Niche Insurance Companies

Niche Insurance Companies

Description

This report is about niche companies in the personal property-casualty insurance market. The report introduces the niche idea and sets our case histories of several niche companies. Then the report draws conclusions about how and why such companies come into existence, about how they work and about how they affect the rest of the market. A niche insurance company is created to help people in the niche. Often it is a self-help effort by the people themselves. But this report focuses on the broader impact of such companies—on what they do to and for the market in general. For niche companies lead the whole market to evolve and to renew itself. They are agents of change. They do it by breaking through the uniformity and rigidity that usually prevail in insurance markets. Their breakthrough forces change upon the others. What prompts our analysis is a growing tendency of federal and state governments to address some current insurance issues by requiring uniformity that has, in the past, created the need for niche insurance companies. The Niche Solution to Market Neglect The forces of uniformity insurance have always been strong, for valid business and regulatory reasons. Those forces have also tended to make the insurance market rigid and resistant to change. It has often happened that the uniform and unchanging market left out some people who wanted in. They were not able to get insurance at all, or not on terms they considered fair. Sometimes those people devised a solution. If followed a recognizable, recurring pattern. Niche companies have appeared throughout the history of insurance in America. Among their customers were the members of auto clubs and farm bureaus, military officers, government employees, teachers, older people, wealthy people, non-drinkers and Japanese Americans. Their stories have a common thread. Niche companies were created when the established sellers of insurance would not or could not respond to the needs of a particular group of insurance buyers. Every niche company began as a practical solution to a real problem of customer neglect. Many were self-help efforts. While neglect got them started, two other qualities kept them going. The report calls those qualities identity and access. Identity was traceable to some characteristic the people in the niche had in common, often one that set them somewhat appear. The common characteristic made them recognizable as a distinct group. The characteristic was always something about them other than their need for insurance. It could be an occupation or a hobby or club membership or nationality or religion. Identity fostered loyalty between the niche company and its customers, loyalty running both ways. Loyalty on the part of the company meant sustained focus on the niche. Focus led to expertise in underwriting, marketing and loss control. Loyalty on the part of customers meant they stuck with the company. Such stability lowers costs. When working well, these qualities reinforced each other in a virtuous circle. A big item of expense and difficulty for any insurance company is distribution or access to the customer. Natural and easy access to niche members led to efficient distribution of insurance by the niche company. In the history of nearly every niche company, the founder was already connected with the neglected group. Doors were opened, and sometimes the group formally endorsed or sponsored the new insurance company. In one way or another, the close relationship between the company and its customers simplified distribution and lowered costs. The Niche Company as Agent of Change When market uniformity and rigidity leave an unmet need and a niche company fills it at a profit, sooner or later that fact becomes known. Other companies, including the established ones whose neglect of the niche created the market opening, then want the niche clientele and start competing for it. Insurance is a business with no meaningful patent, copyright or other special protection from competitive pursuit and emulation. Any innovation in the insurance marketplace can find the fruits of its creativity, effort and risk-taking appropriated by larger, better capitalized competitors. It may seem unfair, but in the real world of the insurance business, that is the way competition works. But sometimes the niche innovator develops cost and service advantages that are too great for established providers to match. The unmatched advantages protect the innovator’s niche position and give it a secure base from which to expand into the general market. At that point, the established companies find themselves on the defensive on their own turf. They have to improve their own operations just to hold onto the business they have. In that way, the niche company breaks through uniformity and market rigidity, and it does more than simply survive as an exception. It makes the whole market take notice and adapt. It is a catalyst for change. That is due to the niche company characteristic of efficient access to customers. Efficient access means lower costs of distribution and of overhead in general. Lower costs mean lower prices. Challenged by that kind of competition, the established companies have a choice: get their own costs down or lose business. Niche company formation is an essential step in the competitive process of creative destruction by which the insurance market evolves. Niche companies are not the only forces for change in insurance, but in the history of the personal lines of property-casualty insurance, they have been the most important one. Today, over half of personal lines is written by companies with niche origins. Public Policy and Niche Insurance Companies The uniformity and rigidity addressed by niche insurance companies grew out of practical business and regulatory concerns. For most of the history of the insurance business, uniformity and rigidity were based on agreements among competing insurance companies. The agreements covered premiums, policy forms, agent compensation and underwriting criteria. Their purpose was to prevent insolvency. Until the end of the Second World War, such agreements were lawful in insurance, and they covered nearly all of the market. Even after explicit agreements became illegal, many of the old practices and attitudes lingered, both in the business and in its regulation. Starting after the Second World War, the state regulators of insurance prodded by anti-trust minded federal officials, loosened their support for uniform pricing and underwriting in the cartel style. Price competition began to look like a good idea. With growing regulatory tolerance and even encouragement, more efficient sellers of personal insurance took over larger shares of the market. By the late 1960s and early 1970s, most state insurance commissioners and most of the industry had come to favor competition and the abolition of the kinds of rate regulation that restrained competition. It was a complete turnaround on the issue of competition versus uniformity for both the business and its regulators. With the emphasis on competition, companies sought out neglected market segments and other pockets of profit. Very few niche insurance companies came into being because the pre-conditions—chiefly neglect—did not exist. The swing from government support for uniformity to government support for competition was a momentous change for insurance regulation. It was a full swing of the pendulum between two competing basic principles of insurance—rating everybody the same and rating each risk according to its propensity to cause loss. It was also a full pendulum swing between two competing principles for government’s role with respect to any regulated business—prescribing how the business is to be run and encouraging the market to work it out. In both the general government-business dimension and in the specific regulation-insurance dimension, such swings in public policy cannot be expected to go on forever in one direction. None of the ideals involved is valid at all times and to the total exclusion of its opposite. The postwar movement toward competition in insurance indeed did not go on forever. It ended in the late 1970s, when people saw that competition did not solve all their problems with insurance rates—particularly the problems of regressiveness in auto liability insurance rates and of premium inflation generally. Since then, while industry sentiment has continued to favor competition, government attitudes have swung somewhat away from competition, at least enough to make the enforcement of uniformity of pricing and underwriting once more a possibility. Government-enforced uniformity is offered with increasing frequency today as a remedy for various insurance ills, be they company insolvencies or rising premium rates or the desire for subsidization of one market segment by another. The pendulum of public policy has not moves as far against competition as it might, but unmistakably it has moved.

Publication Date

1997

Niche Insurance Companies

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