Soft Market Challenges

Soft market conditions could last for another nine months to five years, predict representatives from the agent, broker, carrier, reinsurance, and excess and surplus lines sectors of the insurance industry.

“I anticipate that we are going to continue the downward slide for another three years, hopefully bottoming out by the fifth year or so,” said Mike McCall, executive vice president of Swett & Crawford. Noting statistics he had gathered from several research sources, McCall said, “What we have seen in the past trending wise, as far as a soft market cycle, is that it lasts anywhere from four to seven years, so [the prediction of ending in] five years is pretty much on track in that time period.”

Traditionally, the last three hard markets changed when combined ratios hit 115 percent, McCall noted. “Last year, the combined ratio was at 96 percent, so we’ve got quite a ways to go before we hit a low point.”

Mike Miller, CEO of OneBeacon Insurance Co. agreed the soft market may last several more years. Leading up to 2008, he said the industry saw a buildup in surplus, which led to more financial strength in the industry and more competition, eventually creating the soft market. “As I look out to the next three to five years, I think we will again in this industry, as we have done in the past, reduce the surplus in the industry and the business will become less profitable again,” he said.

As this happens, Miller said, many property/casualty companies are facing a combination of worsening underwriting results and lackluster investment returns, given general economic conditions. Thus, he said companies will begin to focus more on underwriting results.

“These are the kind of years that will distinguish companies that are truly underwriting companies, because the pressure is going to be there inevitably on the rates, and so understanding risk selection and your own profitability levels are critical.”

Rob Reader, managing director of Guy Carpenter & Co. Reinsurance, said he is “a little more optimistic” about when the industry will come out of the soft part of the cycle because he believes the capital the industry built up during the past two years could be deployed better. Businesses are losing jobs and downsizing, which is not positive, he said. “Hopefully, we’ll do a better job of managing and deploying that capital in the world economy to protect businesses during the course of some price declines.”

As the insurance industry evolves through the soft market cycle, there will be more company consolidations and acquisitions, Reader, McCall and Miller predicted.

“We will see smaller companies going insolvent, not being able to keep up with the market,” Miller said. Yet one of the positive aspects of the soft market is that it creates competition, innovation, and companies will find ways to operate much more efficiently with new technology, he said. “And at the end, things will turn around and the industry will be much stronger,” he said.

Paul Hering, CEO of Barney & Barney, suggested agents and brokers look at their operations from a micro and macro perspective when trying to figure out how to survive the soft market. The micro perspective looks at what the business is doing relative to clients; the macro perspective looks at what the business is doing from the perspective of the CEO to position the organization for the future, he explained.

From a micro perspective, Hering recommended agencies form great relationships with their key clients. “Make sure you are executing on the service aspect to clients, delivering on the promises you made,” he said.

As agencies build relationships with their customers, there are more opportunities to up-sell, such as selling additional limits. Agencies also can cross-sell other products and services to clients.

“Clients want to buy from people who know what they are doing and know what they are talking about. And if you know more than your competitor and can bring value to your client, you have a chance to differentiate yourself in the marketplace,” he said.

Hering also suggested agencies reward incumbent carriers by building relationships between clients and carriers. “That pays off in the long-run with renewal negotiations and also builds client loyalty to a particular carrier.”

Miller agreed relationships with carriers are key. “These times truly test companies, and you find out what relationship you have with those you consider partners,” he said, “because, quite honestly, we have limited time and resources to focus on. During these times, smarter companies will focus on the companies and relationships they believe are trying to do business in the same way, from their vantage point, and the right way.”

Reader suggested reinsurers be considered agency partners, in that they can provide a perspective on the marketplace and in certain lines of business, through analytics, help agencies to look at their books of business and see which are above and below average from a risk-bearing perspective.

When looking at how to survive from a macro point of view, selling other lines, such as employee benefits, has helped Barney & Barney diversify its business, Hering said. Writing new business, as well as investing in new talent, also help.

“One way to make up for account shrink and the soft market is by writing new business,” he said. “If you’re investing in your business, hiring new talent, that’s your pipeline to production to new business.”

Investing in great talent is key to surviving any market cycle, the others agreed.

“The way things are moving with technology, companies need to have a greater knowledge base to respond quickly,” McCall said, noting companies need to aggressively seek talent because college students don’t often think of insurance as a worthy profession.

Nevertheless, now is a terrific time to recruit talent to the insurance industry because other financial industries that typically compete against the insurance industry for talent are in disarray and have had to cut their recruiting and training programs, Miller said.

Providing training for existing employees is also necessary, especially at a time when companies are trying to motivate employees to produce more with fewer resources, Hering said. “Yes it’s a soft market, but the market is the market. We need to carry on and survive,” he summarized.

Hering, Miller, McCall, and Reader were speakers at Insurance Brokers and Agents of San Diego’s I-Day.