Smaller Buyers Still At Market's Mercy

Agents must depend on deductibles, credits to help contain premiums

Although the conventional wisdom is that the commercial insurance market is softening, the rising cost of coverage remains a big concern for many Mom and Pop, Main Street businesses, while options for keeping a lid on premiums are limited for smaller buyers, independent agents contend.

Indeed, the National Underwriter Spring 2005 “State Of The Market Survey”–sponsored by Zurich in North America–found that big corporate buyers reported flat and even decreasing rates on average in most commercial lines.

However, the independent agents and brokers surveyed–typically representing a wider range of clients, including many middle-market and smaller insureds–said that a premium hike is often still in the cards for their clients.

In addition, in follow-up interviews with those surveyed, agents reported that while risk managers have more loss-control tools and alternative market strategies at their disposal to keep prices under control, smaller buyers are often hard put to exert much influence over their premiums, which are driven more by market forces.

The primary weapon agents use to help small and middle-market accounts control their cost of risk is deductibles, according to those agents interviewed for this story.

“We are working extensively with deductibles,” confirmed Dan Weber, owner of Weber Insurance Agency Inc., in Casselton, N.D.

“To manage [the] price, we use the same thing any agent uses,” added James Lafond, owner and president of R.C. Lafond Insurance Agency Inc., in North Andover, Mass. “We use credits on [businessowners policies], gain deductions for the use of alarms–any deduction we can find.”

“We control [commercial auto] costs by advising our customers to check their driver's motor vehicle reports and raising deductibles,” agreed Donna Barrow, an agent with C.H. McNally & Son in Schaghticoke, N.Y.

The agents contacted also complained that markets are often harder to locate for smaller and middle-market business, advising their colleagues to develop relationships with carriers that focus on certain niche markets, which already understand the types of unique risks the producer is shopping.

Mr. Lafond said price can be less of an issue than selling the business to the underwriter in the first place. Many of his clients are doctors, dentists and lawyers, with some small eateries and other Main Street-type businesses, and he said his niche insurers are “anxious to get their hands on them” because they know he will keep an eye on their exposures.

“We have many small, family-owned businesses,” he said. “We have a vested interest in what happens to them, and no one will look out more for the welfare of that business than we will.”

Where his producers find they cannot place a risk–primarily in the middle-market range–the customer is referred to other, bigger brokers the agency believes it can trust to write the account.

“We are limited in some areas,” he explained. “We feel it is best to do what we do best. We will advise the client that they need to look elsewhere. If we have a good relationship, and refer the customer to an agent who does a good job for them, that client, we believe, will reward us later with lines we can write for them.”

Getting a decent rate depends first on having a clean loss record, said Mr. Weber of his North Dakota clients. “That really gives me working ability,” he said.

In the current economic climate, with the investment markets producing uncertain returns, insurers, he finds, are more concerned with loss frequency–especially on smaller accounts. A risk that has had one or two losses stands a better chance of being placed than someone with a series of losses, he noted.

Still, some specialized risks–specifically daycare centers and recreation businesses–just won't find placement in the standard market. The alternative, he said, is the wholesale market.

Commercial drivers have a hard time finding a market in New York, noted Ms. Barrow. Underwriting standards for such specialty markets are very strict, she said, adding that some loosening in the softening market might help.

Without a lot of internal options, the few accounts that can't be placed within the agency have to be turned over to the excess and surplus lines market–or, in some cases, may be referred to other, bigger agencies and brokerages with more markets and more clout with carriers.

“Ninety percent can be placed in our own markets,” she noted, “but there is always that 10 percent that no one wants to write.”

Shopping accounts is done out of necessity, the agents noted, and loyalty still plays a big role in retention.

In North Dakota, observed Mr. Weber, customers might be willing to change carriers or agents if there is a substantial premium savings. (He said in North Dakota, that trigger point could be $100 or more every six months). However, memory of the last hard market can keep clients loyal.

“A lot of customers found it hard to obtain insurance during the hard market, so they will stay loyal to the agents and insurers who were willing and able to get coverage for them,” he observed.

“A lot of [insurance] companies left the state during the hard market and put the state in a bind,” he said. “Those [companies] that stayed are now reaping the rewards of staying loyal to their customers.”

Often, when an account goes elsewhere, noted Mr. Lafond, it is because that customer's business has grown beyond the agency's market niche. “Businesses change and evolve,” he said. “We get a lot of start-ups. We can write a small-business owners policy for them, but in 10-to-15 years, they may no longer fit our profile.”

When it comes to choosing a carrier, a client's concerns depend on the customer's location and their past loss experience with an insurer, producers note.

Ms. Barrow explained that company stability is a major concern for her customers. They want to be with a carrier that will be there and pay claims. She credits this outlook with experience from clients who have been in business for 20-to-30 years, and who expect a long-term partnership with their insurance agent and carriers.

In North Dakota, it is price that worries customers most, said Mr. Weber–but the concept of what constitutes a stiff price increase can be very different from urban areas such as New York or Chicago.

“In the big picture, North Dakota, as a whole, has fairly cheap insurance,” he noted. “But until you live out where it is higher, [customers here] don't realize how cheap it is. It is hard for them to grasp that.”

While NU's survey found the vast majority of risk managers dissatisfied with the delivery time and accuracy of their policies, when it comes to more off-the-shelf products sold to small and middle-market buyers, this is much less of a problem.

Indeed, production has become so automated there are few problems with the policies clients receive, according to agents queried. When there is a mistake, the producers said, it can be tracked back to a clerical error, but otherwise there are few complaints in this area.

When asked if customers are concerned about the contingency fee scandal, the agents interviewed said their customers are not. “I think we are talking about apples and oranges,” said Mr. Weber, noting that compensation deals for national brokerages are much more complicated than for independent agencies. “I have never had a comment from a customer on it. It is not a concern out there.”

“Not one of our clients has asked about it,” Mr. Lafond said. “They understand commission payments, and they don't care how we are paid. They are concerned about stability of the product and price.”

“A lot of customers found it hard to obtain insurance during the hard market, so they will stay loyal to the agents and insurers who were willing and able to get coverage for them.”

Dan Weber, Owner

Weber Insurance Agency

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Smaller Buyers Still At Market's Mercy

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