The nonstandard auto market is not for every carrier or agency. Since 2007, carriers writing nonstandard auto policies have reported deteriorating operating performance, and many have struggled to maintain market share.

But while some have been hurt by or lost interest in the market, others have invested in technology and building the scale needed to serve this volatile, transaction-heavy, service-oriented line of business.

The exact size of the nonstandard auto market is hard to pin down. Industry estimates calculate the market at 30-40 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 could mean $33-$40 billion in annual premium.

The nonstandard auto industry is highly concentrated geographically. Three states—Texas, California and Florida—accounted for 59 percent of all direct premiums written in 2013, according to an A.M. Best report, “Under Pressure: U.S. Private Passenger Nonstandard Auto Market,” published in November 2014. The remaining 40 percent or so of business is spread more evenly throughout the United States, with no other state having more than 5 percent of nonstandard auto premium.

According to the A.M. Best report, no carrier writes more than 10 percent of the market, and most companies have market shares of less than 2 percent.

Market Definition

A definition of this market can also be difficult to pin down. 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. The target insureds vary by insurer.

“For us, it’s the customer that wants minimum state required limits of liability coverage,” says Andy Jordan, senior vice president of corporate marketing and business development for GAINSCO Inc., an insurance holding company for GAINSCO Auto Insurance Co. in Dallas. “It doesn’t sound like nonstandard, but for us, it starts there.”

For GAINSCO, this market might include risky drivers or those that fall outside the risk profile of what most insurers prefer. “It’s not always extremely risky drivers,” says Jordan, whose company specializes in selling minimum limits nonstandard personal auto insurance exclusively through independent agents in eight states.

Confie Seguros

One specialist that has been riding high in the nonstandard auto world is Confie Seguros, a California-based group of regional agencies focused on Hispanic and C-segment consumers, or those with household income of $30,000 to $60,000 annually.

Confie Seguros began to build its portfolio 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 few years, Confie Seguros has broadened its business to include preferred and standard auto business as well as small commercial. But according to Mordy Rothberg, president of Confie Seguros, the organization still gets 75 percent of its revenues from nonstandard auto and expects this business to grow substantially in the next five years.

“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.

The Hispanic population is growing in several of the states in which GAINSCO operates. “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.”

Favoring Large

The nonstandard auto market favors larger carriers and agencies, according to experts.

Kenneth Tappen, senior financial analyst for A.M. Best Co., is co-author of a report that identifies some of the factors that have discouraged small, regional and single-state writers in this sector over the past decade while favoring larger players. “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,” the report says.

Their technological capabilities and scale make it easier for large standard carriers to target the most profitable policies, leaving the riskier policies to the smaller nonstandard auto writers, according to Tappen.

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.

“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. “You want to stay toward the top of the barrel and get the best nonstandard risk possible.”

Smaller companies typically don’t have the technology to compete with some of the bigger players in the market, and as a result they are getting the “bottom of the barrel” risks, Burtone says.

Burtone says the successful nonstandard auto insurers have overhauled their technology and underwriting over the past five years.

“It’s been a real whirlwind change in the auto line of business,” Burtone 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. For the most part the larger carriers have the resources and ability to utilize these tools and invest in them.”

These carriers with these tools can 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,” he says.

Years ago the nonstandard auto market was much less scientific about risk selection. According to Tappen, today 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.

Transaction-Heavy

Technology and scale are an advantage for MGAs and retail agents as well.

The nonstandard auto business is transaction-heavy. Ten years ago, the industry handled nonstandard auto apps by hand, mail and check. But that’s no longer feasible.

“Those days are over. Today, there is no pre-printed app. There’s hardly any business that comes in with a check anymore; it’s all electronic,” says Andy Swindall, CEO of Personable General Insurance Agency Inc., a general agency and specialist program underwriting manager in San Diego.

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.

Many of Swindall’s customers are 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.

He says Personable Insurance has invested in technology to improve processes and vendor relationships and to take advantage of data analytics.

Confie Seguros faces similar challenges.

“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.”

Ripe for Consolidation

Poor operating results among some private passenger nonstandard auto insurers have led to consolidation. According to A.M. Best, 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 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.
• 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 that 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.

Wells is editor-in-chief of Insurance Journal Magazine, which published the original, longer version of this article in its March 9, 2015 issue.