Smaller Buyers Still At Market's Mercy

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Agents must depend on deductibles, credits to help containpremiums

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Although the conventional wisdom is that the commercialinsurance market is softening, the rising cost of coverage remainsa big concern for many Mom and Pop, Main Street businesses, whileoptions for keeping a lid on premiums are limited for smallerbuyers, independent agents contend.

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

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

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In addition, in follow-up interviews with those surveyed, agentsreported that while risk managers have more loss-control tools andalternative market strategies at their disposal to keep pricesunder control, smaller buyers are often hard put to exert muchinfluence over their premiums, which are driven more by marketforces.

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

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

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

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

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The agents contacted also complained that markets are oftenharder to locate for smaller and middle-market business, advisingtheir colleagues to develop relationships with carriers that focuson certain niche markets, which already understand the types ofunique risks the producer is shopping.

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

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

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

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

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

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In the current economic climate, with the investment marketsproducing uncertain returns, insurers, he finds, are more concernedwith loss frequency–especially on smaller accounts. A risk that hashad one or two losses stands a better chance of being placed thansomeone with a series of losses, he noted.

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

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Commercial drivers have a hard time finding a market in NewYork, noted Ms. Barrow. Underwriting standards for such specialtymarkets are very strict, she said, adding that some loosening inthe softening market might help.

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Without a lot of internal options, the few accounts that can'tbe placed within the agency have to be turned over to the excessand surplus lines market–or, in some cases, may be referred toother, bigger agencies and brokerages with more markets and moreclout with carriers.

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

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

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

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

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

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

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

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

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

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

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

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Indeed, production has become so automated there are fewproblems with the policies clients receive, according to agentsqueried. When there is a mistake, the producers said, it can betracked back to a clerical error, but otherwise there are fewcomplaints in this area.

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

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

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

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Dan Weber, Owner

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Weber Insurance Agency

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