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Third Step to a New, Successful Program

Editor’s Note: This is the fourth in a series of posts in which CJ Lotter, a 15-year industry veteran, shares lessons learned in the form of guidance to MGAs on the steps required to build a successful program. The earlier articles are available here

By now, you’ve become familiar with our series of posts on program business. We’ve covered the processes for identifying a market to target and for validating the opportunity through research. Now comes one of the most important steps, analyzing competition. Much like the other steps, analyzing the competition can be boiled down to three things:

  • Gathering all available public data
  • Looking at the market on a macro level and determining which competitors own the space
  • Looking at individual players and their attributes and figuring out potential market entry points

Gathering Available Data

After all your research, you should have a program plan narrowed down to a specific class code with a need gap. Now it’s time to do some research on the players already in the space.

Insurance is one of the only industries in which your competitors must file their business plan, and anyone can pull the filings of anyone else. That’s exactly what we are going to do in this section. You have already selected an industry segment to target. Now, pull the filings of each competitor in that space, and all the product offerings. This will provide the raw information for your analysis in the next two sections.

If, by chance, your competition is offering a non-admitted product, you will need to go elsewhere. Work with an industry focus group to ask about the type of insurance offerings available and gather information that way, or do market research on the product offerings available.

Ideally, you will use the data you gather to answer several key questions. The most important ones will depend on your organizational goals, and we will cover those in the section on qualitative research.

See also: 10 Steps to Successful Insurance Program  

Analyzing the Competition

After gathering all the available competitive data, it’s time to develop the insights that will help us decide who our real competition will be. Figure out how much market share each major competitor possesses in your targeted industry. Consider these potential market share scenarios:

Each scenario will require a different set of strategies. Which of these is more appealing?

If you were to pursue “Scenario 1,” you would be attacking a single dominant player. In “Scenario 2,” you would enter a market with a variety of players offering a variety of solutions. What you decide depends on the attributes you are competing on. Traditionally, with programs, it is easier to enter a market with one established player. Ideally, this player is clunky, does business slowly and can’t react quickly enough. In this world, you can easily compete with better technology, better costs or better service, preferably all three.

A word of advice if you choose to compete on cost: Unless the cost saving is 15% or more, it will be hard to get customers to switch from an incumbent.

Profiling the Competitors

With the market data pulled and analyzed, you can now move on to a qualitative analysis of the individual competitors, and ultimately decide how and where to deploy your new program. Combining the data you’ve gathered, the “word on the street” from insureds in your target market and additional market research, you’ll build profiles of the major competitors.

These are the attributes you should start with:

  • AM Best rating of the company
  • Size of the company in premium
  • Whether the company operates nationally or regionally
  • Types of products (from the filings, for admitted products)
  • The company’s market share in your targeted industry
  • Pricing for the product (from filings, focus groups or competitive research)
  • Distribution: Is the offering sold online or through agents?

The goal is to apply this data to understand which companies you will realistically compete with. Using the example we introduced in our prior post, the top provider of tow truck insurance may only serve the Midwest and Pacific Northwest, leaving open an opportunity in a Northeast market like New York. Or, perhaps there is a cost saving you can offer with a new product package.

A four-quadrant (i.e. 2×2) matrix can be a good tool here, too. Pick two important variables, one for each axis, and place all the competitors onto the graph. For example, one axis could be company size, while the other represents geographic reach (from regional to national operators). Going as far as to do a full SWOT (strengths, weaknesses, opportunities and threats) analysis on each competitor may also be a good practice and will help illuminate the competitors you stack up against most favorably. A good resource for SWOT templates can be found here.

See also: How to Improve the Customer Journey  

Final Thoughts

Through diligent research, and a good measure of analysis, you should uncover a path for potential new business. Making the right decision on where to deploy, at what price point, with which distribution model and other vital issues can make or break a program launch. Some of these will be the topics of future blog posts.

When planning a program, it is vitally important to have the conviction that you are bringing a product to the market that solves a problem better than the competition. Better pricing, better distribution or better product design are great examples of value that will improve your chance of success.

Excerpted with permission from Instec. A complete collection of Instec’s insurance industry insights can be found here.

