What’s Driving Nonstandard Auto – Technology, Consolidation, Population Changes, Fuel Specialty, Opportunity
By: Andrea Wells, Insurance Journal, March 2018
The nonstandard auto market is characterized by substandard operating performance. Since 2007, carriers writing nonstandard auto policies have reported deteriorating operating performance and many are struggling to maintain market share.
But that hasn’t stopped interest in this large – and extremely volatile – segment of the property/casualty industry.
Carriers, managing general agencies and retail agencies with the tools to succeed in this commoditized sector of the insurance industry are gearing up for growth in the years ahead.
Nonstandard auto insurance has been traditionally defined as a market for drivers who have certain risk factors that make it difficult or impossible for them to obtain insurance in a standard or preferred market. These insureds include new or young drivers, drivers with credit problems, drivers with multiple losses or moving violations, people who want only minimum limits coverage and those with an unusual driver’s license status.
“For us it’s the customer that wants minimum state required limits of liability coverage,” says Andy Jordan, senior vice president, corporate marketing and business development for GAINSCO Inc., a property/casualty insurance holding company for GAINSCO Auto Insurance Co. in Dallas. “It doesn’t sound like nonstandard but for us, it starts there.”
For GAINSCO, that might include risky drivers or just those that fall outside the risk profile of what most insurers prefer. “It’s not always extremely risky drivers,” Jordan says.
No one knows the exact size of the nonstandard auto market but industry estimates calculate the market at around 30 percent to 40 percent of the total private passenger auto insurance industry. According to Conning Research & Consulting’s “Personal Lines Consumer Markets Annual” report published in late 2014 that figure could be as much as $33 billion to $40 billion in annual premium.
“It’s a large part of the overall auto market and it’s growing along with the total U.S. population,” says Jordan. GAINSCO specializes in selling minimum limits nonstandard personal auto insurance exclusively through independent agents in eight states.
Nonstandard auto is a segment with identifiable needs and a segment that is ideal for specialty insurers and agencies. The Conning Research & Consulting report says that a declining presence by some of the largest personal auto insurers in this market is opening the door for a number of specialists to expand.
One specialist who’s riding high in the nonstandard auto world is Confie Seguros, a California-based national insurance distribution company primarily focused on Hispanic and C-segment consumers, or those that fall within a household income of $30,000 to $60,000 annually.
Confie Seguros began to build its portfolio of regional personal lines brokerages in the nonstandard auto world in 2008. Today, the firm boasts annual revenues of more than $360 million with 650 retail locations in 17 states. In the past couple of years, Confie Seguros has broadened its business to include some preferred and standard auto business as well as small commercial, according to Mordy Rothberg, president of Confie Seguros. But overall the organization still gets 75 percent of its revenues from the nonstandard auto world.
Rothberg says that while his organization is expanding into other markets, its commitment to the nonstandard auto client is not waning. In fact, he sees Confie Seguros more than doubling in size in the next five years with a substantial part of that growth coming from nonstandard auto business.
“We think the nonstandard auto market is actually growing faster than the standard and preferred marketplace,” Rothberg says.
Rothberg is not alone in that assessment.
GAINSCO’s Jordan says the population that falls under the nonstandard auto umbrella is considerable. “It’s a large market, especially in Texas and in other states with growing populations,” he says.
In many of the states in which GAINSCO operates there’s also a rising population of Hispanic consumers. “In the Sunbelt states – Florida, Texas and Arizona – there’s a greater percentage of the Hispanic auto insurance market that is inherently nonstandard,” Jordan says. “There are also lots of folks who only want minimum limits coverage and people with an unusual driver’s license status such as a Mexican driver’s license or an international driver’s license that would fall into the nonstandard market. That can be a huge chunk of the population in some of these states.”
The nonstandard auto industry is highly concentrated geographically, as three states – Texas, California and Florida – accounted for 59 percent of all direct premiums written in 2013, according to an A.M. Best Co. report, “Under Pressure: U.S. Private Passenger Nonstandard Auto Market,” published November 2014. The remaining premiums are spread more evenly throughout the United States, with no other state accounting for more than 5 percent of nonstandard auto premium.
The A.M. Best report noted that no single carrier in this segment writes more than 10 percent of written premiums and that 91 percent of the companies examined in the report hold market shares of less than 2 percent.
Big Changes
As the population nonstandard providers serve is changing, so is how the providers are going about serving this market.
Specialty carriers and managing general agencies (MGAs) in the nonstandard auto space have made big changes in technology, underwriting, claims, marketing and in how they serve insureds in this segment. Those that haven’t kept pace may be the ones suffering, says Kenneth Tappen, senior financial analyst for A.M. Best Co., and co-author of the report.
According to the A.M. Best report: “Small, regional and single-state writers of private passenger nonstandard auto policies have seen their operating performance deteriorate over the past decade and are struggling to maintain market share in this segment of the insurance industry. Factors such as increased competition from large standard auto writers, economic conditions, limited scale, rising loss severity trends and fraud all have played a role in this downturn, which will not likely subside in the near future.”
Tappen says that large standard carriers have grown in the nonstandard segment, as their technological capabilities and scale make it easier for them to target the most profitable policies, leaving the riskier policies to the smaller nonstandard auto writers.
“If you want to conduct business in this segment you want to get the best possible risk,” says Joe Burtone, assistant vice president at A.M. Best & Co. While all nonstandard auto insureds come with challenges – new or young drivers, prior violations or accidents, poor credit history, drivers who have lapses in coverage, or just those drivers looking for minimum limits coverage – there are some risks that are much better than others, he adds.
