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Thinking small: larger insurers head into the small-commercial market to offset downturn losses.

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The small-commercial insurance market is looking more attractive as the recession wears on. As often happens during an economic downturn, larger players are looking toward the small-commercial arena for stability. Currently, middle market and specialty lines insurers are slowly edging into this space, finding it less precarious than the larger market.

They're also finding fewer small companies to insure, as Main Street businesses shutter their doors in the face of sliding sales. Small operators that do remain open are shedding personnel and scaling back on policy needs, even though most remain loyal to their insurers.

The recession's real impact on the small-commercial industry is from a premium standpoint, said AM. Best property/casualty analyst Andrew Colannino.

"For commercial lines, there's not going to be as many businesses to insure because of the economy and its downturn," Colannino said. "Payrolls will be cut; workers' comp will be lower in terms of the number of people insured. To the extent that companies downsize or close up, that's less business that insurers can write."

Adds Gaff McGiffin, senior executive in the insurance practice of global consultant Accenture: "Retail closings are a very real manifestation of where we are in the economy."

To lower their overall operating costs, companies also are investing less in safety equipment and building protection, McGiffin said. Even the property/casualty sector on the personal lines side is being affected as some clients begin reducing their insurance, or dropping coverage altogether.

On the commercial side, it's magnified "by the sheer exposure to loss being so much bigger," she said.

The U.S. Small Business Administration has a multitude of parameters as to what defines a small business. In general, the Small Business Act defines a small business as a for-profit concern, with from $750,000 to $35.5 million in average annual revenues and/or from 100 to 1,500 employees--depending on whether it's a Main Street or agricultural business.

Scott Goodby, executive vice president of Liberty Mutual Agency Markets and president of its Regional Companies Group, said the insurer is starting to see premiums drop. Liberty Mutual Agency Markets defines the small-commercial market as businesses with annual premium of $150,000 or less (Main Street and small regional businesses).

"Renewals are coming down as levels of payrolls and sales come down. We're seeing some reduction in premium in that respect," he said.

For instance, in the small-business arena, companies are starting to cut back on things like their fleet needs; a client that had three trucks on the road might pare that down to two, he said.

"Certainly I have lived through hard and soft markets. Certainly I have seen recession conditions and lived through those. But [with] the magnitude and the acuteness of the economy, combined with the soft insurance market, this is the first time I'm seeing the depth and the intensity of that combination," said McGiffin, a 25-year insurance veteran.

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Hanging in There

Yet the small-commercial market is holding on.

"What we're seeing is that the rate softness that had been in the marketplace ha general has been a little less in the small-business area," Goodby said. "Returns are pretty adequate at this point."

Most carriers seem to be doing well enough in the small-commercial marketplace that they are continuing to be aggressive. As a result, the market has remained highly competitive, he said.

"I don't see a whole lot of carriers trying to move in, but the ones that are there are continuing to push for business," Goodby said.

Usually in a down market, new carriers aren't coming into the space. "It's costly. You have to put systems in place," Goodby said. Such an endeavor can cost a carrier $30 million to $50 million, he said.

These immense start-up costs can keep larger companies out of the small-commercial space, said Lew Bivona, a partner with public accounting firm WithtumSmith+Brown of Princeton, N.J.

But for a large insurer that expands into this market via acquisition, it can be a good move. "I've seen some large companies looking at small companies as a way of diversifying and actually making decent investments," he said. A lot of large companies have been insuring risk that they really haven't understood for a long time, and the greater stability of file small market is attractive to them, he added.

Small mom-and-pop stores suffer from most of the same problems as larger businesses, but not from the massive layoff's or credit crises that the big companies are facing, Bivona said. And even if larger insurers do see commercial interruption claims ha the small-commercial space, it's not like "the craziness that you see in the larger markets," he said.

Middle-market writers entering the small-commercial market is a cyclical part of the insurance industry, McGiffin said. "I'd say there's definitely a flight to small commercial going on. I've been here long enough to say it's not the first time it has happened. In softening market conditions where premiums have eroded, it's the nature of such a market to put additional pressure on growth and expense."

Growth Potential

Some regional insurers will expand more nationally in the small-commercial market, McGiffin said. More importantly, some carriers will expand internationally, and non-domestic carriers will look to expand into the United States, she said. There's even growth potential for smaller carriers, she said, because small businesses incur international exposure as soon as they send a salesperson or a product overseas.

