Beyond Insurance

By F. Scott Addis, CPCU, CRA, CBWA, TRA

HARD MARKET: HAVE A PROACTIVE PLAN

You don’t need to be a deer in the headlights as today’s market shifts

In 1986, I was an account manager with Johnson & Higgins (now part of Marsh USA). Although I had eight years’ experience in overseeing the insurance and risk management needs of hundreds of Philadelphia-area middle-market businesses, I was ill equipped for the deep, dark, hard market that crushed our country in the mid-1980s.

While I had my CPCU designation and was technically competent, I had not been schooled on how to deal with an industry tsunami—the hardest market the industry had ever seen. Psychologically, emotionally, and tactically unprepared, I was a deer in headlights … scared to death as I did not know how to communicate with or tackle the issue for the clients I loved.

Tune up loss runs, scrub loss data, challenge reserves, study risk control reports. Identify a strategy to demonstrate risk profile improvement.

How severe was this hard market? So severe that the cover of the March 24, 1986, issue of Time magazine read: “Sorry, America, Your Insurance Has Been Cancelled.” Consider:

• In 1984, Brine—a U.S. maker of lacrosse equipment—was paying $8,000 annually for $25 million of product liability insurance. In December of that year, William Brine, president and chief executive officer, received notice that his premium would increase to $200,000 for just $1 million of protection.
• Armada Corporation, a Detroit automotive exhaust systems manufacturer, had carried $10 million of liability coverage for its 10-member board and 28 corporate officers. In November 1985, Armada was advised that its premium would increase from $45,000 to $720,000. Armada refused to pay. Fearing exposure to litigation, eight board members, including the board chair, resigned.
• Red Blazer, a restaurant in Concord, New Hampshire, saw its premium rise from $1,000 to $12,000. To invite the public to share its pain, Red Blazer and 400 other New Hampshire bars sponsored Unhappy Hour, in which a Heineken beer cost $14.75 rather than $2.25 and a Beefeater’s martini cost $40. Their customers got the message.

The Time article stated, “In the best of times, property and casualty insurance insurers rarely make money on underwriting. Most of their profits come from investing the premiums they collect. Five years ago, when the prime interest rate hit an incredible high of 21.5%, such investments paid off very, very well.

“Then the bottom fell out. Interest rates began tumbling in 1981, with the prime hitting an eight-year low of 9%. Underwriting losses have ballooned. Some 40 liability insurers have become insolvent in the past two years.”

I had learned my lesson. I had experienced the turbulence of the mid 1980s hard market and would be prepared the next time it came around.

The next hard market

In preparing this article, I pulled my “historical hard market file.” It led me to the plan that I put in place when the market hardened from 2002 to 2007. Although this tightening was not as severe as that of the mid-1980s, rate increases created significant pain through all segments of the U.S. economy.

On September 9, 2002, I sent a letter to all clients of The Addis Group, educating them on the reasons for the hardening market and explaining the proactive stance we were taking on their behalf. I included research findings of the Insurance Services Office (ISO), National Council on Compensation Insurance (NCCI), A.M. Best, American Medical Association (AMA), and The Council of Insurance Agents and Brokers (CIAB).

We sent our clients the Council’s Quarterly Market Index every quarter over the next five years with a cover note. We also prepared flip charts and PowerPoint presentations to inform our clients of the actions we were taking to mitigate rate increases.

What additional actions did The Addis Group take to help our clients weather this hard market? Because I had seen the pain, fear, and uncertainty of my J&H clients 18 years before and had the scars to remind me, we designed a Hard Market Planning Guide. It contained:

• Historical information and the reasons for market shifts
• CIAB Quarterly Market Index
• Data on every key client, including loss ratios, response to risk control recommendations, historical pricing, and carrier loyalty
• Documented risk profile improvement initiatives for each client; we asked each client to provide them
• Completed service plans and stewardship reviews so we could convey to the underwriting community why our book of business should be given special consideration
• Timing and frequency of meetings with key carriers to understand their underwriting positions on classes of business as well as risk verticals
• Inclusion of underwriting teams in service plans and stewardship reviews with clients
• Pre-renewal strategy sessions at 120 rather than 90 days before renewal, supported by agendas and action plans
• Plans B and C if the incumbent carrier took a position that was not logical in our eyes and those of our client

Our plan worked to perfection. During the early 2000s, The Addis Group had 100% key client retention. We also picked up a significant number of new clients because the incumbent agent or broker did not have a results-oriented plan or the ability to settle their nerves.

