First, when you see mutual companies reorganizing to gain better access to capital, this generally means they’re out of operational surplus. It might also mean executives have figured out this might be a way to make a lot of money. Based on the carriers reorganizing, my assessment is most just need an influx of capital because they’ve lost so much surplus.
How did they lose so much surplus? Every carrier’s story is unique but quite a number incurred huge investment losses when interest rates increased but they weren’t smart enough to slow premium growth quickly, thereby causing their leverage ratios to increase too fast and too high. For others, they probably should never have been in the property reinsurance business. For some, it is bad luck. For others, they lost track of how to underwrite. And for most, it’s some combination of these factors. But, it’s not global warming and it’s generally not catastrophic claims or whatever other excuses are being pedaled. In summary, it’s mostly a management problem.
Second, the NAIC really needs to ban any new companies from including the nom de guerre “Universal” in their name. Seriously, how many “Universal Insurance” companies does the industry need. It’s bad marketing too because with so many “Universal” insurance companies, branding is impossible. It’s like if every fifth hamburger joint was a McDonalds this or that. Maybe the naming is also indicative of underlying strategy issues too. I’m not sure. But we don’t need any more insurance companies, or agencies, with “Universal” in their names.
Third, sort of like mutuals needing to reorganize, there’s been an exponential increase in reciprocals.
I find few agents understand reciprocals and few insureds understand them either. (This topic deserves a full article or white paper, rather than a few short paragraphs in a newsletter.) Reciprocals get what amounts to a kind of free capital contribution. For example, if a quality stock carrier raises capital, investors will want a return on their investment of probably around 12%-14%. Or if they borrow money, they’ll pay interest of 5%-8% (unless they’re weak and borrowing through surplus notes where the interest rate might exceed 10%). Regardless, money cost money.
But with a reciprocal, the policyholders are effectively giving the insurance company capital for free. And if the carrier fails, the policyholder has no debt protection and if the carrier sells itself for big dollars (unlikely but possible because it has happened recently), the policyholders get nothing. Money for nothing!
But the policyholder can find themselves obligated to contribute even more free money! Agents: I hope you understand what you’re selling and advise your clients well.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.
None of the materials in this article should be construed as offering legal advice, and the specific advice of legal counsel is recommended before acting on any matter discussed in this article. Regulated individuals/entities should also ensure that they comply with all applicable laws, rules, and regulations.
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