Many insurance industry professionals are living in a dream. Their fantasy is that the soft market is ending, but nothing could be further from the truth. As long as our economy stays weak, the soft market will continue.
A good portion of insurance industry capacity followed the real estate and construction markets. Now that both these markets have declined dramatically, carriers and brokers are looking at other industries for business development. Many companies and brokers are chasing what are perceived to be recession-proof industries. Yet there are only so many good options out there.
Simultaneously, many businesses with public exposures are seeing a marked increase in the frequency of claims. Those who don’t have health insurance often submit claims against a business to see if they can get some payment for a purported incident. For instance, Professional Program Insurance Brokerage paid for a blepherplasty (eye lift) about a year ago and a root canal recently when consumers “fainted” at our clients’ places of business. These types of claims will continue to increase as long as the economy is weak and people are out of work or underemployed.
Given an increasing frequency of claims, which affects carriers’ bottom line, shouldn’t prices be hardening?
This does not seem to be the case. In fact, it appears that now is an excellent time to market insurance to clients with bad claims records. Lately we have seen carriers fight for business even on risks with huge loss ratios. PPIB recently lost a client to another company, although that client reported two losses in 90 days. The other company under-priced our renewal rate by 30 percent. Four days before policy expired, the insured submitted another lawsuit. Although clients who have two claims usually end up filing more claims, carriers don’t seem to care in today’s market. In fact, these loss-driven clients command a bit more premium than normal, good clean businesses, so that seems to be attractive in our business-hungry industry.
Another concern is the pricing of business. PPIB had a client recently move his business to another carrier because the new broker quoted a premium about 20 percent less than what we could. When we called the carrier to ask if they were really writing this business for that premium range, the carrier said absolutely not. The broker who quoted the risk only gave a price, not an outline of what was covered. The broker essentially knew nothing about the client’s business, because if he did, he would have known he couldn’t sell the policy for under $1,000. The broker may face a huge errors’ and omissions mess if the client submits a claim, because the price really was too good to be true. Nevertheless, clients have come to expect agents and brokers will fall over backward to get business — because brokers and carriers alike are hungry for premium dollars in today’s economy.
In far too many other cases, the price the client is charged is what the carrier is selling. Companies who set up programs and then under-price clients to get the business are going to be in trouble if the theory of increased claims frequency holds true. New carriers coming into popular industries can only make headway by under-pricing the coverage, leaving all the other players scrambling to get market share. You might think this will ultimately harden our market, but I am skeptical.
Two examples of crazy pricing just occurred. In the first case, PPIB was presented with a salon type of risk that had almost $1 million in 15 paid claims. When we asked the broker what the target premium was, she said $70,000. We were shocked. By all rights, the premium should have been well over $500,000, but who knows in this marketplace.
The other example was an attorney with a $1.5 million claim against him asking for a premium of $70,000. That might fly in some instances, although not with any carrier with whom we work.
The bottom line, however, is that there is way too much capacity right now and too much focus on marketing to specific industries. As long as everyone chases the same categories of clients, the market simply won’t harden. So I’m considering other fantasies at this time that might happen before the next millennium.
Preston is president of Professional Program Insurance Brokerage (PPIB), a national program manager headquartered in Novato, Calif., that caters to the permanent cosmetic, tattoo, tanning, beauty, medispa and laser center industries.