Getting tough in a soft market

We waited many years for a hard insurance market to get here, and it appears that to a large extent it is already over. While rates and premiums still appear to be at adequate levels, most lines of business appear to have peaked and are now headed downward.

Absent a crystal ball, no one knows how long the current downward cycle will last or how steep the decline will be. But if it is anywhere near as long as the last soft market, we need to prepare for a long and sometimes painful journey.

With that in mind, we need to change the way we do business. Failure to do so is a risky proposition, as evidenced by the number of businesses who didn’t make it through the last soft market.

Quite simply, you can’t afford to do “business as usual” if you want to survive in an increasingly competitive environment. The following areas should be reviewed and analyzed with an eye toward improving your efficiency.

Pick your partners wisely

Whether you are a reinsurer, carrier, managing general agency or retail agent or broker, you should always be “tiering” your clients. There are numerous methodologies and philosophies for deciding who your best clients are, and there is significant benefit in going through the process.

Not all of your clients are created equal. Much has been written about the 80-20 rule, where 80 percent of your business comes from 20 percent of your clients. If that is true in your case — and it probably is — what do you do with that information? Now that you are going to have to work harder for your revenue you need to carefully dedicate your resources, and your biggest clients are certainly the best place to start.

Find new partners

Even if you have great relations with your best clients, the softening market is undoubtedly going to present new opportunities for them. You can’t just rely on all of your top clients from last year to continue to be your top clients next year. Things change.

Think back to the clients you did business with at the beginning of the last soft market. Some of them weren’t as loyal as you thought and many of them are probably no longer in business. A dynamic organization in any field must always be on the lookout for new revenue sources. Look for clients that are aggressive and looking to grow.

Use technology effectively

The industry has made strides in the past few years to improve efficiency through the use of technology. Prior to the hardening of the market in 2001 many carriers had elaborate initiatives to use technology to improve their processes. It may be a good time to re-visit these opportunities.

At a minimum, you should be looking for ways to improve your quoting systems and your data analysis tools. A key to profitability in any business in the future will be the ability to effectively manage data.

Emphasize your strong points

You should have a system in place to honestly discuss your divisions’ strengths and weakness. You will also need to evaluate where your best opportunities lie, as well as where to find the potential landmines.

It is imperative that you know your strengths and continue to develop them.

In the excellent book, “First, Break All the Rules” the authors tell us that “weakness fixing might prevent failure, but strength building leads to excellence. Focus on strength, and manage around weaknesses.” This is excellent advice for a complex and competitive industry like insurance.

Clarify your targets

This pertains to both the classes of business that you seek to write as well as the distribution method in which you choose to sell your products. We were several years into the last soft market before most companies developed the mantra: “You can’t be all things to all people”.

As the industry has become more specialized, the expertise of companies, divisions and individuals has followed suit. One of the biggest buzzwords of the 1990s was “focus.”

Get ready to start hearing that word again on a regular basis. A market that is increasing in difficult situations requires attention to detail and a focus on specific avenues in that business.

Know when to say ‘no’

The changing market necessitates a larger degree of discipline than in recent years. The obvious pressure of a softer market is the declination of rates, and it is imperative that in any market you consistently push for adequate pricing. But too often the pricing of accounts become the sole source of attention.

Meanwhile, it is often the subtle changes in coverage terms that put a company into peril. Rather than worrying about losing a few points in rate, pay extra attention to sub-limits and coverage terms. The seemingly insignificant issues like increasing of flood limits can be the same issues that cost millions of dollars when a non-flood zone sees a river overflow.

Improve your customer service

With the increasing use of automation, the transaction of business has become much simpler. At the same time, many organizations struggle with customer service.

The most important first step with any problem is recognition of the issue. And it is hard to recognize that you have a problem if you aren’t asking the questions.

Honestly and objectively, ask questions about how you treat your customers. Set up a strict and measurable set of guidelines and stick to them.

Increase head count

No, this is not a crazy thought. In the face of decreasing prices and a likelihood of slimmer margins, the recommendation to hire additional staff might appear illogical. It may seem hard to justify pushing for additional people, but it makes sense.

Implementing the suggestions in this column do not come without a price and doing all of them with the same number of people may be impractical. Remember the words of a wealthy and wise man who said, “No insurance company ever went out of business for having a high expense ratio.”

Conclusion

One of the keys to underwriting and selling in any market condition is to use your time wisely and efficiently. The need for efficiency is increased in a soft market because decreasing prices mean you need to write more accounts to generate the same revenue.

As professionals, we like to think that there is a consistency to our approach and hopefully we do largely follow the same fundamentals regardless of market conditions. However, the difference in market conditions requires a different outlook and a different approach.

We are facing numerous challenges as we enter a soft part of the insurance cycle. The power of the market is a huge and undeniable force. It’s almost entirely out of our control, yet to a large extent it dictates the profitability of our industry. While we can’t control the market, we can and must control the way we react to it.

Michael P. Egan is the director of property programs at NSM Insurance Group in Conshohocken, Penn. He can be reached at mpegan@nsminc.com.

Topics Pricing Trends Market