Playing hard ball: independent agents are taking advantage of the hard market to grow their businesses through referrals, retentions, focused marketing and some in-the-field underwriting. (Industry Strategies: Agents).

In the midst of this hard market, when insurance companies have raised rates and turned away from writing unprofitable business, many independent agents are reaping the rewards in the form of increased volume, higher premiums and healthier commissions.

The new conditions mean they often can add to their staffs, take advantage of unfolding opportunities and experiment with new sales and marketing techniques. On the other hand, they're finding it tougher to find takers for some hard-to-place customers, and there's almost no way they can cushion the blow for policyholders in some lines that face double-digit rate increases.

So while many agents relish their brighter financial picture, they can't help looking over their shoulders, knowing that it's only a matter of time until the soft market overtakes them again.

That's true for Jacki Jungsberger, who is experiencing her first hard market since becoming an agency owner. She owns Tri-County Agency in Brick, N.J., with her father, who is semi-retired.

"I actually love that my agency volume has increased dramatically," Jungsberger said. With volume up, she is preparing to add another agent to her five-person staff to handle mostly commercial lines and some personal lines. The general agency has a $3.9 million book of business, serving policyholders in central and southern New Jersey.

In terms of commercial insurance sales, 2002 was a banner year for her agency. "I think it's because of the pricing," she said. "It's at the point where you're working very hard on the account, you're getting a fair premium and clients are accepting it. You're finally getting the appropriate premium instead of reducing it dramatically for same coverages just because of a soft market."

Contingency profit sharing has been better lately, too. Under this system, a carrier sets levels for an agency's amount of growth, percentage of corn business and loss ratio. If the agency reaches all the levels, the company issues a profit sharing or contingency check at the end of the year. "It's like a bonus for doing such a great job for the company," Jungsberger said. "And most of the time now because everything has increased, it's easier to get to your profit sharing because you're creating more of the business, the volumes are all going up and hopefully the loss ratio is staying low."

Even the agency's retention level has risen because people don't seem to be shopping much for better rates. This is surprising, she added, considering the premium increases in the range of 15% to 25% that some accounts are facing. "You would have thought more people would shop, but either they have shopped and realize that's what the going price is, or they realize that between the economy, 9-11, the war and everything that's been going on, that's to be expected."

After absorbing increases from their own suppliers, the policyholders also may see this trickle-down effect as inevitable for every business at some point, Jungsberger said.

Recently, one insurance company's officials told her and other agents that it's taken eight years to get the premium dollar that they should be getting on accounts. Even in these good times, however, she knows she has to prepare for the inevitable market reversal.

Jungsberger said she has a producer in her office who prefers writing large accounts of $30,000 and higher, while she is used to writing $15,000 or lower. "I usually get the Main Street accounts, and he likes to write the larger ones," she said. The agency has done very well with the large accounts for the past two years, but how many large accounts can you have when this hard market falls and we go back to a soft market?, she asked.

Her biggest challenge then is to outbalance her producer's accounts by the smaller Main Street accounts, because the smaller accounts are not getting as big a hit from higher rates. "Yes, they're going up a bit, probably 10% or 15%, but they're not going up like the larger accounts," Jungsberger said. "So, if I can just write a lot of smaller accounts, it's going to balance out the books when this soft market comes again." In the meantime, Jungsberger is hoping that the hard market lasts another two years or more so that she can squeeze out more time to get the rest of her book balanced.

Field Underwriting 

No matter what the market cycle, Nicholas Argeros, president of all Mass Group Inc. and owner of Argeros Insurance Inc. in Reading, Mass., said he has always worked closely with insurance company underwriters. And in recent years, that collaboration has taken the form of cleaning up books of business to get the greatest earning potential from them.

If some insurers are taking a tougher underwriting stance now, it's because "they got fat and lazy during the soft market and were making more money on investments than they were on insurance," he said. In taking a more proactive look at books of business now, these companies essentially are underwriting them the way his agency always has, Argeros said. "Managing the book of business is an important aspect of getting the most premium dollars in the form of profit sharing," he said. "I always want to get every single dollar of premium available out of the accounts."

To that end, he thinks the role of the agent, to some extent, is to be a field underwriter. Argeros said he has seen his profit sharing double during the past four or five years, something he attributes to his aggressive approach in keeping homeowners policyholders informed about the importance of insurance to value.

"Because of that additional contact, I was able to grow my agency by rounding out accounts, selling additional business to my existing customers whether it be umbrella policies or just increased coverages or getting another line of business I did not have with them," he said. "I really educated them that keeping your insurance values where they should be is important. I've also trained my insureds that higher deductibles are the norm--it saves them money and puts the perspective of insurance on catastrophic losses."

