The past 10 years has been incredibly profitable for insurance companies. Net income for the industry – that is net, not pretax – has equaled $448 billion; that’s almost half a trillion dollars. It is not chump change.
Let that sink in for a moment.
The profit is generated by impressive underwriting profits and investment income. The industry has become much more profitable from an underwriting perspective. Net investment income equals approximately $518 billion through 2013 (2014 numbers are not final at the time of writing). Net underwriting income equals -$24.732 billion (all numbers are per A.M. Best). That looks worse than it is because it includes the huge losses a handful of companies specializing in financial guaranty insurance and related products incurred during the credit crisis. Overall, the industry has been very, very profitable.
Yet insurance companies are sending disparate, convoluted messages to agents regarding how profitable they are, what their future is, and the importance of agents to the company’s future growth. In many cases, my impression is not that carrier executives, underwriters, and marketing representatives are being disingenuous. They simply do not know. The world is changing and they don’t know their own future. Many though don’t even understand their own present. They do not understand their own profitability.
Property reinsurance is so plentiful that earlier this year some key reinsurers simply withdrew from parts of the market because they didn’t have enough buyers. I hear insurance company people always telling the world how woeful their investment income is but the results above prove otherwise. I think they’ve lost track of reality relative to investment income. Some newer companies clearly have no clue that tail losses always catch up. They seem to think their fast growth and low loss ratios exemplify their elevated skills rather than reading history and learning that if a company is growing quickly, its loss ratios should be lower than slower growing peers. Some do not even understand their own NAIC filings.
These items constitute basic elements of industry profitability. To explain how out of touch some companies are, I have literally had to show them their own filings and ask them what part of their filing is wrong. Some company people and even entire cadres within a particular company are more knowledgeable of the industry and their own company’s results so I do not want any reader to think that all company people are out of touch with reality. Enough are, though, to make a difference.
This article is not likely going to cause any insurance company CEO to better understand their own financials. My goal with this article is to give other parties knowledge so that in their conversations – with their superiors if they work for a company or with their company contacts for agents – they can better understand why a communication disconnect is occurring between the ivory tower and the reality of the field. On the off chance that a key insurance company executive recognizes the opportunity here or a really intelligent agent understands the opportunity this presents, call me to exploit it.
Otherwise, the key point to understand is that insurance companies do not want their agents, the public, or even their own employees to understand how the company makes money. Insurance companies have never made money on underwriting except on the odd occasion. Rates are not set to make money on an underwriting basis. The entire business model is not designed to make money on underwriting.
This is why Warren Buffett years ago wrote something to the effect that insurance companies are nothing more than poorly organized mutual funds.
Focusing on underwriting profit serves the company well for many reasons including the fact that no one in the field can do anything about investments. It also serves as a distraction. As underwriting software improves and usage increases, the field becomes less important other than as a pure sales function. Field underwriting value is decreasing daily. The focus then on underwriting profit is less of a conversation for agents and company field people because they have less and less control. This is one of the reasons carrier messages have become convoluted and confusing because without an ability to articulate the issue, agents and company field people understand they have less and less control over underwriting results but companies continue to pressure them on improving results.
The focus though has not moved entirely to the only other reality and that is more sales. Companies are not comfortable telling agents they just need to sell and the company’s underwriting technology will take care of the underwriting. Some companies don’t yet have the full technology, some companies don’t have full faith in their technology, and many companies just can’t bring themselves to tell their field that they just need to sell. They just can’t utter those words. Messages are muddied as a result.
We have an industry in transition where key people either don’t understand the transition, don’t understand their own results, and/or can’t send a clear message even if they did because it just wouldn’t seem right. The entities that get their eyeballs above the mud have a distinct first mover advantage, whether they are agents or companies.
Transactional and Relationship Sales
The key going forward to increase sales and take advantage of insurance company profitability is to determine the kind of sales that will be made, not the underwriting. The kind of sales can be divided between transactional and relationship. Transactional is transitory, temporary, here today and gone tomorrow. Neither party has any predilection toward staying together any longer than it’s an advantage to do so.
Relationship sales are professional sales whereby the selling entity customizes the sale to fit the client’s exact needs and the client in turn, will recognize the professionalism and remain with the company/agent for years. This is true whether it is personal lines or commercial. The nature and definition of professional will vary considerably from one demographic to another and it will not just be coverage centric. It may be technology focused, coverage focused, or experience focused, to name just three possibilities.
The two kinds of sales though will be oil and water. There will be no mixing – possibly some migration, but no mixing. Agents and carriers seem to have immense difficulty understanding this point. The opportunity for those that get it is just that much greater.
The industry has been blessed with arguably too much profit, regardless of whether adequate knowledge and education on this point exists or not. That profitability is driving the industry to points unknown.
Change always creates opportunities for those with the most insight as to the drivers. The opportunity is yours. Are you up to opening your mind and the challenges these opportunities create?