My research suggests insurance companies are in far more trouble than is being made public. Just think about these recent actions taken by insurance companies:
A $10 million book with a 32% five-year loss ratio “must be moved”.
A $7 million book with a 37% loss ratio that was so bad, so horribly bad (satire here), that the carrier could only afford to write it directly (although it did not appear like they wrote it directly because of the hidden ownership of the agency to whom they wanted it moved).
A statewide book with a 42% loss ratio that needs a 20% rate increase.
What other industry, besides banking for similar reasons, throws away multi-million-dollar revenue streams with 25% profit margins and ROIs that exceed 20%? Only two explanations exist, and both are plausible. The first is sheer stupidity, which is the cause in some of these scenarios.
The second though is desperation. The three carriers noted above, based on my financial analysis, are in such severe trouble, they must eliminate premium to the point that their reduced surplus becomes adequate. In other words, instead of raising capital, which they cannot do in the short term, they must reduce premium to attain an adequate surplus to premium ratio.
They cannot tell agents this. So they develop some of the most cockamamie explanations possible leaving agents wondering if the carrier executives have lost their minds. I feel for one or two of these carrier executives who know what they’re saying is ridiculous and their morals are such they really struggle with the rationale they are giving.
Like a bank, an insurance company requires $X of surplus (defined as: an estimate of the amount by which an insurance plan's assets exceed its expected current and future liabilities, including the amount expected to be needed to fund future benefit payments, per lawinsider.com) to support $Y of premium.
Those assets vary significantly from company to company, and within an individual company, they vary in quality. It is a myth that insurance companies must maintain their surplus in high-quality bonds, high-quality stocks, and cash. Some carriers invest heavily in junk bonds as an example.
Let’s assume though for the following example that this carrier’s surplus is all high-quality pure cash (which it never is):
A carrier (I am using real numbers here) has $1.5 of surplus supporting $1 in premiums. What virtually no carrier seems to publish in press releases is that quite a few lost 10%-25% of their surplus in 2022 due to bad investments. Investment losses were far worse than any increase in claims for many carriers, but some who lost their investments also had high loss ratios too. These carriers are really hurting.
The example company’s surplus, after investment losses, is now $1.13, but rates increased 10% so premium is now $1.20. That is a huge reversal in their surplus to premium ratio. This company cannot likely survive without fixing that ratio. They have three choices:
Raise capital to increase surplus and they can generally achieve this through these primary methods:
Sell equity
Borrow money
Buy reinsurance
Reduce premiums
Achieve some combination of the first two options
Capital in all three forms (equity, debt, reinsurance) is expensive today and who wants to invest in an insurance company needing to shrink significantly? Growth then must be below 0% to survive. Eliminating profitable books is not smart, but an act of desperation. To eliminate such profitable books is a red flag as to how desperate the situation is.
The executives that do not understand the root of the problem, a problem that has been building for years and that I predicted with high accuracy carrier by carrier years ago, will likely screw it all up again. One such executive told me, “But we have $100 million in cash.” And I said, "but you lost $500 million." He will make the same mistake again if he does not retire first. But my point might be my envy. I looked up his salary. I wish I was paid that much for losing $500 million. He must be right.
Other carriers will learn from their mistakes and some did not make these mistakes. They are in the proverbial catbird’s seat. They are in an enviable position that will give them a permanent increase in market share.
If you are running an agency or brokerage, what do you do? I consult for many agencies and brokers specific to this question. Often the first response to my initial suggestion, to eliminate weak carriers, is that producers do not care if a carrier is strong or weak. They just sell price, so why bother addressing these points?
It’s time to be a leader. Are you leading the agency or following your producers? A leader is going to lead the agency/brokerage in a direction that partners with strong vendors providing value beyond the next sale. Control how and where business is placed. Focusing on the stronger carriers is better for your clients too so your interests are aligned with your clients’ interests.
Your producers are selling price with weak carriers for one of four reasons:
The producer is incompetent relative to coverage and quality.
They are lazy.
Management lets them get away with putting themselves ahead of the welfare of their clients and the agency.
It's the only carrier left!
How are any of the first three reasons good other than building something for someone else to clean up? Unless the agency itself is desperate.
Agents contribute to the inanity of carriers by placing business with carriers lacking strong operating surplus (not solvency surplus, which, simplistically, can be created by eliminating good books of business).
This market is going to weed out some carriers and the best returns are to align with the strongest carriers even if you must force your producers to do so. I encourage you to be the leader your organization needs to align with the future.
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.