Focus, specialization and expertise in a specific area are keys to success. A November 2005 Best's Review article described how highly focused niche carriers outperform their larger and more diverse competitors in workers' compensation, fidelity and surety, medical malpractice and commercial auto in underwriting profitability.

As further evidence, according to Best's 2008 Aggregates and Averages, E&S carriers have grown 189 percent during the last 7 years while the entire industry has grown only 35 percent.These specialty carriers, known for their places in the industry, are more profitable and growing five times faster than the industry in general. In contrast, consider those generalist carriers that have not projected a clear message of their specialties. As of December 2007, eight national, multiline carriers are available to independent agents–Travelers, Liberty Mutual, Farmers, Hartford, Chubb, CNA, Safeco and Allianz, including Fireman's Fund. Their total net written premiums growth during the last 7 years is only 29 percent after adjusting for acquisitions, versus the industry's 35 percent growth.Although Adam Smith described the advantages of specialization in his "A Wealth of Nations," published in 1776, many companies are still trying to prove him wrong. These companies often try to be all things to all agents and have too little focus. The results are evident in their poor growth. Greater success follows when companies find a good specialty and exploit it.Diversification has its advantages, and can be a successful strategy when used for a specific and focused purpose. However, many carriers–and many companies in other industries–have strayed down the wrong road by using diversification as a cover for laziness or poor results. When companies are too lazy or inept to thoroughly analyze their core businesses, they buy a variety of businesses that operate in a variety of areas. This is a defensive move, and in business, playing only defense usually results in a slow demise, often covered up by even more acquisitions. If you see a company doing acquisitions, investigate if its core business is keeping pace with its industry.Our economic environment for the past 8 to 10 years has made it easy for companies seeking to diversify through acquisitions. Equity and debt have been extraordinarily inexpensive due to the excessively free money supply strategy structured by the U.S. government and poor regulation of the securitized debt and derivative markets.Additionally, with easy credit, firms could leverage small profit margins into big profit margins by borrowing a lot of cheap money. Because everyone was doing it, the effect was exponential–with more profits, the firms' customers could buy more, too. But easy credit is gone, so now what?The big diversified generalist insurance companies mostly were growing slower and underperforming in underwriting. Almost every carrier in the news recently has been a large, diversified insurance company. They may be too large for the government to allow failure, but this does not mean they can now provide competitive advantages.My money is on carriers that understand their core businesses and really know how to underwrite. If your agency does not represent any of these carriers, now is the time to work on acquiring an appointment before the hard market develops.Diversification has its advantages and can be a successful strategy when used for a specific purpose. For agencies, diversification is a good strategy when the area in which the agency focuses has very significant weaknesses. For example:o Cyclical business: If an agency insures a cyclical business where most of the renewals are in one month (seasonal businesses are a good example, such as crop/hail programs whose policies have common expiration dates), the agency should identify another specialty to take up the excess capacity in the other months, smooth out cash flow and offset risk. Specialization in an agency can take many forms. It may be a target market, a size of account, a type of sale (professional versus peddler), or a certain type of client. This is a complimentary strategy when the second specialty does not take away focus, energy, money or time from the first specialty.o Declining industry or limited market: Because the No. 1 niche business for independent insurance agencies is construction, many agents today are facing a declining industry. If an agency finds that it has significant exposure to a declining industry or a limited market, there are two good options: Identify another industry that is underserved by other agents, or continue to ride the industry, but with a focused plan that milks the industry to the end while pushing aside all the other agents. When done well, riding an industry to the end can generate huge profit margins.Diversification without a specific purpose is a losing strategy. Diversification is too often used as a cover for laziness and poor results. When used with a specific purpose, it can be a perfect complement to a winning strategy of specialization, and specialization is key to success.