The rise (and fall?) of specialization

COVID-19 has not made a significant dent in brokers’ optimism about their financial future, according to the results of Canadian Underwriter’s 2020 National Broker Survey.

Nor has the global pandemic changed three-year trends in what brokers have identified as successful business strategies and best practices. Specialization continues to be one of the most important ways to serve brokers’ customers well, while referrals continue to be the most popular way to gain new prospects.

This is not to say, however, that the pandemic has had no impact on how brokers think about specialization. Survey results show, for example, that enthusiasm for specialization as a growth strategy may be starting to plateau. Some industry observers suggest the pandemic has highlighted the risk of extremely specialized business models.

Specializing during the pandemic

In the property and casualty insurance industry, specialization is tricky to define. For simplicity’s sake, we define it as insurance coverage that is 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,  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.”

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 (see Figure 1).

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 (see Figure 2). 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%.

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.

What’s motivating the move towards specializing?

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.

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, president and 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.”

Rise of referrals

Physical distancing or no, brokers still see referrals as being the best way to generate sales leads and gain new clients.

“Word of mouth,” one broker in the National Broker Survey wrote, when asked about the most beneficial way to find new clients over the past 24 months. “Our brokerage is in a smaller community, so we know many/most of our clients personally. And the assistance we provide our clients, our willingness to help when they have questions, concerns, or are dealing with a loss, leads them to refer family and friends to us.”

One senior broker of 42 years in the industry said he now does business only by referrals. “I’m completely customer service-oriented, so selling my knowledge and skills for the past 42 years gives me an excessive amount of referrals from existing clients, plus I belong to a networking club.”

As in the past three surveys, brokers found it most beneficial to ask existing customers for referrals, as opposed to asking other professionals for referrals, although both methods are popular (see Figure 3). Out of six options for generating new leads, brokers placed referrals from existing customers at the top of the list (67% this year), and referrals from professionals in second place (46%).

The popularity of seeking referrals from professionals jumped 11 points from 2018 to 2019 (from 41% to 52%), but levelled off slightly this year. Still, one broker in the survey said the business contacts generally resulted in better closing success. “Industry players — e.g. financial advisers, life agents, and real estate agent referrals — will yield much better prospects that fit your corporate culture, thus higher closing/client success.”

Other options in the survey included maintaining an active social media presence, personal advertising (not the same as the brokerage’s general advertising), or cold-calling. Company website leads and digital marketing leads from third-party vendors also came up in the written comments.

Rowe believes changing demographics in Canada have contributed to the success of referrals in finding new business. Access to information has improved on the internet, and generations that have grown up with the internet (such as Millennials, for example) have become more likely to research a product before buying online, as Rowe observes. As part of their research, they are asking friends and family for advice, which makes referrals from them all the more important — and successful. And so, brokers are more actively reaching out to their clients for referrals.

Simpson does not see this changing because of the social distancing required to slow the spread of the novel coronavirus. “There is always value in relationships,” he says. “Insurance is a people business. A referral could actually add more value to a brokerage. It becomes stickier because of the relationships involved. It’s less likely to move around than in situations you might see [during the pandemic].”

For example, a client unhappy with relief offered by an insurer during the pandemic could theoretically be more likely to move from one brokerage to another, seeking a better relief package. And some referrals during a hard market may be one way for clients to access capacity that may not be available.

Post-pandemic prospects

Brokers tend to be an optimistic lot. In both 2018 and 2019, most brokers in our National Broker Survey predicted that their financial performance would be better the next year than it was the year before (see Figure 4 on Page 28).

The same was true in 2020, despite the pandemic and the global economic meltdown associated with it. More than two-thirds (68%) of Canadian brokers in this year’s survey said the financial performance of their brokerages would be “somewhat better” (50%) or “much better” (18%) next year compared to this year.

They had every reason to be pessimistic. By most meaningful performance metrics, the Canadian P&C industry’s financial results took a beating during COVID-19. Federally-regulated insurers reported an $893-million underwriting loss in 2020 Q2, according to statistics released by Canada’s solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI). MSA Research’s quarterly stats show the Canadian P&C industry posted a combined ratio of 103.6% during the second quarter, when government-ordered lockdowns shuttered the businesses of broker clients. (That means insurers were paying out $1.03 in claims and expenses for every dollar of premium revenue they collected.)

Economists and industry analysts don’t see much improvement for the global economy until some kind of vaccine or treatment for the virus is found, which many sources in the medical community predict will not be widely commercially available until next year at the very earliest.

So, where is the brokers’ sunny sense of optimism coming from?

To be sure, the broker’s sense of financial optimism is more muted this year than it has been in the past. In 2019, 71% of brokers surveyed expected a somewhat or much better year this year than last year. (If only they knew about the pandemic then.) But while some brokers admitted that the pandemic tempered their forecast and financial results, others said it had no impact at all. Many brokers in the survey found reasons for optimism in the future.

“It affected business in the short term (Mar., Apr., May),” one broker reported, “but we have normalized now, and we see opportunity in the uncertainty ahead.”

It helped that insurance is an essential service, meaning brokerages across Canada were able to keep their doors open to clients, although many brokers are still working from home to prevent the spread of the virus. One broker in the survey highlighted how the pandemic caused many clients to contact the brokerage for advice.

Many Canadian brokerages took calls from clients who wanted to change their coverage to reflect the fact that their business operations had either been closed or restricted. Clients also looked to their brokers to advocate for premium relief measures. These dynamics accentuated the value of brokers’ services to their clients, which in turn was good for broker business.

“The pandemic has been good for business,” one broker reported, “because we are personal service-centric and [we] were available to speak to our clients at any time.”