Editorial: Say goodbye to the cash cow

For those of us with colleagues and friends working in primary carriers and at reinsurers, last year was a painful reminder of the fragility of the market as loss ratios crept up past 106% (if you strip out commercial insurance), and claims costs rose to record levels. As a result, many P&C carriers had to take a good, long, hard look at how they were (and are) conducting business.

The mantra that led this introspective examination was sustainability. And the conclusion was a more disciplined underwriting process.

One step removed from this financial fallout were brokers who continued to conduct business in the best possible way: By finding and capitalizing on market and customer efficiencies; by building relationships; and by defining the broker value proposition.

It was a strategy of riding out the financial turmoil–a strategy that has worked in previous soft-to-hard-market cycles. This time, however, this wait-and-see strategy is not enough. Not according to Ross Totten and Joel Baker–both of whom spoke at the recent Cookson Walker Crystal Ball event.

According to Baker, president and CEO of MSA Research Inc., “property lines are no longer a cash cow,” with carriers “losing on both property and auto,” prompting loss ratios to climb dramatically between the third and fourth quarter in 2009.

“The reason why brokers should care [about] poor loss ratios,” says Totten, president and CEO of Totten Insurance Group, an insurance intermediary, “is because brokerages will start to suffer as insurance companies have less tolerance for brokers who are not making money.”

Last year’s losses prompted carriers to let go of unprofitable lines, says Totten, meaning “entire lines are being dumped: by broker, by geography, or by line, but it is happening.”

Is there a silver lining? Absolutely.

“Independent brokers, with their flexibility in the markets, have an advantage over agents and direct writers,” explains Totten. “In particular, agents and direct writers don’t have access to the entire market–this is why brokers have the advantage.”
As such, brokers need to focus on:

  • Strengthening select current carrier relationships;
  • Building intermediary relationships, so that non-standard business can still be quickly and adequately placed;
  • Developing customer segments and then developing business practices around those segments; and
  • Increasing knowledge and exposure in insurance classes you are unfamiliar with, thereby developing new, and hopefully profitable, lines of business.

If the goal is to stay profitable, then the strategy must be to accentuate your value proposition–the importance of your role in that insurance transaction. Ask yourself: “What value do I offer?” If you don’t like the answer, neither will your client.

Romana King,
Editor Canadian Insurance magazine

Originally published in Canadian Insurance Business Magazine, April 16, 2010