The 2020 firming market

Because market cycles differ, it is imperative that you understand the dynamics behind a firming market. Today’s hardening market has occurred for reasons different from those in the 1980s and early 2000s. According to Deloitte’s 2020 Insurance Outlook, some of the rise in U.S. net written premiums can be attributed to changes in reinsurance purchasing strategy.

Commercial lines rates rose 6% in the second quarter of 2019, according to Marsh’s Global Insurance Market Index—the seventh consecutive quarter of price hikes. Although rates are increasing in the commercial property and casualty market, Fitch Ratings does not expect the trend to lead to a hard market. Fitch states that the current market will experience “considerable profit challenges,” noting that the industry’s combined ratio was 99 in 2018 after a 104 ratio the year before, which was driven by catastrophe losses.

The property, automobile, and liability segments in particular will continue to be under scrutiny with upward pricing pressure. Rate increases in the financial and professional liability areas are being driven by escalating securities and derivatives suits. Property increases are a result of higher disaster losses over the past few years.

How to navigate a hardening market

As it has been almost 15 years since we last experienced a hard market, you may have not weathered a storm brought on by market constriction. I recommend five strategies:

Strategy 1—Market Dynamics. Understand as much as you can about changing market conditions. Why, where, when, and how. Collaborate with underwriters; study market data and trends. Ask questions about why the marketplace is changing. Communicate with clients to help them understand the market outlook and see you as a trusted risk advisor.

Strategy 2—Account Performance. Know the underwriting performance of your book, including each individual account. Tune up loss runs, scrub loss data, challenge reserves, study risk control reports. Identify a strategy to demonstrate risk profile improvement. Be prepared to tell underwriters a story about why each client is “best in class.”

Strategy 3—Pre-renewal Strategy Sessions. Move these meetings up a month. Prepare like you have never prepared before. When you arrive in your client’s office, present an agenda that includes account performance, underwriter’s renewal position, and strategies to achieve a positive outcome. Most important, understand your client’s mindset.

Strategy 4—Treat Underwriters Like Gold. In a firming market, underwriters have a difficult job. Take time to understand their world and see through their eyes. Where possible, present your client’s renewal information in person at their office. Show gratitude, compassion, and appreciation.

Strategy 5—Stewardship Reviews. While a stewardship review at the six-month point of the renewal process is a wonderful strategy in all market conditions, it takes on added significance in a changing market. The review demonstrates your dedication to your client, your desire to deepen knowledge, and your interest in risk profile improvement, and it allows you to communicate industry trends. A well-done stewardship review will eliminate surprises, enhance relationships, and keep out renewal competition. It also serves as the first step of the renewal process.

Although you do not have a magic wand to control market conditions, you do have the ability to build a proactive plan to navigate. Safe travels!

The author

Scott Addis is CEO of Beyond Insurance and an industry leader. His agency was recognized by Rough Notes magazine as a Marketing Agency of the Month, he was a Philadelphia finalist for Inc. magazine’s “Entrepreneur of the Year” award, and he was selected as one of the “25 Most Innovative Agents in America.”

Beyond Insurance is a consulting firm that offers leadership training, cultural transformation, and talent and tactical development for enlightened professionals who are looking to take their organization to the next level. Since 2007, the proven and repeatable processes of Beyond Insurance have transformed agencies as measured by enhanced organic growth, productivity, profitability, and value in the marketplace.

To learn more about Beyond Insurance, contact Scott at saddis@beyondinsurance.com.