Focus Simplifies The Task Of Insurance Marketing To Minority-Owned Enterprises

Commercial insurers, in particular, have shied away from targeting minority businesses. In part, this can be attributed to carriers general lack of experience in differentiating their products for the various market segments they serve. It has been easier for many carriers to simply assume that their agents will make the appropriate connections with minority businesses in their marketing areas. And yet, by failing to differentiate underlying coverages and services, carriers have allowed their products to remain commodities that are subject to all the negative pricing pressures they so regularly rail against.

Nevertheless, the allure of minority-owned small commercial business segments continues to grow. Recent Census Bureau pronouncements on the rapid growth of ethnic-owned businesses no doubt have played a role. So, too, does the industrys growing appreciation of the benefits of targeted marketing efforts, as well as the growing scarcity of agents positioned to capitalize on small commercial opportunities.

The good news is that some straightforward segmentation techniques can greatly simplify a carriers–or agencys– challenges in approaching minority-owned businesses.

In particular, recent MarketStance research confirms that most ethnic-owned businesses tend to be heavily concentrated in a limited number of counties, often in or near large metropolitan areas (MSAs). By applying the "80/20″ rule, carriers can focus their ethnic marketing activities on a surprisingly manageable set of ethnic/geographic markets (the 20 percent) and develop an ethnic marketing capability that reaches the bulk (the 80 percent) of the states total ethnic market potential. Put simply, they can get 80 percent of the ethnic market gain for only 20 percent of the pain.

The following map (Map 2) illustrates just what we mean. In this case, limiting our focus to Hispanic-owned firms, were able to readily identify the handful of California counties in which Hispanic businesses are a crucial part of the business risk mix. In fact, only 11 counties have Hispanic-to-total-business ratios greater than or equal to 15 percent.

Also of note, however, is that, in this instance, most of these high concentration counties are not part of core metropolitan areas.

Lets see if weve got this straight– CaliforniaHispanic-owned businesses11 key counties.

The thought process for developing an effective ethnic marketing program for this massive state suddenly becomes much more straightforward and manageable.

Recently developed data on the ethnicity and gender of small business owners enable commercial lines insurers or agencies to answer a key set of questions:

Concentration–In what states and metropolitan areas do these businesses tend to congregate?

Focus–What minority-owned business groups are most important in my marketing territory?

Fit–In what classes of business are these minority business owners most active that are within my underwriting appetite?

Potential–How large do these minority businesses tend to be relative to their non-minority counterparts?

Dynamics–Which of the minority/territory/class of business segments are the fastest growing?

Lets look inside one market cluster and try to answer these questions.

Take the Los Angeles-Riverside (LA-R) metropolitan area as an example. Both its size and diversity illustrate many of the tactical issues–and opportunities–carriers will confront in developing an ethnic/minority market focus that profitably taps this areas enormous growth potential.

In terms of geographic concentration, the Los Angeles-Riverside metropolitan statistical area, which covers five southern California counties, contains more than half (56 percent) of the states minority businesses–or some 440,000 firms. (The five counties that comprise the Los Angeles-Riverside area are Los Angeles, San Bernardino, Orange, Riverside, and Ventura.)

Turning to ethnic focus, Asian- and Hispanic-owned firms predominate the ethnic-owned businesses in this metropolitan area. Irrespective of firm size, ownership is divided roughly evenly between Asians (with 44.5 percent of ethic-owned businesses) and Hispanics (44.1 percent) within the metro area as a whole. However, Asian-owned firms account for 58 percent of jobs generated by LA-Rs minority businesses and 65 percent of the MSAs minority sales. Reflecting their smaller average size, Hispanic-owned businesses account for about 35 percent of jobs generated by the regions minority firms and 30 percent of ethnic-owned firms sales.

The LA-R regions minority business market is, however, far from homogeneous, geographically speaking. Minority businesses are unevenly distributed across the area–by owner ethnicity, business size and business class. (See Chart 1.)

And despite the geographic contiguity of Los Angeles, Orange, Riverside, San Bernardino and Ventura–the counties that comprise the metro area–the considerable dissimilarities within the minority business communities place a premium on specialized marketing programs and strategically positioned distributors.

By itself, Los Angeles (LA) County is home to about two-thirds of the Los Angeles-Riverside metro regions minority-owned businesses with some 290,000 such firms. In addition to sheer size of the county, this large number reflects the appreciably higher concentration of ethnic businesses–with ethnic-owned businesses accounting for 33 percent of all businesses in LA county.

To put that in context, if LA County were a stand-alone state, it would rank fourth in the number of minority firms domiciled within its borders, behind the rest of California, Texas (367,000) and Florida (306,000).

