The Power of Choice

By Gerald F. Ladner | March 5, 2012

Peering across the market, it’s easy to see the telltale signs of a market in transition, the completion of one cycle and the beginning of another. This time around, dusting off the old underwriting “hard market” play book may be a very bad idea.

During the recent Independent Insurance Agents of Texas (IIAT) Joe Vincent Management Seminar, I listened to a range of agent observations on how different companies are grappling with a pressing need for rate nourishment. Some of these observations reflect a need to repair damaged balance sheets overnight at the expense of valued independent agency relationships. Fortunately there are those who understand any hardening of the market will likely be short in duration in comparison to previous market transitions. I suspect this will throw a monkey wrench in the plans of those intending to execute “bleeding edge” rate-taking strategies. Never mind the invitation for regulatory intervention.

We should always remind ourselves of the global nature of our business. While the industry remains very well capitalized, competition remains significant and pressures on the financials of reinsurance markets and domestic U.S. insurance companies are very real. Reinsurance pricing, whether treaty or facultative, tends to roll down hill. We should all take responsibility for educating consumers on the macroeconomic forces at work. Direct writer advertising that dominates the media is influencing how consumers think about our business. Basic economics is not a part of the message.

Last year’s weather-related losses in the U.S. and around globally eerily resemble the kind of volatility found in our recent banking crisis, exacerbated by the European debt crisis. This may be an imperfect metaphor, but what happens in Japan and New Zealand impacts the cost of insurance in Amarillo, Texas.

Regional carriers will play a more significant role in the new market cycle.

Last year, our industry experienced four of the 16 largest insurance losses ever recorded. The legacy of 2011 remains with us in the form of increasing reinsurance costs. U.S. storms accounted for $ 21.3 billion, Thailand floods $10 billion, New Zealand earthquake $13 billion, and the Japan earthquake $37.5 billion, adding up to a total $81.8 billion loss of capital.

We’re observing another unforgiving aspect of a global economy. Industry accident year combined ratios are continuing to deteriorate, positive loss reserve development is reversing and we might as well become accustomed to functioning in a low interest rate environment. This market signal is unmistakable.

Message Discipline

The signs of a firming market appear to be driven by a combination of firming reinsurance terms and U.S. insurers deciding they need more rates across their entire risk portfolio. The challenge is translating strategic underwriting intent into consumer education. How this is internalized and executed at the field underwriter level is anyone’s guess. If what the agents are telling me is true, there is a need for greater message discipline.

There is also a sobering cost to inaction. Rates will rise and business will change hands. There will also be increased tension between agents and those companies who lack the front line communication skills to facilitate a meaningful transition. Hard skills matter in our business; soft skills matter even more during times of change.

Independent agents have already begun making assessments of carrier relationships and have strong contingency plans for addressing deviant behavior head on. They would readily agree that rate nourishment is a good thing, even during tough economic times. They also understand the importance of company partners managing their coastal and RMS-modeled interior aggregates. Understanding this, the underwriting community should ask, “Are we working as partners to protect customer balance sheets or are we focused principally on our own?” The short answer is, both! We cannot be successful over the long term if we don’t balance these seemingly competing objectives.

Regional carriers will play a more significant role in the new market cycle and are sufficiently poised to grow. The leaner, more agile carrier is never deluded into believing that it can exact a regressive tax when only a responsible rate is needed. I predict an inverted food chain scenario in which unbridled rate taking is met with the power of choice at the agency account manager’s desk, then at the point of sale.

About Gerald F. Ladner

Ladner is regional president of State Auto Insurance Cos.’ western region headquarters located in Austin, Texas. E-mail: Website:

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Insurance Journal West March 5, 2012
March 5, 2012
Insurance Journal West Magazine

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