First Step to a New, Successful Program

Editor’s Note: This is the second in a series of posts in which CJ Lotter, a 15-year industry veteran, shares lessons learned in the form of guidance to MGAs on the steps required to build a successful program. The first post is here.

The trend in insurance today is toward large volumes of policies with very little human intervention. Although the cost benefits may be attractive, this movement is leading us toward a commoditization of the industry where the only differentiator is price. Any business-minded person will tell you this is not a good position to be in. Ideally, you want to sell unique solutions that are difficult to replicate, raising the barrier to entry.

There is an alternative to commodity products. It’s called programs. The best program business is difficult to understand, labor-intensive and hard to automate. Unique underwriting expertise is required, and it should be hard to find and difficult to train. The role of technology in this market is to assist the process and provide the flexibility to adapt to unique risks, not to replace human ingenuity with mass automation.

For an MGA seeking to launch a new program, there are three types of opportunity that provide the greatest potential: a distressed class, a perceived distressed class and an underserved class.

A distressed class is one that most underwriters don’t understand or for which losses are difficult to predict. To underwrite this business, you need unique underwriting skills – an understanding of the nuances of the class and of the characteristics of the risk that could produce significant losses. Clever underwriting and careful selection of risks is key to remaining profitable in this niche. Heavy loss control may be required here, too. Your ability to make this riskier class safer is your competitive advantage.

See also: 10 Steps to Successful Insurance Program  

Nuclear plants are one example of a distressed business class. The dynamics of radioactive materials and the consequences of their incorrect handling are complicated. Losses are catastrophic and will most likely include loss of life, millions of dollars of property losses and loss of business income. Underwriting this class calls for highly trained underwriters who know a good risk from a bad one. These are specialists who can assess, for example, whether safety manuals and procedures are sufficient to minimize the potential for losses.

A perceived distressed class refers to business that potential competitors shy away from because their underwriters perceive it as too risky. By careful analysis, a clever underwriter can discover that what others thought were drivers of claims were indeed not so.

Ski resorts are one example of perceived distress. Underwriters may avoid this class because of the downhill ski exposure, while the real claims drivers are slips and falls in the restaurant. This is an extreme example, but it illustrates the point.

The underserved class is another spin on program opportunities. The less competition in a class, the better the chances for a successful program. There are many reasons markets avoid certain classes. It may be that the specific geographic territory is overly litigious or that the universe for this specific class is small. Whatever the reason, once you identify the issue and find a solution or compromise, you will have uncovered a program opportunity with little competition.

The class may also be underserved because a traditional “old school” risk taker with archaic systems is the only alternative for this specific class of risk. By providing modern technology with automation that makes it easy to do business, you can outperform the competition and capture your fair share of the market.

An example of this kind of risk may be trash truck operators in the boroughs of New York City. It’s a tough jurisdiction to write trash hauling insurance. A longtime traditional insurance company may have locked up the market. But at the same time, pricing may have crept up over the years, and customer service and loss control may be stale.

There is no meaningful competition in this space, and it’s ripe for the introduction of an MGA program. Start with an updated product offering that includes new coverages like data destruction and privacy, and dynamic pricing tuned to the characteristics of each individual risk. Round off the offering with quick quote turnaround, killer personalized service and fast and fair claims handling, and you’ve got a program that will attract business from the incumbents.

See also: Is There a Future for MGAs?  

So, there you have it – three scenarios that provide the first ingredients for building a new insurance program. Whichever you choose, when you create your program, ask the following question: “Will my program be so different that it will be difficult to duplicate, and so appreciated by buyers that price will not be the focus?” If your answer is “yes,” you have taken the first step to a successful program.

Excerpted with permission from Instec. A complete collection of Instec’s insurance industry insights can be found here.

10 Steps to Successful Insurance Program

This is the first in a series of posts in which CJ Lotter, a 15-year industry veteran, shares lessons learned in the form of guidance to MGAs on the steps required to build a successful program.

Creating a successful insurance program requires the execution of 10 essential steps that take advantage of market conditions, skills, partnerships and technologies.