San Bernadino County has the second-highest concentration of minority businesses in the region. The 78,000 minority firms there represent 31 percent of all the countys businesses.

Reflecting its much smaller size and much lower concentration, Ventura County is at the opposite end of the spectrum with only about 11,500 minority businesses–or about 18 percent of all businesses in the county.

The minority businesses domiciled in LA County represent more than half, or $1.2 billion of the regions minority business commercial insurance premium potential. Orange County, meanwhile, is a distant second, but still offers over $400 million of premium potential.

While these concentrations might suggest a specific set of tactics, the fact that the ethnic mix of minority business owners is uneven across the five counties presents additional challenges to effective execution that speaks to a need for further assessment. For example, minority-owned businesses in LA County, with its substantial lead in potential premium, are split about equally between Asians and Hispanics, with 43.0 and 44.1 percent ownership, respectively. Elsewhere, as Chart 1 indicates, Hispanic-owned businesses dominate except in Orange Country, where a very large share of minority businesses are Asian-owned.

Carefully assessing the question of potential (or the relative size of minority businesses) sheds still more light on the LA-R regions prospects. Counter to common perceptions, many minority-owned businesses are rather substantial enterprises. Collectively, they represent a formidable economic force. According to MarketStance, minority businesses in the overall LA-R metro area provide over 1.4 million jobs, meet an annual payroll exceeding $48 billion and generate approximately $287 billion in annual sales.

Focusing on larger firms sheds additional insights on the insurance opportunities within LAs minority-owned business community. For example, the share of ethnic-owned businesses with 20-plus employees varies greatly from one ethnic group to another, and indeed, between the various LA counties.

The share of Hispanic-owned businesses with 20 or more employees is less than 2 percent in Los Angeles county, but is considerably higher in San Bernadino, Orange and Ventura counties (Chart 2). Indeed, this larger businesses share is about the same for Hispanic businesses as it is for all businesses in Ventura County.

In contrast, the share of Asian-owned businesses with 20-plus employees exceeds the all-business norm in each of the Los Angeles MSAs five counties. This is especially so in Riverside and Ventura Counties, where the share of larger Asian-owned firms is more than two percentage points above the comparable all firms share.

All else equal, larger firms normally have higher insurance exposures and therefore higher premium potential than smaller firms. Minority firms hold true to this norm.

Among Asian-owned businesses, firms employing 20 or more workers account for between 52 and 56 percent of this groups premium potential across the five counties in the LA-R metro area.

In comparison, firms with 1-19 employees represent from 40-to-44 percent of the premium potential, and businesses with no employees represent approximately 3-to-6 percent of the regions Asian firm potential.

Similarly, among Hispanic firms, those with 20 or more employees represent 48-to-54 percent of groups premium potential in the metro region. Firms with 1-19 workers account for 37-to-43 percent, and those with no employees represent between 7 and 15 percent of the LA-R premium potential for Hispanic-owned businesses.

Carriers can gain even greater insight, and better marketplace alignment, by looking more closely at how class of business lines up with the distribution and premium information already developedthe question of underwriting fit.

In Los Angeles county, for example, Chart 3 shows that Asians are more likely to own retail or wholesale trade businesses compared with the industry distribution for all firms in California. In contrast, Asian-owned businesses have a markedly below-average presence in the contracting industry.

San Bernadino County provides an interesting example of the differing industry concentration of Hispanic businesses. Hispanic-owned firms in this county have very low presence in the wholesale trade and finance, insurance and real estate industries. In contrast, they have well above-average presence in the construction, transportation and retail trade industries.

Rather than allowing themselves to be put off by the diversity and distinctions characteristic of minority-owned businesses, savvy carriers will take advantage of the more accessible market information and do the basic segmentation work that will open the door to the robust growth opportunities minority-owned business represent. By focusing fledgling ethnic marketing efforts, say on Asian-owned service businesses in Los Angeles with 20+ employees, the challenges of effective targeting in a diverse and dispersed market segment become manageable. Even more enticing is the fact that the top five of these "mini-segments" (industry-county-ethnic group segments, such as Hispanic-owned construction firms in San Bernadino) combined are likely to account for more than two-thirds of the entire minority-owned small business potential in California.

By taking the time to segment and narrow its focus, a carrier can develop programs addressing the bulk of this premium potential at a fraction of the complexity a broader effect would entail–and greatly improve its chances of success.

Claude A. Fongemie, Ph.D., is vice president of Research at MarketStance and Adjunct Professor of Economics at St. Josephs College of Maine.

MarketStance is a precision market analysis tool for the U.S. commercial property-casualty insurance market.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.