Most insurance professionals detest a soft market due to the increase in competition, unreasonably low pricing and increased market vulnerability. Some, however, may appreciate a softening precisely because of the change in underwriting and pricing philosophies.
No soft market (or hard one) lasts forever. I’m no economist or fortune teller but I’m confident the hard market will arrive. Just like the “real estate bubble” had to end, carriers cannot sustain both underwriting and investment losses.
What does this mean to retail agents and brokers?
Agencies with a majority of their book placed with preferred carriers may spend additional, unanticipated time trying to re-market those accounts because of the crises being faced by these carriers.
Carriers know that if they continue to entertain risks as they have during the soft market, they could wind up insolvent.
This commentary is not intended to scare; just to remind agents to prepare for the return of the hard market. When the market does turn, the burden once again will be on agents to adapt to the new market– to which some may not be accustomed or even ever experienced.
Underwriting complacency and pricing latitude will disappear in the next hard market, as in all hard markets.
Additionally, clients accustomed to the current market conditions are going to complain, asking why their renewal offers are so much higher, or why the incumbent carrier is not renewing the policy despite a clean claims history. Being able to satisfactorily answer these questions and successfully retain clients will soon be the mission of every agent.
Don’t Be Left Behind
How do agents avoid being left behind when the shift happens? I’m an underwriter and this is not about soliciting business. It’s about the reality of the coming marketplace and the need to be prepared. I offer a few suggestions:
- 1. Just as a grocery store operator regularly checks, agents should do the same to make sure current markets are not significantly changing guidelines or increasing rates. If they are, this could mean they are planning to cut a few agencies as soon as they feel that their executives can no longer spend $1.2 million to renovate their offices (I won’t say who). Agents who have other preferred carriers should approach them before the market changes. They shouldn’t wait until the last minute.
- 2. Agencies should gather individual loss runs and agency loss data as quickly as possible. This is important because if/when markets become insolvent, it is very difficult, if not impossible, to obtain loss runs or analytical reports. Agents shouldn’t assume that the insurance departments, guarantee associations or any other governmental agencies can or will assist in securing this data. They will most likely disregard such requests since they work for consumers, not the industry.
- 3. Agents should renew and/or rebuild their relationships with their excess and surplus lines markets. Surplus lines brokers, wholesalers or MGAs make markets available to retail agents who lack the necessary “preferred” markets or need a market for risks normally declined by preferred carriers.
- 4. Agents should not be afraid to ask questions or reach out to past or current contacts. Many insurance practitioners rely on knowledge gained from on-the-job experience, self-education or acquaintances rather than company training programs. Unlike standard carrier underwriters, many excess and surplus lines underwriters have knowledge and direct experience at both the carrier and retail levels. MGA underwriters cannot only advise on current market conditions, but they can also help agents by obtaining rates and coverages not normally available.
- 5. Agencies must automate. More people buy insurance via the Internet. Agencies need to communicate with customers more through technology.
- 6. Participate and invest in industry seminars and conventions. Agents who are well informed understand the deeper aspects of the industry and the market.
The industry will be facing great challenges in the near future. I believe preparation is the best option.
Chang is an underwriter with RIC Insurance General Agency Inc, a managing general agent in California. Chang has been in insurance for 18 years on both retail and wholesale side. At RIC, he specializes in program business including restaurants and garage. http://www.ric-ins.com/. This commentary originally appeared in Insurance Journal magazine, April 6, 2009.