Carrier Financial Status and Statements
Updated: Aug 25, 2020
I study insurance carrier financials in detail all the time and have even built my own database. I consult with agents, brokers, networks, and carriers relative to their numbers and what those numbers mean to each party. Obviously, these numbers have different uses depending on whether the user is a carrier or a distributor, but what is awesome about math is that the resulting story is not subjective.
I study insurance carrier financials in detail all the time and have even built my own database. I consult with agents, brokers, networks, and carriers relative to their numbers and what those numbers mean to each party. Obviously, these numbers have different uses depending on whether the user is a carrier or a distributor, but what is awesome about math is that the resulting story is not subjective. A revenue figure of 100 and expenses of 110 year after year tell a clear story of a carrier that is inept and likely to fail. The only subjective part is when it will fail and the details of how it will fail (sell, insolvency, etc.). On the other hand, a carrier with revenue of 100 and expenses of 85 year after year will likely grow quickly and provide stability and profits for its agents and shareholders/policyholders (if a mutual). The only subjective part of their story is how much profit and how fast they will grow. Two and two always equals four and 4-5 always equals -1.
I got started doing this a long time ago, kind of on a lark. I wanted to calculate each carrier's true profit margin and see if I could match the results they reported to agents. Originally it was really just a puzzle, something kind of fun to do. I built a formula and then gathered the carriers' financial filings. I then ran the calculations and my number was always approximately ten percentage points higher than the profit those same carriers reported to their agents.
I called my friends at insurance companies and asked them if my formula was correct. Over and over they advised me that my formula was correct. I then asked if the numbers I used were correct. They advised me that my numbers were correct. I then asked if my result was correct and they advised me my result was wrong. I asked how it could be that if my formula was correct and my numbers were correct, my result could be wrong? No answer other than it was wrong.
For several years I asked over and over what I was doing wrong. I asked good friends so when they said they did not know why my calculations showed the carrier for which they worked making about ten extra points of profit, I trusted they were telling me what they felt was the truth. But I was still left with a ten-point gap.
One night I was consulting for a carrier. We'd had a long, tough day trying to solve a very difficult and emotionally laden problem. I decided to take advantage of their tired nature and ask them about my math. These were C-suite executives. They chuckled and advised that my math was off by .1% - .2%, not 10 full percentage points. They were even kind enough to explain my .1%-.2% error.
Ever since, I have continued to witness the same phenomenon. Few carrier employees actually know their companies' true profit margins, much less their peer carriers' true profit margins. I have explained all the way up to CEO's their own company's profit math. This is not to say these are dumb people. Instead, I have come to believe that early in their careers the industry brainwashes people to not recognize mathematical realities. Two parts to this brainwashing exist.
The first part is simple to describe and tough to address. From the beginning, considerable wishful thinking is imposed to believe that all carriers have the same expenses. When carriers had more fat, this error carried penalties, but the penalties were survivable. Carriers today realize they have to manage their expenses well if they want to remain in business. The differences in expense ratios between carriers can be correlated to success and is not as simple as who pays commissions and who is direct. There is nothing simple about managing expenses as tightly as they need to be managed today. For example, one carrier I know pays high commissions but still achieves a quite reasonable expense ratio and some carriers that do not pay much in commissions have unsustainable expense ratios.
The second part is how emotional carrier employees become when their results are not at the top or when their actual profit margins are exposed (I put these two aspects together because in my world, exposure and the realization of not being at the top usually occur simultaneously). For example, with some disguising of the actual carrier, I consulted for a carrier relative to their results versus their competitors' results. The goal in these consulting assignments is to help carriers understand how to improve and where they are weak relative to their competitors, and then build a strategy to improve. In this case, as in most, many competitor carriers had better profit margins which gave them opportunities my client did not immediately possess. Simply put, when one has more profit, one can spend more to grow, to innovate, to decrease rates, and so forth. My client was in a box. But math is math. It is objective, so it is best to accept that reality. Nevertheless, one executive accused me of acting unfavorably toward his company and favoring his competitors more because their results were better!
His emotions completely over rode the obvious and rather simple math. He could not stand to see that his company was not the best, and moreover was at a clear disadvantage. As is usual, he did not want to realize or accept that his competitors had better profit margins. He wanted to believe profits were more or less equal and success was simply dependent on execution. He was so emotional he almost left the meeting, and he is not alone when confronted with this kind of data. I have seen it over and over and over again.
Companies today normally have no choice but to cut expenses. Cutting expenses skillfully requires a deep understanding of one's financials relative to one’s most comparative competitors. Otherwise, the cuts are likely going to be the wrong cuts in magnitude and line.
Agents need to know which carriers need to cut expenses the most because they are likely going to pay a higher price when representing carriers taking deeper cuts. It is only logical for agents to feel more pain with carriers taking deep cuts versus representing carriers that already have their act together.
It is at this point when carrier employees can become really emotional because they do not want their agents to know their troubles. They do not even want their marketing representatives and RVPS to know the truth. Plausible denial is their go to strategy.
In the current situation the differences are stark. For example, in one commercial line over the last five years, the largest carrier (specific to that line) has consistently beat the number three carrier by approximately 35 full percentage points on a combined basis. Thirty-five points is huge. The number three carrier has little choice but to raise rates by around 30%-40% and/or non-renew a huge portion of their book. When they raise rates that much, the remaining decent business is going to leave. Agents will feel that pain. The remaining business is going to be pure adverse selection probably requiring even more rate. If they non-renew, agents will feel the pain there too. In other words, any reasonable corrective action on the part of the #3 carrier is going to cause agents pain. Agents would therefore be wise to begin moving business early, proactively rather than reactively. And, of course, this is a key reason the carrier gets upset when anyone learns the truth about their profits.
Right or wrong, the debate about whether humans need and can handle true knowledge, particularly of the mathematical kind, has been debated heatedly over the last 2,000 years, although usually between religious entities and scientists. Shining a light on knowledge is usually a better solution than hiding the data. Companies can spend the same energy fixing their situations instead of hiding them. My clients, at distributors and carriers that lead with knowledge seem to be taking advantage of those that do not quite successfully.
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.