Insurance Carrier Futures
I recently read an article in A.M. Best regarding a carrier I thought had long since gone the way of other poorly run carriers, and I was right, but also wrong. I have an interesting history with them.
Circa 2002, give or take a couple of years, I analyzed that particular carrier and predicted (relative to their better agents only), that the carrier had no future and that those agents should find an alternative soon rather than waiting for all of the carrier's agents to begin moving business in mass. It seemed likely that the carrier would begin nonrenewing accounts, jacking up rates, and making life unpleasant for agents and customers. I note that my advice only applied to the better agents because the agents only looking to make sales, not seeing the forest for the trees, would continue to use them regardless.
About a year later I was giving a presentation to a mixed crowd of carrier people and agency owners. I used that carrier as an example without giving any names or any particulars relative to location, niches, etc. When I finished, about four carrier people found me and asked if the carrier used as the example was their company. I looked at their name tags and sure enough, it was! They then asked if they should look for other jobs.
That carrier went through serious issues that resulted in the need to eliminate a lot of business causing agents to move accounts and often their entire books. Moving books under those circumstances is expensive and can wipe out many years of profits (specific to that book) in the worse circumstances. I quit paying attention to that carrier because it shrank so significantly it became immaterial in my world.
I have been studying insurance carriers in depth for about 25 years. To be clear, I am not trying to supplant A.M. Best or provide any type of A.M. Best alternative. They do a great job, and the analysis of carriers that I perform for agencies has a totally different purpose than does A.M. Best. They provide an extremely valuable public service designed to inform consumers of carriers that may go insolvent and they have leverage to cause carriers to manage themselves more safely. A.M. Best really benefits this industry. I do not provide any kind of public service, rating service, or any indication of the likelihood of insolvency.
My goal is simply to help my agency clients in a myriad of ways by educating them about their carriers' futures which includes identifying carriers that possess really bright futures. In reading the article, I decided to review some of my early work relative to the carriers I considered weak 20 years ago. Several of them no longer effectively exist or have no ratings. Others have been bought out and a few still exist.
In reviewing these old analyses, the carriers I thought were weak and still exist, are often still weak. It is amazing how long weak insurance companies can survive. As you might expect, the industry has a plethora of Zombie insurance companies given the 1,000 or so P&C carriers in existence. Another characteristic of these carriers is that several have reinsurance programs where the reinsurer is an entity related to the carrier and often is the weaker entity. The reinsurer is almost always located offshore. Please note that I am working within a limited universe so I am sharing personal findings and not a statistical study.
Just like the subject carrier in the article, I find it amazing that poorly, sometimes horribly, run insurance companies can survive. I do not know if their survival is a result of their unconventional reinsurance, owners who have invested so much money without an adequate return that it causes them to hold on and hold on and perhaps even invest more money, or simply a factor that given how insurance companies are run, with enough mass their demise simply takes forever and a day.
Another thought in reviewing one carrier in particular is whether some insurance carriers are simply fronts. Are they really loss leaders enabling other related companies to make profits? I am fairly sure it is the case in some instances.
One can see this is the case given how some recently established P&C carriers have been structured. The founders are going to make quite a bit of money regardless of whether the carrier fails quickly or, better for the founders, has a slow but long demise.
The question for distributors is this: Which kind of carrier best aids you in achieving your goals? For some distributors, the financial and operational health of a carrier simply does not matter. If they have the opportunity to write an account, usually, in my experience, with inadequate coverage, they simply want as many carriers as possible available to place the account at the lowest possible price. Their business model is to place as much premium as they possibly can without regard to the quality of coverages or carriers. Their operational and sales structure is about volume and they are not dependent on their carriers' assistance to help them grow. The carriers are just numbers. I believe Joseph Stalin had a famous quote regarding how "quantity has its own quality" (relative to sending masses of ill-equipped soldiers to attack well defended positions).
Retention will be lower, but that loss is built into their models. Their E&O claims may be higher, but that is also built into their models. Their profit sharing is likely lower, and this too is built into their models. These are simply price shops, and some are rather large.
Other distributors focus on building relationships with carriers and clients. For these distributors, working with carriers that provide high quality products, high quality claims service, good underwriters, and a healthy combination of rate versus underwriting requirements adds horsepower to the distributors' growth and profitability. Working with carriers that are gradually deteriorating is not going to help these agents and brokers achieve success more quickly. At best, these carriers are temporary holding pens for accounts that are important to the agency but unappetizing to the better carriers.
For agencies whose management has a clear understanding of what kind of distributor they are, aligning carriers, operations, and sales with their strategy will achieve the most success.
The problem faced by a large proportion, probably a majority, of distributors is that they try to do both. Sometimes this is because they employ people who have diametrically opposite values, sometimes it is simply because they try to be all things to all people, and sometimes it is because management has no clue what they are truly doing other than avoiding conflict. When an agency is a small town agency with seven employees, being many things to the community is feasible and maybe necessary. If both conditions, small town and small agency, are not met, then agencies need to decide what kind of agency they want to become. Hire people with values that match your decision. Contract with carriers that will aid your growth and profitability. Avoid those carriers that are being used and abused by distributors who possess a different business model and avoid those carriers that are gliding slowly downward, sometimes very slowly their inevitable demise seems pleasant.
Avoid those carriers that are loss leaders for related entities. The management of those carriers will always focus on the bigger picture and provide resources accordingly. The carrier that you would do business with will receive the minimum resources necessary to provide the loss leader benefits.
An interesting finding for me in reviewing those old reports was that the carriers I identified as having the brightest futures have had the best results and helped their agents achieve extra success. I like the idea of working less hard to achieve more success and those carriers definitely helped their agencies do that.
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.