You don't have to be a big firm in a big market to do big niche business.

According to Big I and Reagan Consulting's Best Practices study, conducted every three years and based on the previous year's financial results, agencies of all sizes and locations have experienced steady growth in specialization. Even in the economic dark days of 2009, agencies still dedicated more resources to niches.

Forty percent of agencies with less than $1.25 million in revenues and 80% of agencies with more than $25 million in revenues had at least one specialty line in 2013.

Specialty business is more profitable, easier to retain and provides a stream of new business through referrals. And although it's less complicated for big brokerages to devote the time and talent to the process—searching for viable niches, then building internal teams around those specialties to best serve the client—small agencies are making it work, too.

Take Carroll Insurance in Maumee, Ohio, a suburb of Toledo. With only four employees, the agency is licensed to do business in 43 states and specializes in restaurants, pizza franchises and law firms, says partner Mike Carroll. He began specializing in 1997 after seeing limited competition and a “major pain for the consumer.”

The agency works closely with insurers and wholesalers to develop the business (Allied, Travelers, Argo and Employers for restaurants; Guarantee and AIG for pizza; Zurich, Admiral and Chartis for lawyers).

Carroll is so conversant on the topic that he's written books on all three niches. Check them out at Thebestroibook.com, Insurepizzeriabook.com and Insuringlawyerbook.com.

Then there's Hobson Insurance in Hobson, Mont., population 250, specializing in archery ranges, gun stores and ranges, shoe retailers and sporting goods stores. Vice president Kristy Longfellow-Hodik co-manages the family agency with her sister, Misty Longfellow-Kriskovich.

Their father launched Hobson in 1995 and began specializing with two buying groups. Now 13 different buying groups and associations endorse Hobson, which is licensed in 48 states.

Longfellow-Hodik says the increase in agencies finding a specialization means more competition. And although Hobson's long-term expertise in its chosen niches makes it hard to beat, they still feel competitive heat from the local insurance agent. “But people want the best bang for the buck,” she says. “Being highly recommended by other association members helps a lot.”

One challenge is when insurers cancel a program after years of success, leaving the agency stuck with an orphan book of business. Or when an agency develops an exclusive program for an insurer that ends up releasing the program nationally on its own. “Be sure to get it in writing that the program is exclusively for your agency,” says Hodik. Otherwise, you could find yourself giving away all that work.

Specialization has its ups and downs, but it's one of the major ways independent agencies can set themselves apart from the generalists and direct writers who are howling for blood. Specialization is like insurance for the insurance professional—it protects your business. Like any insurance, it requires some research and costs some money. But when it's done right, it can help protect your agency against the loss of profits to commodity sellers.