In this changed market, the agent who sold on price is getting hurt now, Argeros noted. He knows his prices tend to run higher than others', but he believes in selling the policyholder service, professionalism and accessibility. One former customer recently called him after she had a car accident to ask him some questions. She felt she wasn't getting the right information from her new agency. "Now she's coming back to us," Argeros said. "She's more comfortable with my knowledge of insurance than her current agent's."

Like Jungsberger, Argeros fully expected his customers--faced with dramatically rising homeowners rates--to begin shopping around. "But none of that is happening," he said. "People are just accepting it because everything in our economy is going up in price."

Writing New Accounts

David George, vice president of commercial sales for the Thompson Group, Parker City, Ind., said the hard market signifies opportunity, and the agency he works for has been able to create a lot of growth through the writing of new accounts, "Doors are open more now than they were five years ago when everybody's price was competitive," he said.

One way that his agency has grown its book of business is by asking existing customers for referrals. "You're not chasing your tail. You've got a warm lead, somebody that you obviously have been able to assist," George said. "From a coverage standpoint and pricing considerations, that certainly has been more beneficial than just cold calling on accounts."

It's also very important now that agents understand the marketplace from an insurance company standpoint, he said. "We constantly are evaluating our companies, our contracts, and we've brought in a couple of new standard companies to write and fill some voids that have been left by the remaining contracts that we have," George said.

To size up new companies, representatives from the Thompson Group visit their home offices before they will accept their contracts. "We want to meet with billing; we want to meet with accounting, underwriting, claims, loss control and management, and most importantly, those meetings would be with upper management and hopefully the president," George said.

The need to make evaluations like these was not as important during the soft market because everyone was aggressive at that time, he said.

After a long soft market that lasted for most of the 1990s, premiums for commercial multiperil insurance--the cornerstone of commercial insurance business--rose 3.9% in 2000, the largest increase in five years, according to Conning & Co. The trend continued; in the last quarter of 2002, commercial property/casualty insurance premiums, although leveling out a bit compared with earlier survey results, were continuing to march upward, said the Council of Insurance Agents & Brokers, a group of the nation's largest insurance brokers. More than two-thirds of the small and medium-sized commercial property/casualty accounts and 59% of the large accounts experienced premium increases between 10% and 30% during the last three months of 2002 the survey found.

Homework Required

"At this point, the worst thing an agency could do would be to accept a contract without doing their homework, without knowing how those companies are going to respond and what their appetites for certain lines of business are," George said.

The Thompson Group also looks at the companies it currently works with to understand the classes of business they want to write. Then the agency will try to market to those classes. For example, all the insurers that the Thompson Group deals with want to write construction trades and excavators. "Therefore, that's really what we try to stay focused on," he said. "We're not out there calling on every type of account. We try to drill down and do direct marketing to those particular companies with which we know we'll have a high success ratio in placing business."

The agency works with six standard markets where it consistently places business. In addition, the agency has some monoline workers' compensation markets and uses a number of brokers. While the agency is licensed in six states, the main focus of its marketing is in central Indiana.

George considers it very important to evaluate every prospective client. At their first meeting, he will ask business owners what insurance company they currently are with, how long they have done business with that insurer, and what problems have arisen. It's all in keeping with the mission statement for his agency, which is "Find the pain, heal the pain and show the love."

"It's intended to be a little hokey and it's intended to get a giggle, but the basis of it is right on," George said. "We're only out there looking to deal with people who have issues. We try to then fix those issues, heal that pain. We try to get our arms around them from a service standpoint and I have to say that we are extremely successful at retaining our business. So by showing them love, by giving them great service, hopefully they'll never leave us."

George thinks that every good commercial producer is an underwriter at heart. The era of just selling a product is over for now, he said, so if he finds out something in that initial meeting with a customer that needs to be shared with the insurance company underwriters, he will share it and see "right off the bat, what their appetite is to write an account like that."

Evaluating prospective customers is more intense in this hard market, George acknowledged. A few years ago, insurers were more flexible as far as the nuances of an account went. Things that probably were allowed to slide by from an underwriting standpoint in a soft market are being looked at much more closely these days. For example, insurers were more willing to overlook the excavator that did 10% of his business in demolition and consider it nominal in regard to the overall scope of the excavation company's work. Now, that may not be the case, George said. "Insurance companies don't like demolition; at least, our companies don't," he said.

His biggest challenge these days is trying to place the hard-to-fit customer--a company with a claims history--with an insurer. "There are companies out there with losses; there are companies out there with classes of business that are not considered to be preferred," George said. The difficult part is dealing with a client that has been insured in the standard market, but then incurs losses and becomes unprofitable to the insurer. "Now you've got to give them sticker shock on what excess and surplus is going to cost them on a general liability policy," George said. "That can easily equal what their entire program cost them for the previous year."

