Establishing a Program Market: Sizing the Universe CJ Lotter, MBA, Director, Engagement Management | Sep 05, 2019

Insurance Program Data Research

Editor’s Note: This is the third of several posts in which CJ Lotter, a 15-year MGA insurance industry veteran, shares lessons learned in the form of guidance to MGAs on the steps required to build a successful new program.

In our last post we tackled the first key ingredient required for program creation: distress. In a perfect world, insurers would spot distress, respond with a product, and sell it to huge success. This is not a perfect world. It takes time and diligence to carve out a new program. In this post, the third of our series, we’ll explain how to collect and analyze the data that will help you avoid the typical pitfalls and create a successful and profitable program.

Carving Out a Profitable Program

If a program should target a distressed or underserved class, how do you find one?  You could conduct market research to identify an underserved industry and hire the underwriting expertise to go after it. But a better approach would be to start with the expertise you already have in house. Underwriters with experience in a specific risk class are your best source of new program ideas.

For example, let’s say you have been writing general commercial auto and transportation business for a very long time. Your underwriters have gained experience over the years on the nuances of this market. Your book analysis shows that you write a high number of tow truck operators quite successfully. Additionally, one of your underwriters is intimately familiar with tow truck businesses and can tell a good risk from a bad one.

With some quick research you find there are a limited number of carriers in this market, with limited coverages. You also know, from our last post, that tow truck operations check the box for a distressed class. You now believe you have enough of an underwriting advantage to offer a specialized program for this market, but you need to validate the opportunity with good research.

Gathering Data

Good data is the backbone of a good program, and no expense should be spared to find the most accurate version of the truth. The more data collected in the early stages, the more likely you are to have a successful program or avoid a bad one. In our example, you want as much data on tow truck operators as possible. That means raw numbers and reports on the industry.

Work with companies like Dun and Bradstreet to source the market data you need. Drill down at least four digits on SIC codes to find a target class as specific as possible. Filter and sort your findings by the attributes that matter most to your company. For example, if you are targeting large tow truck companies in New York, sort by number of employees, revenue, and location.

Preparing the Data

Your initial data should provide an accurate sizing of the market for your potential program. Now you can pursue some qualitative and quantitative research to further evaluate the opportunity. Here are three to consider:

  1. Map the Data. Quadrant analysis is one of the most effective ways to visually analyze a diverse set of data. Map the companies from your target list onto a two-by-two grid to reveal patterns that will help narrow your focus. In our example, you may start with a grid that measures company revenue on one axis and claims on the other. You may also want to place the companies on a US map to visualize where your target market is most concentrated.
  2. Form a Focus Group. From your list of target tow truck companies, build a focus group to validate the program opportunity. Call on 20 or so companies and ask them to discuss their needs and relevant details about their current insurance coverage. Supplement your focus groups with surveys to your full list. Keep survey questions to a minimum to maximize response rate, focusing on the most critical information such as policy size.
  3. Narrow Your Target. Whittle your data down to a specific target niche. Say there are 10,000 potential customers in the tow truck market. Your research shows the average commercial auto policy is $10,000. If your goal is $1M in commercial auto in the first year, you will need to write 100 policies. That’s 1% of your target universe. Is that feasible? If your sold to submitted ratio is 1:3, you will need to engage with 300 businesses. Do you have a marketing program that will generate that kind of volume?

Long Term Planning

Once you determine your initial opportunity, forecast the first three to five years. Make sure your chosen market is large enough to sustain rapid growth in the early years. The rule of thumb is to double your premiums in the first three years and drive to $10M in premium as soon as possible. Just one limits loss can sink your program if you don’t have enough critical mass.

Tying it All Together

Thorough market research on the minute details is critical to evaluating a new program’s viability. Gut feelings are nice, but numbers give you real proof. Invest in research and analysis and you will greatly improve your chances of a successful program.

CJ Lotter joins Instec as the Director of Engagement Management. He adds deep insurance program expertise as Instec continues to grow its program market share. Most recently, he spent nine years as Chief Research and Business Development Officer at the US programs division at Willis Towers Watson. There, he established a process for efficiently launching programs, and in eight years created nine new Managing General Agent (MGA) programs resulting in double-digit premium growth.