"We're seeing middle-market carriers go downstream. We're seeing small carriers go upstream. We're seeing specialty writers looking to write standard lines commercial," McGiffin said.

Specialty-market writers step into the small-commercial market as both a growth avenue and a defensive move in a down economy. There they can better compete with writers that offer a flail complement of standard and nonstandard lines, she said. They also move downstream to minimize instability in their own books of business.

"There are all kinds of movement going on," she said. "We've had consolidation, so there are fewer players, but their strategies are very much in play. I can't begin to think of a carrier that isn't doing something like this."

Bivona said insurers are looking for simplicity: "That's why there's not a big run to the small-commercial market, but there's certainly a movement toward it." He said "keeping it simple" has become part of the economic culture; it all comes down to customer service, longevity and familiarity.

Main Street businesses want to see "somebody who's got the same amount of skin in the game and seems like a regular guy or gal, versus someone who is aloof and out of touch," Bivona said. "The small-commercial companies have been spared that image."

That's why some big-name companies that were never on Main Street, such as Geico, are getting involved in small markets. Even some large health insurers that never had a Main Street office are now reaching out and establishing a community presence, he said.

Yet that's precisely why many small-business insurance clients are opting to stay with their current providers, Goodby said.

"It's part of that syndrome--when times are bad, people hunker down and stay with what they're familiar with, including their insurance agent," he said.

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* The Background: The recession has caused stagnant growth and declining premiums for many midmarket and specialty lines writers.

* The Issue: Midsize insurers are expanding into the more-stable small commercial market to revive their business.

* The Result: The small-commercial market is seeing increased competition as new writers move in and established firms consider new opportunities.

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Liberty Mutual Insurance Cos. A.M. Best Company # 00060 Distribution: Independent agencies For ratings and other financial strength information visit www.ambest.com.

Exiles on Main Street

The overall mood on Main Street remains bleak. The Index of Small Business Optimism, a monthly survey of members of the National Federation of Independent Business, hit its second-lowest level in March since the survey's inception in 1973. This dramatic drop follows two prior second-lowest-level dips in December and January.

Actual numbers of small-business closings nationwide in 2008 are not yet available from the U.S. Small Business Administration or the U.S. Census, the primary sources for such data, said Holly Wade, a policy analyst for NFIB in Washington, D.C. However the NFIB Optimism Index "shows a good trend of how indicators have looked over the years, Wade said.

The Optimism Index fell 1.5 points to 82.6 in March (for reference purposes, 1986=100). About 24% of small-business owners said they reduced staff over the three prior months. Only 9% increased employment, although 11% reported unfilled job openings and 6% plan to create new jobs. The only lower readings in these areas occurred during the recession periods of 1974-75 and 1980-82, according to the NFTB.

The report also showed that 8% of small businesses are scaling back on compensation, a record high. Another 11% in the survey reported raising employee compensation, a record low.

A Voice for the Little Guy

A mid the clamor about bailouts and financial wrongdoing, small-business owners have nearly been forgotten. That's why three major trade associations that deal with the financial interests of small companies have banded together to ask lawmakers to remember the little guy.

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The Main Street America Coalition includes the National Association of Mutual Insurance Companies, the Independent Insurance Agents & Brokers of America, and the Credit Union National Association. The group wrote Congress in late February asking that any regulatory decisions involving the financial services network take into account the needs of small business.

"Obviously a lot of the focus has been on large financial institutions and what has occurred across the financial services marketplace," said Charles E. Symington Jr., the IIABA's senior vice president for government affairs. "We just want to ensure that the small-business community's perspective is considered while the modernizing of the financial services regulatory system occurs."

The possible creation of a federal systemic risk regulator to oversee the financial markets is making Main Street nervous, he said, and regulations made to oversee large financial institutions also could impact Main Street.

"It should not be forgotten that independent insurance agents sell the products of many of those large insurance companies," he said. "Please do not harm small businesses because small businesses weren't the ones that got us into this trouble."

While the trade groups alone can't compete with the large financial institutions, together they represent millions of "mom-and-pop" stores nationwide, Symington said. "We have many members," he said. "There's strength in numbers."
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Title Annotation:Property/Casualty: Commercial
Author:Cavanaugh, Bonnie Brewer
Publication:Best's Review
Geographic Code:1USA
Date:May 1, 2009
Words:1754
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