Strategy and cultural changes are more urgent than ever. For the past four years, the P&C insurance industry has been in the hardest market in the last 50 years. Hard markets are 100% driven by a lack of surplus, not a profit issue. This is evidenced by how profitable carriers have been over the last four years. In 2023, they made record profits--but they didn't before record surplus.
Strategy and cultural changes are more urgent than ever. For the past four years, the P&C insurance industry has been in the hardest market in the last 50 years. Hard markets are 100% driven by a lack of surplus, not a profit issue. This is evidenced by how profitable carriers have been over the last four years. In 2023, they made record profits--but they didn't before record surplus.
Hard markets always drive far more change than soft markets. Soft markets are coasting times led largely by carrier management teams and agencies selling price. The hard market is when the tide goes out and reveals who has been swimming naked, i.e., they don’t have the surplus to support all the premiums they added during the soft market and initial phase of the hard market.
With my predictive metrics, the situation is straightforward to identify carrier by carrier. But I find a lot of carrier executive teams do not understand this fundamental point and are therefore wasting time, money, and effort on misdirected strategies. Insurance company surplus strategies at the most fundamental level should possess the following points:
Do we have real surplus or ethereal surplus? Many carriers’ surplus is far stronger on paper than in reality, and some management teams are fooling themselves on this point. They’ve consumed far too much corporate Kool-Aid. Typically, this Kool-Aid is not as poisonous as what Jim Jones served, but I can think of a couple of examples which are likely to result in permanent injury.
An assessment must be made using real surplus as to whether adequate surplus exists to responsibly achieve the carrier’s growth goals.
An assessment must be made as to how surplus will be grown to sustain growth goals.
I find few carrier executive teams proactively address these three points. This is one reason why carriers possessing “excess” surplus who initiate fast growth initiatives often stumble and sometimes fail about five years later. It’s as though they are trust fund kids who spend all their capital not realizing that they should have only been spending the income produced by that capital. They spend their “excess” surplus and plan to continue growing quickly not realizing that once the “excess” is used up, they had better slow growth and/or figure out how to raise capital.
What is worse is they often do not seem to understand how the tail works on loss ratios so that when growth slows by plan or by force, i.e., a rating company requires them to slow because their surplus is insufficient to support continued fast growth, that the loss ratios will catch up. That eats into their surplus further.
These are fundamentals of insurance company strategic planning. All the fancy consultant speak, technology fears and drivers, and socio-economic issues are secondary if a company cannot afford growth.
So much of today’s culture and easy credit has enabled many companies to shift focus from the basics of corporate mathematical finance. The situation has been exacerbated by the allowed financial engineering prevalent throughout the industry, but especially with certain insurance companies and private equity firms. Sooner or later though, if someone does not have the money to pay their bills or support growth, they fail. Running companies is easier if managers remember and manage based on the fundamental realities of math. Revenues should exceed expenses to the extent that profits can be added to surplus at a rate that supports the company’s growth goals.
Life has been easy for insurance companies even if they haven’t realized it or if their management team messed things up so severely that life is hard, it is hard because of their own mistakes.
Now life is about to become difficult on a much broader scale because of two factors. The first is there are three, maybe four, carriers who manage to the fundamentals and their results are so powerful, they have been slowly putting other carriers out of business. The pace has been spread evenly enough that most individual carriers haven’t fully noticed the impact, but an exponential impact is about to happen. The carriers swimming naked are about to go out of business unless they can pivot back to the fundamentals fast. The impact here is mostly personal lines, but commercial will be pressured too.
The second impact is that the alternative commercial market, especially if surplus lines is included, has become far, far better at insuring higher quality accounts on a mass level. The new types of markets are stripping traditional retail carriers and while relatively still nascent, the growth is such that regular admitted commercial carriers are not, overall, growing their premiums beyond industry inflation, if that. All the real commercial growth is in these other markets and pretty soon, those markets will reduce the lumbering carriers’ growth to zero or negative. This is unless they can pivot their strategy.
To pivot their strategy, the leader needs to rise above all the bureaucracy and people who have created little unimportant fiefdoms. The pivot is simple. If the employees, especially management, are not capable of generating adequate profit with which to build surplus capable of sustaining the desired growth rate and/or cannot then generate adequate sales, find better management.
Insurance company management needs are quite similar to national leadership needs. In times of peace, countries usually need leaders that stay the course. But a leader that can only stay the course when a crisis occurs is usually a failure. The long soft market, likely the longest soft market ever preceding the hardest market in at least 50 years, did not prepare leadership for this hard market, and most are definitely not ready for the level of competition about to intensify.
Rather than focusing then on a slow transition of culture, to pivot, boards of directors likely need to complete a hard, detailed review of insurance companies’ C-suites. New leadership is likely required in some cases. This is obvious given their results. And that new leader needs to be a person who can force changes, however painful, in the culture quickly. The fundamentals of insurance company finance provide the foundation for building the new culture and strategy. Always come back to those fundamentals and ask whether the strategy categorically achieves those points. If not, the strategy is too weak.
The carriers who are about to win understand these fundamentals well and manage to them. Most carrier cultures are too soft to adapt, and they will be eliminated. Our data and analytics are the best in the industry. If you have the leadership to pivot, I have the analytics.
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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