Specialization Versus Fragmentation. A Coordinated, Cohesive Approach to the Specialty Market

Over the last decade, industry experts have touted the benefits of independent agencies building industry- and product-focused specialization amid an increasingly competitive specialty distribution landscape and complex risk environment. Studies have validated the correlation between specialization and agency growth — simply stated, independent agencies that specialize grow at a faster pace than those that do not.

Many successful agencies have embraced the trend, building practices and verticals that concentrate on clients within a specific industry, such as construction, technology and nonprofits, or on a specific product line for clients across industries, such as management liability or professional liability. With this approach, an agency can offer deep technical expertise within its focus areas, establish credibility as a go-to agency for the industry, and build deep relationships with clients and others in the space. And, many carriers also have embraced niche, specialized strategies in efforts to be knowledgeable go-to markets for profitable risks and drive growth.

For a good portion of this business, agencies have developed singular product relationships or have aligned themselves with single-line focused, niche carriers — a model that has been adopted throughout much of commercial lines. But at what expense? While niche carriers and single-line relationships can play an important role in an agency’s portfolio, writing too much business with these carriers can have an unintended consequence of fragmentated coverage. This leads to a more cumbersome placement process, complexity and duplication in service, inconveniences for customers, and insurance programs with potential gaps in coverage.

Independent agencies can benefit from specialization, while keeping their books of business from becoming fragmented, by specializing across products and industries, coordinating placements across different units within their agencies, and strategically partnering with insurance carriers that offer broad portfolios of specialized coverage suites designed to simplify the placement process with total account solutions.

Unintended Consequences of Specialization

Many agencies underestimate the level of fragmentation that exists within their portfolios. Analyzing agents’ books of business using The Hanover’s proprietary data, we found:

• 50% of commercial accounts have only a single policy with an agency, but have many more insurance policies elsewhere.
• When this occurs, agencies can miss valuable opportunities to sell the full suite of coverages a customer may need, which invites competitor agencies into the relationship since the customer must turn elsewhere to get the additional coverages. It also increases confusion and risk for the customer, who now has policies with a variety of agencies and carriers.
• When commercial accounts do have more than one policy with an agency, 24% are split across multiple markets, causing added work for agencies that are often left trying to coordinate placement and servicing across multiple carriers.
• As a result, the typical mid-sized agency has at least 50 carrier relationships, and sometimes significantly more, leading to diluted relationships and lost opportunities to generate higher revenues through partnerships with select carriers.
• Yet, more than 60% of agencies’ premium is placed with their top five markets, indicating widespread fragmentation in an agency’s portfolio

This all results in extra work for agencies. At the same time, customers experience inefficiencies when they must juggle multiple bills from different carriers, a variety of customer-facing applications, numerous loss control visits and more.

Safeguarding Against Fragmentation

Specialization does not have to create fragmentation. The best agencies are taking a collaborative approach to coordinating coverage across several specialized practices and partnering with the right carriers.

Often, it is beneficial to have a deep relationship in which an agency and customer partner together to build and customize an insurance solution across lines of business, allowing the agency to gain a deeper understanding of the customer’s insurance needs. Importantly, this helps agents to have an overarching view on clients’ insurance protection and risks, and enables them to identify possible gaps in coverage. The best case scenario is placing a variety of a clients’ risks with a single carrier that specializes in those areas. This allows agents to take advantage of policy language that is often designed to complement and integrate with other policies offered by the carrier.

With this approach, customers are also in a much better position to efficiently protect their business with a single bill and a single carrier contact. Customers can especially benefit from coordinated risk management programs and simplified claims handling. Loss control activities can be coordinated across lines of business. Similarly, if a loss occurs and more than one coverage is triggered, claims handling can be coordinated more efficiently and effectively when coverage is placed with a single carrier.

Top agencies look for carriers that have both the knowledge and the product offerings to deliver insurance programs that offer a full suite of coverages for their customers’ businesses. This cohesive approach helps address a business’s total risk portfolio, rather than its individual parts. Niche carriers that offer a few capabilities can still play an important role, but, agencies that specialize across multiple products and industries may not find as much value in these carrier relationships.

Those who do recognize the risk of fragmentation are taking steps to guard against it by:

• Building broad sets of specialized capabilities. By building these capabilities themselves, across products and industries, agencies are putting their businesses in a position to address the majority of their clients’ insurance needs in an efficient and effective manner.
• Taking a coordinated approach to placement. While it’s helpful to center agencies around specialized capabilities, those that can operate across internal silos to effectively coordinate coverage for various lines are helping position their agencies for future success and efficiency.
• Partnering with carriers that have similar specialized capabilities. When agencies build strong partnerships with carriers that have broad, specialized capabilities that mirror their own, they maximize the value of the relationships and help agencies present account-focused solutions for their clients. While at times carriers may not be able to solve for all of the P/C needs of a customer, they very often can provide comprehensive solutions that reduce fragmentation, which helps agencies more efficiently deliver robust, tailored coverage, while enhancing the insurance experience for their clients.

Agents who are adept in this space are building broad specialization and partnering with carriers that have designed product portfolios that respond to the wide variety of risks facing businesses. Strategic carrier partnerships can empower agents to be more efficient and maximize protection for their customers.