RELATED ARTICLE: In Hard Market, Agents Need to Be Advocates

For Scott Hauge, president of CAL Insurance & Associates, San Francisco, the hard market is a mixed blessing. His agency, which handles commercial lines, clearly is faring better financially. Premiums are up, overall commissions are higher and contingency profit sharing is rising. Despite this, the job satisfaction among employees has plummeted. It's very stressful for Hauge and the others to deliver the bad news of far higher rates to clients, he said. "Especially given the state of the economy right now, businesses are struggling. They're looking at increased costs not just on their insurance, but energy's going up, gasoline's going up, so this is just one more thing that's going up double-digits and then some."

CAL Insurance's workers' compensation clients in California are hearing that rates will be rising from 30% to 40%, and they were hit with 30% increases only last year, Hauge said. "In workers' comp, we have continuously let our insureds know what the future holds," he said. For example, in January 1995, when open rating came into effect in California, allowing insurers to charge whatever rate they were filed to charge, Hauge's agency recognized that there was going to be significant competition. Prior to that, insurers had to charge a minimum rate. "It was your typical situation for a regulated industry going deregulated," he said. "So we knew that the prices would be going down."

His agency told policyholders to expect decreases for the next few years. "We started planting the seeds with clients that we had back then and have continuously done so, not just in workers' comp but for the other lines," he said. "We have constantly tried to tell insureds what, the state of the market was at that point and to be prepared down the road for the market to turn and for rates to go up."

The agency also has positioned itself as an advocate for small business, something that Hauge has a passion for, he said. In the workers' comp area, for example, he is recognized as a spokesman for small business and serves on a task force formed by California Insurance Commissioner John Garamendi. Hauge also has formed an organization of 17 associations representing 19,000 small businesses and has put together a political action committee. Through a master e-mail list, he can contact 700 small businesses across California to keep in touch about workers' comp issues. "I try to put us out there as an agency that is looking beyond just having them buy an insurance policy and is truly their advocate," he said. "I think that's important as workers' comp rates go up."

On top of this, his agency shops the market to make sure it's getting the best price it can for clients. In workers' comp, that's very easy, Hauge said, because while quality of carriers can differ, all coverages are the same. In liability and some other property coverages, however, policy terms and conditions can vary, making this more challenging for the agent.

Many of the agency's producers have been with the firm for only five to seven years and are experiencing a hard market for the first time. "There is a certain training you need to do to change the mindset in dealing with clients," Hauge said. In the soft market, some producers might have been inclined to offer a 10% savings to a prospect for writing his new policy, he said. Not any more. With hefty rate hikes looming in workers' comp, "it's just absurd to say you can save money on last year's policy," he said. "So you've really got to sell the service part and the relationship part a lot more than the pricing side of it, and that holds for renewals, too."

From a service standpoint, Hauge's agency is active in claims management. Agents will go out and interview clinic officials for clients, making sure that the lines of communication are solid when the two are dealing with first-aid policy and modified work programs. "We constantly work with clinics to identify the ones that can best serve our clients," he said. "I don't know of any brokers who do that kind of service."

With the hard market, a lot of insurers are reunderwriting their books of business, changing terms and conditions. As a result, agents have had to place some business with excess and surplus carriers. "This creates major problems--it is just a nightmare," Hauge said. "You get restrictive language and you have to explain that to the insured."

In some cases, construction companies in California are facing exclusions for any new residential work. Contractors in California's market for entry-level housing, as well as custom homes, townhouses and condominiums have been finding it difficult to obtain liability coverage in the standard market because of the construction-defect laws and increases of as much as 81% in jury awards. Construction-defect laws allow as long as 10 years to file suit over latent defects after a project is completed. Newly enacted legislation could remedy the situation by providing relief from lawsuits for builders, but the provisions don't apply to construction completed before Jan. 1, 2003, Hauge said. "The cheapest I could come up with to get this coverage is $100,000 and they can't afford that," Hauge said. "So they're left out there. They don't have coverage for residential. For contractors, especially smaller ones, this is devastating."

Hauge has been through four hard markets in his career. The hard market in liability in 1984 was so bad, he said, that he devised a way for everyone in the agency to cope. He instituted a rule banning all of them from talking about rates with clients after 2 p.m. They would tell clients that they would get back to them with rate information the following day, and clients generally accepted that, he said.

This developed after his wife commented on how grouchy he was becoming, Hauge said. "I figured that maybe for my own sanity and employees' sanity, we'd hold off talking about rates in the afternoon and deal with more positive things, and it helped a lot," he said. "We haven't gotten to that point now, but it certainly could come."

His nagging concern is that even though the agency is doing well financially, the market is bound to go soft again and revenues will decrease. "You have to make sure that your operations are set up so that you can deal with that," he said. He's also mindful that the workers' comp situation in California is so severe that some firms are going to be put out of business. "So the short term may be very positive for us, but the long term is a lot of customers are going to close their doors. It's a bittersweet situation."