napkin to launch Vibrant five years ago. The agency quickly grew to boast $6 million in written premium per year—all personal lines.

As a new agency, choosing to focus on personal lines was an easy decision. Compared to commercial lines, there is a big difference in the amount of time and resources that must be devoted to bringing in business, which is why Ohlensehlen has stayed away.

“It’s just simpler to get into,” Ohlensehlen says. “It’s a much simpler conversation to have with a client, it brings in a lot more leads and it’s a much quicker sales cycle, so you can start growing pretty quickly. In personal lines, I can do a policy from start to finish in a week or less.”

Commercial lines, by contrast, “is more complicated,” Ohlensehlen says. “You need someone who understands that specific commercial market, which makes it a lot slower.”

Another obstacle is the cost of producers. “A personal lines agent is going to require a lot less compensation than a really good commercial lines agent, which is going to be a larger up-front investment,” Ohlensehlen explains. “The big agencies have a much bigger payroll and better benefits. They’re older, they’ve been around for a while, so it’s not as risky for them to add commercial staff as it is for someone smaller.”

While hitting a profitable amount of volume of personal lines clients takes “a lot of work,” Ohlensehlen says, “it becomes like a good mutual fund”—which means he’s more focused on continuing to build on his personal lines book than following the industry trend and transitioning attention to commercial lines.

“I’ve got everything down on smaller accounts so a 10% rate increase doesn’t destroy me like it would on a large commercial policy, because the resilience to rate adjustments is a little bit stronger on personal lines,” he says. “At first, we thought we might be able to sell up to $80,000 per month in premium, but we’ve blown past that.”

Currently, with three sales agents, the agency is running at about $180,000 per month. “I’ve got the green light to hire as much as I can,” Ohlensehlen says. “We think we might be able to get to $250,000 or more within another 12 months.”

The Anti-Trend

TWFG Insurance Services in The Woodlands, Texas launched in 2001. Today, it has 350 locations in 18 states and writes around $600 million in premium—mostly personal lines. As one of the top personal lines agencies in the U.S., the agency bucks the trend that larger agencies are more likely to be commercial lines-dominant.

But TWFG didn’t necessarily become personal lines dominant out of choice. “It was opportunistic,” says Gordy Bunch, founder of TWFG. “At the time, we had a mold crisis in Texas. Essentially, all the captive agencies simultaneously stopped writing homeowners insurance. Farmers went to the point of nonrenewing 600,000 customers.”

“All of a sudden, there was a gap in the market due to a lack of homeowners insurance capacity,” Bunch continues. “We filled that void. We focused on homeowners to respond to a market that found itself with no competition.”

As an agent from a large agency that also writes a substantial amount of commercial lines, Bunch agrees with Ohlensehlen about the reason for the overall trend in the independent agency system.

“Personal lines is easier to learn,” Bunch says. “There are not as many variables, there’s less concentration of risk and the sheer volume of available clientele is an advantage. There’s a lot more service work in a commercial insurance sale, and the ability to support commercial clientele is going to take additional staff. Invariably, a smaller agency is not going to have the capital to afford the required talent.”

In personal lines, three-quarters of agencies reported revenue increases in 2017, according to the 2018 Agency Universe Study, which also reports that one-third of agents believe personal lines purchased directly through insurance companies or websites will significantly impact their agency in the years ahead.

While many agencies might be enjoying success in personal lines for now, Bunch believes it could be smart for personal lines-dominant agencies to start diversifying and investing in other lines of business.

“TWFG writes around $70 million in commercial lines insurance, because we know there are vulnerabilities based on commoditization and digital sales growth in the direct market,” Bunch says. “We’re intentionally training our agents to learn small business commercial and mid-market commercial, and make sure they’re more well-rounded.”

Old But Gold

South Carolina-based Springs Insurance is another anti-trend agency—it’s been in business for over 65 years and writes mostly personal lines. Karen Shelnut, vice president, has 35 years in insurance under her belt and joined the agency in 2006—she writes $5 million in personal lines premium from her location in Indian Land.

Staffed by just her and one other person, Shelnut’s location’s operations are proof that it doesn’t take an army of experts to be successful in personal lines like it might in commercial insurance. “It’s just me and an assistant, who is not yet licensed. I do all the producing and all the servicing,” Shelnut says.

Springs Insurance has two other locations—one in Fort Mill, with five staff members, and another in Lancaster with three. Focusing on her community’s personal lines needs instead of branching out into costly and time-consuming commercial ventures has been vital to both Shelnut’s personal success and the longevity of the agency.

As a result, “95% of my business is referral-based and I have a 98% renewal retention,” Shelnut says. “When you focus on personal lines, you end up getting more of the referral-based clientele who stay longer. Unlike commercial lines, they’re less prone to jump around.”

Shelnut focuses her attention on forming deep-rooted relationships with her clients and the community to establish a long-lasting personal lines insurance business. As your clients’ families grow, so does the agency, Shelnut explains. “Right now, I insure grandma, grandpa, their children and their grandchildren,” she says. “Pretty soon, I’ll be insuring the great-grandchildren once they start to drive, as well.”

Another tactic Shelnut employs to stay in contact with her community, lessen the impact of direct and online insurance writers, and buck the industry trend is hosting lunch-and-learn events and open houses, during which she invites clients into her office to discuss coverage and how to prevent claims.

“The more you keep a relationship with clients and the more you’re out in front of them, it’s not as easy for them to move somewhere else because they have a relationship with you,” Shelnut explains. “Personal lines is simply more relationship-driven than commercial lines.”

The Value-Add

For all agencies—big, small, new, old, personal or commercial—to make it work, “you need to be a trusted adviser,” says Steve Brooks, senior advisor-client and market relations, Armor Insurance Services, an Acrisure agency partner, in Covina, California. His agency was founded in 2006 and writes about $90 million in written premium, split 50/50 between personal and commercial lines—another example of a larger, more established agency operating outside the industry trend.

Brooks acknowledges that it’s an “easier entry into personal lines” and “commercial is a more complicated sell.” But he believes the best thing an agency can do is seek to build relationships in both sectors.

At first, “we sold auto, home, earthquake and umbrella—those were our four main polices,” Brooks says. “But as I wrote more and more commercial, I found that that business was almost entirely coming from my personal lines clients.”

“A lot of commercial agencies see writing personal lines as either a nuisance or an accommodation, which is not smart. Agencies that pooh-pooh personal lines have helped me a lot,” Brooks continues. “We’ve been really successful at cross-selling to our small business owners and management and doing their personal lines. Why would we let someone else be their agent?”

While building relationships is one of Brooks' most successful tactics, targeting high net-worth clients is another way Brooks has consolidated his business.

“I don’t care where you are in the country—there are a lot of people out there who have nicer homes and nicer cars,” Brooks says. “You might have fewer clients, but you’re going to have higher persistency and higher premiums, and you’re going to be thought of in a different light than someone who just sold them a policy. And usually, those carriers pay higher commissions, too.”

Another reason for personal lines agencies to target high net-worth clients is the impending impact of technology on the market—“a huge threat” which will “make it even easier to deal direct,” Brooks says. “Part of the reason I shifted my focus toward high net-worth clients is because someone who’s with Chubb or AIG Private Client is not going to be able to go online and get a quote for their Maserati or their $5-million house.”

For agents who have used the low barriers of entry to enter to the personal lines market and set the trend, Brooks has one simple piece of advice: “You need become a trusted adviser. You can’t just be a policy seller.”

Will Jones is IA senior editor.