This article originally appeared in Independent Agent magazine.
Nearly 4% of all small businesses in the U.S. belong to franchises which distribute their goods and services in more than 300 business categories, according to the International Franchise Association.
AZfranchises.com estimates that from fast-food restaurants to auto dealers, hotels and more, the franchise industry accounts for approximately 50% of all retail sales in the country. That means for every dollar a consumer spends in the U.S., 50 cents goes to a franchise.
Franchises are subject to a variety of regulatory challenges: Since California became the first state to regulate franchise sales in 1970, 19 other states have passed “relationship laws” focused on franchisee rights—and 17 now have comprehensive franchise regulation, according to Franchise Direct. Franchises also face regulation from the U.S. Federal Trade Commission’s Franchise Rule, not to mention a number of legal cases with heavy implications.
It’s not the simplest professional liability niche to sell and service, but your agency would be wise to consider playing in this space. Here’s what you need to know before diving in.
James Schibuk, vice president at Arch Insurance Group in New York, says the franchise industry is an appealing one for the insurance industry “because the franchise business model ensures consistency in process and product. Consistency creates predictability and identifiable trends in claims, which allows insurers to more accurately price the insurance so that those with the best risk profiles can obtain the best pricing.”
“If you like one McDonald’s, you’re going to like them all,” agrees Peter R. Taffae, managing director of FranchisePerils—an insurance solution dedicated exclusively to the franchise industry. “Insurance is underwriting and picking what you like or dislike, but if you’re an underwriter and you like restaurants or fast-food restaurants, you’re going to like all of them. It’s a natural fit.”
The franchise industry has been growing since the 2008 recession, when many public companies downsized by firing middle-management employees. “These people were in their 40s or 50s, and they didn’t have a job for the first time in their careers,” Taffae points out. “They couldn’t get back into the corporate world because that had shrunk. So many of them turned to franchising because it was a way for them to own their own business, but not necessarily start from scratch.”
In other words, these are the professional, ambitious clients your agency wants. Consider Franchise Direct’s claim that one in seven franchise businesses is owned and operated by a veteran of the U.S. military, and 43% are co-owned by men and women. “Franchising is very entrepreneurial,” Taffae says. “It’s a wonderful way for people to own their own business with a proven business model.”
Now, franchising is “woven into our economy,” Taffae says. Sean Jordan, assistant research analyst at the International Risk Management Institute, views franchising in a similar way to the on-demand economy. As both business models are implemented more frequently, opportunities to provide innovative insurance products will arise: “It’s kind of the new frontier. And any time you have something like that, I think it’s a great opportunity for agents.”
Although Jeffrey Wolf, partner at law firm Quarles & Brady, notes that many insurers have been “in and out” of the franchise industry for years, Schibuk says “there is significant growth opportunity within the franchise industry for insurers because the industry is growing rapidly—and many franchisors do not currently purchase professional liability coverage.”
What’s In It for You?
Intimidated by the prospect of insuring McDonald’s or Dunkin’ Donuts? Consider that about 90% of franchisors have 50 or fewer employees, and the majority have fewer than 100 franchisees, according to Taffae—which means the average franchisor is a small to midsize business that fits squarely in your commercial wheelhouse.
“So many small and midsize businesses are part of the franchise industry,” Schibuk agrees. “Additionally, the connection to a larger organization presents an excellent referral opportunity. If an agent can show they can do one widget store, that makes a good case for them to do 10-20 more through referrals.”
But first, you need to know what you’re getting into. Franchising is not only a sophisticated risk, but also a highly specialized industry—which means it’s more important than ever to “do extensive research on the industry so you know what some of the hot-button issues are, such as vicarious liability and joint employment, and how they impact insurance,” Schibuk recommends.
Beware inadequate professional liability policies—there are many. “If an agent can identify and offer solutions for those inadequacies, they can become a trusted adviser to that franchisor,” Schibuk says. “We often find that professional liability policies have the most opportunity for improvement and are the least understood, making them an excellent point of entry for an agent trying to win all of a client’s business.”
“The competition is not great. A lot of these franchisors, they need a trusted adviser. They need somebody who can help them, because they’re entrepreneurs—they think they’re bulletproof, they don’t have time and they don’t know about insurance,” Taffae agrees. “If an independent agent makes an investment to learn about this and help these franchisors, they’ll probably earn the client for life.”
And that could end up being a very fruitful relationship, Taffae notes. “That’s the other thing that’s really nice about this—you write a franchisor today with 10 franchisees, in five years, it could be 150 franchisees,” he says. “These companies grow.”
What types of coverage and underwriting considerations come into play in the franchise space? Keep an eye on IAmagazine.com and upcoming editions of the Markets Pulse e-newsletter to find out.