Spinning up an insurance program is a lot like baking a cake. A good cake requires the right ingredients, the right amount of time to bake and meticulous crafting to ensure it looks and tastes great. Creating an insurance program is similar. It takes a combination of ripe market conditions, the right amount of time to grow and the skills to execute. In this post, we introduce the 10 steps to creating a successful program.

1. Size the Market

Prior to starting any program, it’s important to size the entire market. How many companies make up the market? How much premium is floating around your target market segment? How many agencies serve this segment? Spare no expense to gather the most current and accurate data you can find. And tap underwriting experts to find adjacent markets you may be able to enter quickly.

2. Analyze the Competitive Environment

Scan the competitive landscape to determine how easily you can enter the market. How is the market segment being served today? What kind of programs are already in the space? What other MGAs serve this market? To continue making a viable case for your program, you need to ensure there’s enough space for your solution. Ideally, you want to compete against an old school company that can’t rapidly adjust.

See also: Insurance Innovation’s Growth Challenge  

3. Profile the Industry’s Characteristics

Establishing the industry’s characteristics is much like Step One but at a much more granular level. Analyze the perceived threats and challenges. Examine as many dimensions as you can. How will the economy affect this market? Is climate change a key a factor? Is technology a potential catalyst for disruption? You’re looking for clues that suggest an industry with unique needs. You don’t want to create an insurance program for a commodity that is easy to insure. This would only lead to competition on price rather than service.

4. Spot and Attack ‘Perceived Distress’

Good, profitable programs are generally made up of difficult-to-insure business challenges. Ideally, you are looking for a distressed industry to serve, specifically a distressed class code. Perceived distress is the key here. Perceived distress essentially boils down to a gap in the insurance offerings available to your market that can be exploited by technology, underwriting advantage or better customer service.

5. Assemble Relevant Expertise

Identifying a strategic direction for your program establishes your road map. You hope you can bolster that through agency expertise. Your analysis of industry characteristics will give you the background you need to staff your program through internal or external hires. Assigning or hiring the right expertise can make or break a program. Ideally, you want underwriters with direct experience in the industry you are targeting.

6. Select the Right Technology

Of the many dimensions a company can compete on, technology may offer the biggest opportunity to differentiate in the Darwinian economy. Partnering with companies that do what you want to do and do it well is crucial. Competing on better technology can reduce your time to market so you can capitalize on perceived distress sooner than your competition – especially if the competition is a big, slow-moving, legacy insurance company.

7. Establish the Distribution Network

You’ve chosen your market, sized the competition, analyzed the industry and determined how to leverage expertise and tech. So, how do you sell this new thing? Start with the competition. How are they selling? Do they use agents? Do they have a dedicated team? Look for gaps in your competitors’ ability to deliver. Do they take three days to provide a quote? Use your superior technology and processes to deliver in one.

8. Build the Product

At this point, you have an idea of what the program offering will look like. But you still have a few critical questions to consider. Foremost is whether the product will be admitted or non-admitted. As a rule, you want to do as much admitted business as possible. If even one competitor provides an admitted option, you have no choice but to offer an admitted product.

9. Set the Pricing

Understanding the price elasticity in your market will help determine what it will take for your potential customers to leave their current provider. What can you offer or give them that is of more value? Can you underwrite more efficiently to lower the price? If you can maintain the customer experience while offering a price reduction from incumbent providers, you are in a sweet spot for program launch.

See also: Is Buying Insurance Like Ordering Food?  

10. Choose a Carrier

As an MGA, choosing the right carrier partner can make or break a program. Recent industry developments have made programs a strategic priority for carriers, and MGAs that underwrite and distribute profitably are in demand. If you can’t find a carrier partner, consider alternative capital sources such as pension funds and hedge funds, coupled with a fronting arrangement. This is a model that is growing in popularity as players along the value chain attempt to engage more directly with the policyholder.

This has been a brief overview of the 10-step process to bake a new insurance program. We will revisit this topic in future posts, providing a deeper look at the steps. Creating profitable programs is a vital skill in the new insurance world, and those that do it well will never have trouble finding work. You may not be able to bake a cake, but, with the profits your successful program delivers, you can just go out and buy one.

Excerpted with permission from Instec. A complete collection of Instec’s insurance industry insights can be found here.