Hartford, Conn. — The influence of technology and other external forces is redefining the nonstandard auto insurance market, according to a study by Conning Research & Consulting Inc.

"As predictive modeling has become more prevalent in auto insurance underwriting, the standard auto market has expanded to include and price risks that would once have been thought of as nonstandard," says Alan Dobbins, analyst at Hartford, Conn.-based Conning Research & Consulting. "As a result, the new nonstandard market is undergoing a dramatic shift in risk profile."

Predictive modeling and newly emerging claims technologies should continue to provide leading insurers a significant advantage in the nonstandard segment, according to the study. Smaller and/or unfocused companies may try to replicate these capabilities, but then continue to struggle as more sophisticated models emerge.

The Conning Research study, "The Nonstandard Auto Insurance Market: Evolutionary Challenges," highlighted other trends that will shape the nonstandard segment over the next several years:

• The influence of advanced analytics will cause the nonstandard market to contract and develop a higher risk profile, as predictive modeling allows standard market competitors to extract the more profitable portions of this high-risk segment.

• Accompanying this shift in risk profile, Conning also expects to see a change in the demographic composition of the nonstandard segment, with an increasing importance of the recent immigrant population.

• Direct response organizations are anticipated to increase their presence in this market, due both to their low-cost model (appealing to a price-sensitive segment) and to their ability to offer a "take-all-comers" message to the market (leveraging the high fixed-cost nature of their acquisition platform).

• The ongoing interest of private equity firms highlights the importance of an active and involved management team in this volatile line.

• Significant consolidation is a likely near-term outcome for this segment.

The industry has experienced this consolidation in the form of acquisitions. In 2007, Los Angeles-based Farmers Insurance Group of Cos. acquired Bristol West Holdings Inc., a non-standard auto insurer based in Davie, Fla. In February 2008, Republic Companies Inc. acquired Phoenix-based Four Corners Insurance Services Inc. Four Corners specializes in non-standard auto insurance coverages produced through independent insurance agents in Arizona, Oklahoma, Oregon, Utah and Washington, D.C. Philo Smith Capital Corp. served as Four Corners' broker in this transaction.

"Four Corners will provide a profitable platform for writing non-standard auto business with its advanced policy management system, help us to provide bilingual services to the growing Hispanic market and expand our geographic reach," says Parker Rush, president and CEO of Dallas-based Republic. "In addition, we plan to have Four Corners provide its services to develop non-standard auto business products for us in Louisiana, Mississippi and Arkansas over the next several months."

Sources: Conning Research & Consulting Inc. and INN archives

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