“You want to stay toward the top of the barrel and get the best nonstandard risk possible,” Burtone says. “In general, the smaller companies don’t have the technology to compete with some of the bigger players in the market.” As a result those carriers are getting the “bottom of the barrel” risks, he says.
Technology and scale are an advantage not only for carriers in this segment but also for MGAs and retail agents.
The nonstandard auto business is transaction-heavy. Just 10 years ago, the industry handled nonstandard auto apps by hand, mail and check, according to Andy Swindall, CEO of Personable General Insurance Agency Inc., a general agency and specialist program underwriting manager in San Diego, Calif. “Those days are over. Today, there is no preprinted app. There’s hardly any business that comes in with a check anymore; it’s all electronic,” Swindall says.
Nonstandard auto customers typically buy an auto policy that ends up lapsing sometime within the first three months. “And then they rewrite with us within 30 days,” Swindall says.
Swindall’s customers tend to be facing economic challenges. “As a lower income earner they are making choices, ‘Do I put food on the table or pay for insurance every month?’ So that fragmentation or transit customer creates a lot of transactions with new business, rewrites, cancellations … you have to be very automated,” Swindall says.
Personable Insurance has invested in technology to improve processes and vendor relationships in order to remain competitive, including in the area of data analytics, Swindall says.
Being big comes with advantages for retail agencies as well when specializing in nonstandard auto.
“We touch our customer a lot more than the standard agents do with different endorsements, monthly bills, coming into pay, whatever, both on the phone as well as in person and that’s a big factor,” says Confie Seguros’ Rothberg. In nonstandard auto, the commission made on each sale is small and agents must also service the customer more often. “The only way to be successful in this business is having the scale, having the resources and investing in technology to really understand your business because things have changed a lot over the years.”
A.M. Best’s Bartone says the most successful nonstandard auto insurers also have implemented substantial changes in the past five years in technology and underwriting.
“It’s been a real whirlwind change in the auto line of business,” Bartone says. “The underwriting tools over the years have greatly improved. Rating algorithms have improved, and rate tiering is more prominent now than it’s ever been and for the most part the larger carriers have the resources and ability to utilize these tools and invest in them.” Those carriers more adequately price nonstandard business and “cherry-pick” or take only the risks that meet their underwriting guidelines. “That’s why you’ll see a lot of the larger carriers playing in this segment a little more.”
Years ago the nonstandard auto market was much less scientific about risk selection. According to Tappen, nowadays smaller writers of nonstandard auto have to start investing in technology and doing the same things as their larger counterparts or they will get pushed to the side.
Ripe for Consolidation
Over the past five years, poor operating results among some private passenger nonstandard auto insurers has led to consolidation, according to the A.M. Best report.
At least 10 nonstandard auto writers have either merged with or been acquired by other companies since 2009. A.M. Best reports that much of the M&A activity has been and will continue to be driven by larger writers looking to acquire smaller nonstandard auto writers with brand name recognition in localized areas and multiple distribution channels.
Private-equity firms also appear to have an eye on the nonstandard auto market.
Palladium Equity Partners announced in October 2014 the purchase of Pronto General Agency Ltd., a Texas-based nonstandard auto insurance managing general agency that focuses on the Hispanic market. HGGC, a middle market private equity firm in Palo Alto, Calif., bought a majority interest in Pearl Holding Group, an MGA focused on the nonstandard auto insurance market in Florida. And Personable Holdings Inc., which operates Swindall’s Personable Insurance platform, was brought under the umbrella of Confie Seguros in the fall of 2014 by its private equity investor, ABRY Partners based in Boston, Mass.
Confie Seguros’ Rothberg agrees and says the nonstandard auto market, in particular the nonstandard auto agency world, is ripe for consolidation.
“It is still a very fragmented marketplace,” says Rothberg, who has seen studies showing there are just under 25,000 nonstandard agents around the country.
Rothberg says that Confie Seguros will be a player in the M&A frenzy, bringing more of the “mom-and-pop” nonstandard auto agencies together. Confie Seguros has acquired more than 80 agencies since 2008 and Rothberg plans to acquire another 40 agencies in 2015 alone.
“We think that [acquisition growth] is sustainable over the next 20 years,” Rothberg says. “We are very bullish about acquisitions but we also are growing and plan on growing organically as well.”
Rocky Golem, managing director of StoneRidge Advisors LLC, an investment banking firm that specializes in the insurance industry, says that for carriers, MGAs and retail agencies, growth through acquisition makes sense in nonstandard auto.
“The easiest way to grow in nonstandard auto is to acquire established companies and for nonstandard I think that works because it’s a regionalized business,” Golem says. “There are a lot of examples of companies that have tried to grow organically in different states and have fallen on their face in a big way.”
The smarter way in the nonstandard world is to buy someone in that region that knows it well and knows the pitfalls, according to Golem. “It’s a smarter way to grow than appointing new agents and opening new offices because in nonstandard that can be a long way to profitability.”
Rothberg says that’s where Confie Seguros’ acquisition eye will target – the regional, local mom-and-pop agencies.
“Our competitor is not the big national players. It is not the Googles or the Overstocks of the world. Our real competitor is the ‘mom-and-pop’ shop that doesn’t have the resources it needs to compete in this market,” he says.
That’s why he believes the industry, and Confie Seguros, will see more consolidation in the future.
