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  • Writer's pictureChris Burand

An Extremely Clear Path to Success




I was talking to my good friend Don Phin who has worked with, spoken to, and consulted with over 10,000 CEOs. He made a succinct statement that I’ve found to be true for people running insurance companies and especially people running insurance agencies/brokerages: CEOs are extremely motivated by revenue growth, sometimes to their peril. They tend to ignore other critical factors because their emotional brain simply does not connect.

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A singularly or even heavily focused, sales driven insurance industry CEO is not good for the health of their organization. Many have gotten away with this, as have so many CEOs in many industries, for the last 20 years because of the Federal Reserve’s easy money policy. There’s simply too much money chasing too few real assets.


However, in the insurance industry, like banking (which has had a similarly easy life only broken by unbelievable stupidity and greed, but bailed out nonetheless), revenue growth can ONLY happen if surplus increases commensurately. In other words, if an insurance company wants to grow 10% and assuming it does not have legitimate excess surplus, it must simultaneously grow surplus. Period. This is not a negotiable or arguable point.


Of course, many insurance companies ignore this by actually arguing they are special, by arguing they have excess surplus “to grow into,” by arguing their growth model does not require as much surplus as everyone else’s models, etc., etc. Rarely in my 35 years of experience are these arguments backed up by facts. Instead, these are examples of what the famous German writer Hans Fallada wrote of his fatalist key characters, “In other words, the Quangels were like most people: they believe what they hoped.” These CEOs simply believe 100% in what they hope the outcome to be rather than figuring out how to actually make the desired outcome come true. It’s a silly way to run a company, and I believe that point is less an opinion than an obvious conclusion.


But this explains why so many carriers are growing quickly in 2024 even though their companies lost record amounts of surplus in 2022, with only a slight to no recovery in 2023. They seem to think they never lost the surplus. The industry as a whole lost a record amount of surplus in 2022, not due to claims but due to bad investments. And that record does not include the full reduction of mark-to-market securities (which would have been another 7%-10% of those investments for a large number of carriers) or the mark down on their commercial real estate. The losses were even more significant than reported in the real world, not the accounting world.


When a carrier grows by 10%, they must grow their surplus by 10%, all else being equal and not adjusting for the quality of surplus. When a carrier loses 15% of their surplus (some have lost more than 30%), but grows by 15%, their leverage skyrockets and it’s the leverage that gets out of whack when carriers increase revenues without increasing surplus commensurately. For example, a carrier begins with $100 million in surplus and $200 million in premium. They lose $15 million in surplus but grow their revenues $30 million. Their leverage increased from 1:2 to 1:2.7. That is a significant increase. If the carrier was already short of surplus, the situation gets serious which is why some leverage ratios now are in the 5 to 6 range.


This is also one of two leading causes of insolvency and impairment over the last 30 years according to A.M. Best. And thank goodness for A.M. Best keeping some of these CEO’s on the right side of the line!


The right CEO is a person who understands the need to balance revenue growth and balance sheet strength. Balance sheets are critical to the health of carriers (and agencies), and surplus is a balance sheet item.


If a carrier finds themselves short of surplus, they have three basic options if they want to grow. They can raise capital by selling equity (or borrowing money, which is a poor substitute for an insurance company), they can sell parts of the company, or they can increase profits and then LEAVE the money in the company. I get a kick, and frustrated, by people who develop complex models covered with MBA language, when in reality, the solutions are this simple. You only have these three options if the carrier wants to grow. A fourth option for a carrier just wanting to survive is to eliminate as many accounts as possible, aka, shrink premiums to the amount of surplus available.


In my most recent groundbreaking research, I have identified the six key elements required for carriers to grow profitably while growing surplus commensurately. This research has been thoroughly tested, while nearly 100% of all the existing metrics and benchmarks I’ve reviewed for carriers and agencies have never been tested as to whether they correlate to success, stock prices, values, growth, profits, or anything whatsoever!


My research identifies the correlations. But to use my research, a CEO needs to see past revenue growth, or they need a team member to balance their thought process. My research shows a near perfect correlation that focusing on revenue growth without that balance is a recipe for failure. On the other side, the carriers that are achieving the balance are putting other carriers out of business. The losers do not see the results yet because the winners are taking little bites from 250 carriers. They’re leaving the losers with an ever-growing percentage of adverse selection, but it is happening so slowly the losers are not seeing it. My in-depth research shows that over the last five years, the trend is undeniable.


The first step then is learning if you are on the winning side or losing side – and not believing blindly in what you hope to be the case. I have that data.


The second step is building a strategy based on the six fundamental elements that I’ve identified the winners possess in greater abundance than the losers. These are tangible measures, nothing wishy-washy.


The third step is building a real-world strategy with tactics to which executives will be held accountable. This is what winners do.


On which side of history do you want to be? The winners are a small but elite group. Contact me today if you’d like to join them.

 

NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.


None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.

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