Insurance agency owners often face a crucial decision: should they focus exclusively on personal lines, or expand into the profitable world of commercial lines?
While personal lines might seem like the easier path, incorporating commercial insurance can significantly enhance the growth potential of independent agencies. This article explores the compelling reasons why expanding into commercial lines can be a game-changer for independent insurance agencies.
From diversifying revenue streams to building stronger client relationships, the shift to commercial insurance offers a pathway to sustainable growth and long-term success in an increasingly competitive market.
Expanding into Commercial Lines Insurance
When starting a new agency, nobody ever proclaimed, "I aspire to be successful by only exploring half of the business opportunities presented to me."
Yet, this is exactly the route many novice agency owners embark on when they choose to quote only personal lines business.
Personal lines insurance is indeed more recognizable and arguably simpler to sell. However, it's also easier to lose, and it's a numbers game: you need to sell a significant number of personal insurance policies to earn the same commission you could accrue by selling commercial insurance to a single large account.
If you've scrutinized the alternatives and consciously decided to excel in the personal insurance market in your area, that's commendable. However, if you're sticking with personal lines because it's convenient, we urge you to contemplate expanding to commercial lines.
With appropriate assistance, the commercial lines industry isn't challenging. It could potentially be the catalyst for accelerating your agency's expansion and safeguarding your business from market volatility.
Adding commercial lines to their offerings is often the pathway many agents and agencies take to elevate their performance from satisfactory to exceptional. Facts:
- According to a study by U.S. News, the yearly average cost for a car insurance policy is $1,547.
- Forbes Advisor's analysis reveals that the average annual cost of homeowners insurance for a policy with $350,000 of dwelling insurance is $1,678.
- The average premium for commercial insurance is significantly over $5,000!
The Price of Inaction is High
You might be doing well by sticking to personal lines.
However, without venturing into commercial lines, you won't know what opportunities you're missing out on.
If you're among the many agents who only deal in personal lines, you might be exerting more effort than necessary, only to earn less than what you're worth.
The Business of Commercial Lines
Incorporating commercial lines into your agency can enhance your business model in four crucial ways:
1. Broaden your portfolio.
Having a small portfolio restricts your choices.
Numerous independent agents acknowledge this - indeed, it's frequently the reason they transitioned from the captive to the independent model initially.
Being restricted to selling products from a single carrier often means you may not have the appropriate products for a specific client, resulting in lost business.
The same concept is applicable to personal versus commercial coverage.
If you solely provide personal insurance products, you're not an ideal fit for certain clients, leading to lost business. The broader the range of products you offer, the more flexible and attractive your agency becomes - both presently and when you decide to sell.
"I believe the issue most novice agents encounter, and the reason they shy away from commercial, is their reluctance to try it. In my opinion, not only does it offer a substantial return from a commission perspective, but it also makes it simpler to establish a long-term portfolio with commercial insurance."
- Andy Patton, proprietor of Patton Financial & Insurance Group
2. Protection from market volatility.
The general consensus advises against keeping all your assets in one place.
If your sales are solely focused on personal lines, you're essentially putting all your eggs in one basket, which can be risky as market shifts could affect your business in ways beyond your control. For instance:
- Picture yourself running a thriving personal car insurance enterprise. Suddenly, the personal car insurance market tightens, and you start losing your customers to any firm offering cheaper rates online.
- A significant portion of your efforts is dedicated to collaborating with real estate agents and lenders to provide insurance for first-time homeowners. However, escalating mortgage expenses result in fewer potential homeowners to target.
- Your business is situated in and provides insurance for one of the numerous high-risk areas in your state, but the majority of your carriers abandon the market, leaving you in a scramble.
Even though you can't control these market changes, you can protect yourself from their effects by diversifying your revenue sources. If one stream dries up, you can redirect your attention to another.
"I appreciate the intricacy of commercial policies. You get to understand your commercial clients deeply: you converse with them, you gain insights about their enterprise, you interact with their accountants. You discover their requirements; you strive to fulfill those needs. Moreover, the premiums are significantly higher, so you don't need to issue as many commercial policies as personal ones to achieve the same premium growth within your agency."
- Rachel McRee, McRee Agency
3. Boost your income potential.
Commercial insurance policies typically demand higher premiums than personal insurance policies. Companies have more assets to safeguard and more liability risks. They also require various kinds of insurance.
A personal customer may need home, auto, and life insurance. Nonetheless, a corporate client might require property, liability, workers compensation, cyber liability, e&o, and commercial vehicle insurance. Furthermore, business proprietors might request you to provide their personal insurance quotes.
Given that businesses are concentrated on expansion, their coverage needs are likely to escalate annually in a manner that you wouldn't anticipate from individual insurance clients.
A client with homeowners insurance might purchase a larger home or a holiday property over several years. During the same period, a property manager in real estate might acquire numerous apartment buildings and shopping centers. When clients conduct business for growth, their insurance premiums increase accordingly, and your insurance company grows as well.
Commercial lines insurance may cater to a smaller client base, but the potential for higher earnings is significant. The ability to offer both commercial and personal policies clearly enhances your earning capacity, making the inclusion of commercial lines in your portfolio a strategic move.
"I initially focused on personal lines, but my drive is to assist clients, and I believed I could do more by branching out into commercial lines."
- Francisco Castro, Principal Agent and Managing Partner at JCC Insurance Group
4. Cultivate enduring, loyal relationships.
Regrettably, many personal lines insurance clients lack loyalty. Stephen Crewdson, a senior director at J.D. Power, observes, "Auto insurance customers are beginning to treat insurance shopping like they do when buying gas."
This is corroborated by market data.
Between 2021 and 2023, there was a surge in rate shopping due to policyholders grappling with the rising costs of auto insurance, groceries, and consumer goods, all fueled by inflation.
LexisNexis Risk Solutions discovered that in 2023, 41% of insured households sought out auto insurance quotes at least once. There was a significant three percentage point drop in retention rates from the first quarter of 2022 to the last quarter of 2023, as consumers left their insurance providers in pursuit of cheaper rates.
It's evident that auto insurance policyholders are seeking the best bargain and are willing to switch providers to secure it.
Moreover, auto insurance is readily available online, simple to buy independently, and there's little variation in product offerings, with most providers offering comparable coverage plans. Unless the policyholder has a strong affinity and trust toward their agent, there's no persuasive reason to remain loyal.
Conversely, commercial policyholders might be less inclined to switch providers as obtaining commercial insurance is more complex and not as straightforward for them to manage independently or via the internet.
Even when businesses wish to explore alternatives with various insurers, they typically do this in partnership with their insurance broker.
As previously mentioned, commercial clients require a range of products. When brokers can offer a variety of products, they enhance customer loyalty and retention.
This correlation is also reciprocal: McKinsey & Company reports that insurance companies with more profound customer relationships usually have a higher average product density per customer.
Benefits of Commercial Lines for Agency Growth
Expanding into commercial lines represents a strategic opportunity for insurance agencies to elevate their business model and secure a more robust future.
By diversifying their portfolio, safeguarding against market fluctuations, increasing earning potential, and fostering long-term client relationships, agents can transform their agencies from good to great.
While the transition may seem daunting, the potential rewards far outweigh the initial challenges. As the insurance landscape continues to evolve, those who embrace the commercial sector position themselves not just as policy providers but as trusted advisors to businesses in their community.
In an industry where adaptability is key, expanding into commercial lines isn't just an option—it's a strategic imperative for agencies aiming to thrive in the long run.