Those who believe that death and taxes are the only certainty need be reminded that a soft insurance market always follows a hard market. Accordingly, insurance agents need to consider the future while still focusing on the present.
GROWTH STRATEGY REVIEW
Tactical and positioning strategies
By G. Edward Kalbaugh
The underwriter now sits in the catbird's seat, selecting the best risks while imposing immorally high premiums and limiting conditions regardless of favorable risk profiles, and past performance.
Those who believe that death and taxes are the only certainty need be reminded that a soft insurance market always follows a hard market. Accordingly, insurance agents need to consider the future while still focusing on the present.
Since September 11, more than $30 billion in capital has left the global insurance market balance sheet after taxes. Some additional capital has been formed in Bermuda, but most of that capital has been allocated to catastrophe, reinsurance and specialty risks. The lack of capital for standard risks is exacerbated, especially in the United States, by market losses sustained from the dot-com meltdown.
With lack of new capital, uncertain investment returns and diminished balance sheets, insurers are left with underwriting as the only way to recover losses.
This simple supply and demand situation favors the underwriter, who now sits in the catbird's seat, selecting the best risks while imposing immorally high premiums and limiting conditions regardless of favorable risk profiles, and past performance. And the insured is forced to pay the premium and/or self-insure, and then pass the cost to the consumer. In some cases, the company may simply go out of business.
Those agencies that find markets to cover the risks of their clients are rewarded with high commissions. But agencies that cannot find markets are losing clients and the opportunity to grow their business.
All agencies are at risk in a hard market. As trusted intermediaries, agents are vested with total responsibility for the insurance needs of their clients. For the most part, insurance companies remain transparent.
Accordingly, agents must take steps to protect their interests now and in the future. Following are some tactical and positioning strategies to consider.
Protect your name--Remember, your "brand" is created by the sum experience of your clients and others who interact with your agency. In a hard market, it may be tempting to sit back and enjoy the rewards of higher premiums. However, your clients are suffering.
You need to ensure that clients continue to perceive you as a trusted advisor, making best efforts to assist in every way possible. This means that you need to be in continuous communication with clients, working with them to finance premiums, or to find ways to reduce risk, especially self-insured risk.
For example, one of our agency clients has developed for contractors a discounted legal service that helps reduce costs. While the service provides no revenue to the agency, it helps sustain a strong relationship with the contractors that will carry forward past the hard market.
Empower your staff--The cliché "knowledge is power" has more meaning now than ever. Knowledge is what enables your agency to differentiate itself from others and achieve success, especially in a hard market. And knowledge resides with your people. Provide education and training if required.
Some agencies are taking a different approach by actively recruiting insurance company underwriters to capture this particular knowledge so it can be applied toward helping place business.
Work with your underwriters--While a particular underwriter may be the person you love to hate at this moment, that same underwriter will need your business in the future. Your professionalism in presenting and dealing with the issues is an important factor in making the relationship work. Don't fall into the trap of blaming the underwriter for insurance company policy. Find ways to help the underwriter do his or her job. Most underwriters want to write good business, not turn it away.
Seek new markets--You can never have too many markets. For the most part, the only agencies that complain of too many markets are those that cannot sell to that level of capacity. This does not mean that you should keep all markets all the time. On the contrary, you should continually balance your portfolio among markets to take advantage of opportunities.
Keep in mind that insurance companies want to take advantage of the hard market while at the same time "positioning" for the soft market. For example, one of our client agencies is currently negotiating with an insurance company to roll over a fairly large book of business. This is part of a positioning strategy within a market segment for this particular insurance company.
Work with market providers--One of the most important market providers is the wholesaler. Many small agencies depend on wholesalers for most of their market needs. Larger agencies tend to view wholesalers as the choice of last resort. Insurance companies tend to endure a love/hate relationship with wholesalers. The fact is that wholesalers play an important role in the insurance distribution system and are an essential part of mitigating the impact of a hard market.
You need to find ways to develop closer relationships with wholesalers in order to help wholesalers maintain market relationships. That, in turn, enables the wholesaler to offer better commissions to the agents.
The problem for wholesalers is a classic catch-22. The wholesaler needs more premium with one company in order to achieve better commissions, but too much concentration exposes the wholesaler to risk if the market is lost.
Invest wisely--Those of us who remember the last hard market also remember the sad tales of excess spending and misguided ventures that left many agencies ill prepared for the soft market when it came. It is important to plan for the future soft market when making any long-term financial decisions.
Summary
You should use every tactic available to benefit from the hard market while at the same time properly positioning for the future soft market. Those agencies that are able to achieve this balance will be in the best position to create and take advantage of opportunities. *
The author
G. Edward Kalbaugh is a partner with Allegent Growth Strategies, a full-service consulting firm specializing in services to the insurance industry. Allegent is located at 100 Crossways Park Drive West - Suite 104, Woodbury, NY 11797. Telephone (516) 364-7034, fax (516) 364-7036, e-mail: info@allegentgsi.com, Web site: www.allegentgsi.com