I was speaking with a COO regarding carrier strategies. He is knowledgeable and one of those people who tries to do things the right way the first time. Our conversation ended with him commenting that too much slack still exists for carriers to get real about the need to improve their operations.
His comment bothered me and I started to protest. Any halfway knowledgeable carrier executive, board, investor, or regulator should see that substantial improvements are required now! The most successful carriers have already captured so much market share they are moving steadily toward putting their competitors out of business, one hundred sales at a time.
The most "in-your-face" evidence is that two carriers combined are consistently writing $10 billion in net new premiums annually. There are only thirteen carriers out of around 1,000 that even have $10 billion premium! These two carriers are writing more premium than all the other 987 or so carriers have written in their entire histories! In other words, each year these two carriers consume the equivalent of dozens of carriers just in their net new business.
What else does it take to turn on the light bulbs?
But he was right. Too much money is still being made and no one's job is in jeopardy. Real improvements by carriers will not be made until a serious catalytic event occurs. For example, about three years ago I advised certain clients that one of their carriers' business models had no future. The carrier could not afford to maintain such an expensive model and did absolutely nothing to improve until A.M. Best sent a warning shot across the bow. Then they cut commissions fast. Talk about getting a fire lit! Nonetheless, the problem and solution were obvious years ago.
What then to make of all the announcements regarding this or that innovation at carriers? It is interesting to read these press releases because behind the scenes many carriers' operations remain sloppy. Their operations make too many mistakes, possess too many inefficiencies, and too little internal data, or at least too little organized data. So much of Insurtech technology is focused on external data, not internal data. This is because the focus is on sales. Focusing on external data means no one is prompted to look at the internal processes and data that must be improved. Sweep it under the rug for as long as possible--preferably until the executives retire.
In fact, a larger reason why some carriers focus on the external is that they hope they will not have to deal with the internal. They can bypass the weaknesses that need to be fixed. This is one reason the MGA platform is growing so quickly. They want the MGA's to provide the technology, including processing technology, and the carriers will only provide the paper. It is kind of a third-party processing, outsourcing model.
Few carriers have this option. Most do not have the financial, legal, time, or bandwidth. These carriers in particular should be highly motivated to immediately move forward with foundational level processing improvements. A little time is left and much of what needs to be improved does not require investment in new technology. Technology used well depends heavily on whether people are following the standardized procedures and that there is someone to monitor whether the employees are following such procedures. Without these steps, technology cannot ever achieve its potential productivity improvements. New technology is not going to solve the problem (unless all users of such technology are eliminated).
Urgency is required at the leadership level. Most carriers will not find that urgency until they are threatened with a downgrade, hit a tipping point of losing too much business, or incur some other catalytic event. This reality creates enormous opportunities for carriers with better leaders.
To determine whether you are winning or losing, here are a few metrics to follow:
Use Direct Written Premium rather than Net Written Premium to measure your market share and compare growth rates. Virtually all carrier metrics for these points are based on NWP and NWP is a poor measure of these points. The reason is that too many carriers, especially commercial carriers that have interesting surplus sources, play games with their reinsurance. Maybe "play" is too strong a word because I am sure regulators would catch them if they were "playing" with their reinsurance. However, when a carrier increases their reinsurance by 50% one year and decreases it by 40% the next and then increases it substantially the following year, "playing" seems like an appropriate term to me.
When measuring expense ratios, carefully examine your competitors' use of reinsurance from year to year because when carriers' reinsurance programs change substantially from year-to-year, their expenses change dramatically too. Some will appear to have much lower expenses than they actually incur, but gain a timing advantage. I find many insurance company CFO's who buy straight-up reinsurance and are steady in their reinsurance programs have difficulty believing some carriers follow such volatile reinsurance strategies. That disbelief will cause others to overlook the impact on their competitors' performance metrics.
Many more considerations are required for an apples-to-apples comparison but these two are fundamental. In my work with carriers, I find a lack of important knowledge exists because executives have been taught that all carriers' numbers are equalized so that reviews show apples-to-apples results. That is not necessarily the case. An example might be a highly rated carrier whose surplus is in reinsurance recoverables. In fact, their reinsurance recoverables might exceed 100% of their remaining surplus and without those recoverables, that carrier's solvency would most likely be in doubt. Moreover, that carrier might be their own reinsurer. It is an interesting circle and not really comparable relative to any metrics of a carrier buying straight-up third-party reinsurance and whose reinsurance recoverables are near the industry average of 1% of surplus aid.
Few carrier executives are willing to push financial limits that far. Yet, in peer comparisons, carriers like this do not ever have asterisks next to their numbers. The wrong conclusions might be drawn, especially by executives trying to run their companies in a more traditional manner.
The solution for this latter group of carrier executives who have the emotional strength to create urgency is extremely simple and yet still complex. The simple part is to focus on the basics. Technology will not compensate for weak leadership or poor operational management. Quality operations support growth, however, faster growth on top of poor operations will cause an eventual collapse. Operations must be the foundation. The hard part is divorcing a carrier from historic approaches and cultures. This would include the use of better performance metrics. For example, measuring how much the carrier pays in profit sharing as a percentage of Net Written Premium is appalling and worse than useless because profit sharing is not a function of Net Written Premium. It is a function of Direct Written Premium and profitability. Good metrics are correlated with function. Carriers have measured profit sharing expenses as a percentage of Net Written Premium because it is easy, not because it is correct or even useful.
A new culture built by the best leaders will keep the parts of the old culture that are beneficial and eliminate all else. The goal must be to grow legitimately, without tricks, and in a manner in which operations will support growth faster than the industry norm. That is the only way to avoid being subsumed by carriers who are already achieving so much success. Instead of just focusing on the growth goal, focus on how operations must improve to support $X millions of additional premium too. This is the way in which most successful companies operate and this must be the point to which you lead your company.
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.