Regional companies provide a competitive advantage

Agents need to build a portfolio of carriers to meet their clients needs, and that should include both regional and national carriers, according to Rick Quagliaroli, president and CEO of Strongwood Holdings Insurance Corp. and its subsidiary companies Sequoia Insurance Co. and Networked Insurance Agents.

Speaking at the recent Insurance Brokers and Agents of the West Blue Ribbon Conference, Quagliaroli said regional carriers may have competitive advantages over national carriers in some instances, but both face market pressures, regardless of size.

All too often, “size does not get you respect,” he said. But you only need to look at the banking industry to see that regional operations can be just as successful.

In the United States, 330 new banks are formed each year, he said, totaling about 8,700 banks nationwide. This proves small, startup banks can compete with major institutions because they have human capital, access to financial capital, access to competitive products and because banking is a local business, Quagliaroli said. “Half of the employment in the United States is controlled by small businesses — companies with fewer than 500 employees,” he said.

And particularly with regard to customer service, small businesses tend to have an advantage because “the larger the firm becomes, the focus starts to shift from a focus on customers to the CEO, to a focus on shareholders,” he said. Small businesses are characterized as being less bureaucratic and more innovative in terms of rolling out new products, he added.

Meanwhile, small businesses do not lack access to financial capital. “There’s money afloat all over the globe,” Quagliaroli said. “Anybody with $100 million and a good resume can generate today.”

Furthermore, size doesn’t matter when it comes to access to competitive products. “Whether you develop your own or use human capital, the banking industry is largely a knowledge business,” he said.

But most importantly, the success of smaller banks illustrates that banking is a local business, Quagliaroli said. “Banking is a local business. That’s why you see them on street corner after corner after corner,” he said. “Frankly, often, what a lot of our [insurance] agents recognize as well, is your business is often grown within a local area. So [independent] agents should have no problem competing with anybody in the marketplace.”

In fact, when comparing commercial multi-peril direct written premium in California, the top regional companies have consistently grown faster than the top national companies, and as well as all other companies, Quagliaroli noted. The top regional companies also have outperformed the top national companies, as well as all other companies on loss ratio.

With regard to California workers’ compensation direct written premium growth, the top regionals grew faster than the top nationals through 2005, but they each had very little growth in 2006, as the entire market shrank with declining rates, he indicated. Yet published calendar year loss and cost containment ratios continue to improve through 2006, with the regionals outperforming the nationals, he said.

“It’s not like one of the three regional companies in California, or others in the state, have some kind of unique product that everybody needs to have to work,” Quagliaroli said. Instead, what the California figures indicate, he said, is that “there must be something going on operationally from a regional perspective that enables them to grow almost regardless of the line of business, and yet they would have a better loss ratio.” One conclusion you could draw is that the three largest regionals “reaped more than they should,” he added.

The bad news for California, however, Quagliaroli indicated, is that the top three regional writers in California are also the largest companies writing in Florida, South Carolina and Louisiana, where there is a more significant capital exposure to a loss. He cautioned agents that carriers are in a position today where rates are overrated due to exposures.

Keeping those exposures in mind, Quagliaroli advised agents to build a portfolio of carriers representing regional and national companies. Regional companies tend to be responsive, have local decision-making, competitive products and excellent technology. National carriers, on the other hand, have countrywide accounts, international exposures and unique products.

“It’s pretty typical for a CEO/president of a regional carrier to know who their customers are, understand what they’re doing and be responsive to what they are trying to accomplish,” he said. “Certainly technology today often tilts toward regional carriers; the larger you are, the greater [the likelihood] you have of offending your mainframe and what goes on from there.” Regional carriers also have an advantage in that they can be responsive to agents, which shows up in growth rates and loss ratios, he said.

However, from a national carrier perspective, “there are advantages in that there is countrywide talent, more unique exposures, international exposures, and occasionally … you can get some unique clients,” he said.

Ultimately, “it’s not about size,” Quagliaroli concluded. “While growth is important, it’s really about earnings, and then that commitment to long-term earners.” What agents should have are carriers that are knowledgeable about the market, whether they are regional or national. “You want local knowledge capable of making timely decisions,” he indicated.

Furthermore, regardless of whether a carrier is regional or national, agents should seek companies that are committed to being consistent. “Because they can’t run off to Illinois if Illinois becomes a great market, or if some new venture starts to have a growth spurt,” he said.