November 5, 2020 by David Gambrill
Specialization remains the name of the game in the property and casualty insurance industry.
For the past three years, brokers have extolled specialization in our annual National Broker Surveys. This year was no different. We conducted our study in August and September, during the COVID-19 pandemic. Despite the pandemic, 84% of more than 200 brokers agreed either somewhat or greatly with the statement: “Brokers need to become more specialized to withstand changing technology and sales models.” This result ranked highest among the four options provided for grading.
Specialization is tricky to define. For simplicity’s sake, we define it as insurance coverage different than “standard,” “traditional” or “general” lines of business such as auto, home, and commercial general liability (CGL) insurance policies. Extreme examples of specialization would include insurance for things like ostrich farming, tattoos, all-terrain vehicles (ATVs), bingo prizes, video lottery terminals, or circuses.
Why would brokers wish to specialize? One broker in our 2020 National Broker Survey explains the rationale as follows: “General insurance is an ocean. If you’re going to try and do it all, you will likely never do anything expertly. Find a niche that you enjoy working in and work at being the best at that. Don’t feel that you need to do everything. Clients want an expert, not an order-taker.”
Elsewhere in the survey, we asked brokers: “Over the past 24 months, how beneficial have the following practices been for serving your clients well?” The rankings this year mirrored the same rankings as last year. Developing specialty markets experience ranked fifth out of the Top 5. But while the numbers for the Top 4 have been relatively static over the years, approval for specialization shot up to 65% last year from 49% in 2018. This year’s result remained steady at 66% (See ‘Serving Customers’ chart below).
Specialization is also high on the list of brokers’ best practices for maintaining trusted advisor status. Seventy-one per cent of brokers listed “developing specialty markets experience” as a best practice for establishing or maintaining trusted advisor status with consumers. This has trended upwards steadily over the past three years: In 2018, for example, only 54% of brokers surveyed selected specialization as a best practice.
Why specialization? Why now?
Kent Rowe, president of the Insurance Brokers of Canada (IBAC), cites brokerage mergers and acquisitions (M&A) as one key reason. “We hear a lot about brokerage M&A activity, and we are seeing more of that,” Rowe says. “It’s creating larger brokerages. Brokers are doing this to achieve scale, recruit talent, and enhance their tech resources. That presents an opportunity for specialization. For smaller brokerages, I definitely think we will see that trend continue.”
Late last year, Adam Mitchell, president of Mitchell & Whale, spoke to Canadian Underwriter about the impact of M&A on broker strategy and specialization. “I think to succeed in this business you are going to have to scale the business to grow to a size that you can afford all of the investment into the technology, the marketing, and the efficiency you need in order to be able to compete,” he said. “Another strategy you can choose is to niche. You could shrink down to greatness and get yourself to defend a corner of the market that the others can’t get into. But you’re going to have to pick one or the other, and merge, cluster, buy or sell your way into one of those scenarios.”
Rowe believes there is a place for everyone in the brokerage landscape of tomorrow. Regardless of what may happen down the line with M&A, he says, “brokers will continue to do what they’ve always done, which is to react to the needs of their consumers.” And so, when thinking about specialization, brokers should be focusing not only on niche products and solutions of interest to consumers, but also on niche services they may be able to provide.
Limits of specialization
Some see the trend towards specialization beginning to plateau. The numbers in this year’s survey, for example, show that specialization, although it is still ranked a Number 1 strategy, has started to trend downwards ever so slightly over the past three years (84% this year, as opposed to 87% in 2018 and 88% in 2018).
The pandemic may have shown the outer limits of specialization, says Colin Simpson, CEO of the Insurance Brokers Association of Ontario (IBAO).
“The brokers that have possibly suffered the most business-wise through the pandemic are those that only specialize in certain areas, especially in commercial lines that have been hit by the pandemic,” he says.
This appears to be borne out by the industry’s financial results for 2020 Q2, the financial quarter that clearly shows the economic impact of the pandemic on the P&C business. As MSA Research president and CEO Joel Baker notes in the Q2-2020 MSA Quarterly Outlook Report, multi-lines and insurers in the traditional lines of home and auto tended to do better than those insurers who were selling commercial insurance policies in specialized areas of business. As Baker observes, cyber insurance losses were off-the-charts in 2020 Q2; cyber writers reported a combined ratio of 1,110%, meaning cyber insurers paid out $1,100 in claims for every dollar of premium they raised. Any brokers specializing solely in cyber would not be in business very long with those kinds of numbers.
As a result of the pandemic, “what I think you are likely to find is that there will be more balance going forward,” Simpson says. “Even those brokers who specialize will have a balanced portfolio to support their area of specialization. I think that will be the trend. I think [because of the pandemic] there will be a bit of soul-searching as to, ‘What are the risks to my business in being specialized?’ What I think is likely to happen is that the need for higher level of service will definitely be there, because [the pandemic] has shown a higher need for consumer service and consumer support. And that is where brokers really come to the fore.”
Feature image courtesy of iStock.ca/Eoneren