How to Lose When You Think You are Winning
As I was drafting this article, there must have been something in my subconscious related to a love song. Hence my thought that agency owners and producers are awfully prone to falling in love with carriers that are incompetent but employ nice people.
In fact, I recently read two surveys that show the top carriers as rated by agencies. Seventy-five percent of the carriers listed as "great" have limited futures because their financial performance is so poor. I am not suggesting they will go insolvent, but I am suggesting they do not have the wherewithal to compete and are slowly but surely going out of business.
Many agency owners and producers who fall in love with a failing carrier will ask, "What difference does it make if the carrier is a loser, if they're nice and have the right price at this moment?" These agencies are showing their hands. They are selling price and if the carrier is nice and has the price (I am currently working on song lyrics for this one), then it is clear the agency is really just selling price. They do not have a value proposition. Additionally, the carrier may not have the financial wherewithal to compete because their price is too low which is preventing them from making enough profit to build organic surplus. Without building surplus, they cannot grow!
Currently, a carrier that is under immense pressure to completely rework the company before they are downgraded further has this exact problem. Their rates are most likely 20 to 40 percentage points too low. The agents using this carrier think they are great salespeople, but in reality, anyone could sell rates this low. Now the agents cannot find alternative markets that offer rates anywhere close to what they paid last year. Fortunately, the agents can blame the hard market and inflation.
This situation is an immediate problem. An example of a longer-term issue is that the carrier is slowly losing opportunity. People do not measure opportunity cost very well. It is difficult to wrap one's head around what could have been, and a person can so easily dismiss such thoughts as hypothetical, especially if they do not take the time to think through the lens of reality. But the long-term losses are definitively not hypothetical.
Here is an example to illustrate the losses using real numbers:
Carrier A is failing and can only increase surplus by borrowing money and achieving one-off unrealized investment gains. They have not materially grown in the last seven years even though that time period occurred when carriers were consistently growing and earning strong underwriting profits (between 2015 and 2021, Carrier A's premium increased by -0.9%). Carrier A has lost billions in profits.
Carrier B generates organic surplus faster than their growth. Carrier B always makes a profit. Carrier B averages growth at double the industry average. In other words, they are taking market share away from other carriers. It is difficult to imagine what happens when market share is taken away, if the losers still grow marginally. So, what is the problem, right?
Scenario (other than starting at $100, the numbers are real and growth rates are based on the last seven years):
Carrier A Carrier B Industry
Initial Sales 100 100
Carrier Growth 0% 8%
Industry Growth 4%
Over seven years, this is what happens assuming there are only two carriers (there are actually around 1,000 P&C mother ship level companies and those growing more than about 4% are continually taking market share from those growing less than 4% so while not a zero-sum game, the ones growing more slowly than the market are losing, especially if they are simultaneously unprofitable):
Years 1 2 3 4 5 6 7 Market Share
Carrier A $100 $100.0 $100.0 $100.0 $100.0 $100.0 $100.0 36.8%
Carrier B $108 $108.0 $116.6 $126.0 $136.0 $146.9 $158.7 63.2%
Industry $208 $208.0 $216.6 $226.0 $236.0 $246.9 $258.7
(Note: Initially the growth rate is 4% for the entire market but Carrier B eventually gains so much market share while continuing to grow at 8%, that it increases the industry's total growth to 4.9% by the end of year seven.)
Seven years is too far out for most producers, but it is a good time period for planning purposes. Carrier A has lost twelve percentage points of market share which is the equivalent of losing $32 million in premiums assuming the total available premium is $263,000,000. Losing $32 million in revenue because a carrier is poorly run is an enormous loss, albeit one that is difficult to comprehend compared with the clarity of losing a large book of $32 million. The latter is an obvious subtraction while the former never shows anywhere. It is still a loss and a real loss, even if the carrier's CFO is telling everyone that they have grown by 10% over the last ten years.
How did Company B succeed? They have a combination of better rates, products, and services. Given that they have better rates/products/services, better accounts gravitate to them. What is left for Carrier A? Adverse selection. Adverse selection is a key reason Carrier A's combined ratios are a full and consistent twelve percentage points worse than Carrier B’s over the last TEN YEARS!
In all seriousness, how can anyone conclude that Carrier A has a bright future or even a good future?
At the agency level is it easier to write, and therefore grow more quickly by writing, with a carrier offering a combination of better rates/products/services or a carrier that is only getting adverse selection? If you answer the latter, then your agency is writing lousy business that no one else wants and your future will be limited too.
This is indeed the scenario playing out for many agencies and carriers. Therefore, when agencies are placing business with carriers that are hitting the surveys but do not have a business model, the agency owner really should be asking about the quality of the business the agency is trying to place. One of the surveys I reviewed had a collection of quite specific carriers that are indeed writing the business that few carriers want to write. In another, the collective annual growth rate of the carriers receiving the highest scores was about 1.5%. How great can those carriers be if they cannot even maintain industry pace?
At the agency level, if you write with the best carriers that have the rates/products/services to put wind in your sales, you can grow your agency 10%-20% faster than your current growth, significantly build your brand and make more money. Fact check: if a carrier has materially better loss ratios, then is it more or less likely your loss ratios will be better? If your loss ratios are likely to be better and your growth rate enhanced, then what is the probability that your profit sharing will be higher?
Quite a few carriers are led by executives promoting that they are winning when they are really losing. Do not drink their Kool-Aid. Focus on actually winning all the way through. Partnering with carriers that help you write the best business versus the business that you find available and searching for a market, is the ticket to success. If you want to accelerate your knowledge of carriers, contact me at firstname.lastname@example.org.
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.