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P&C Agencies Face Fundamental Model Shift

by Precise Leads

June 27, 2017

Can “hard” market agencies continue to thrive in an extended soft market cycle?

In Burand & Associates’ latest white paper, founder and owner Chris Burand argues that so-called “hard” P&C agencies may soon be forced to radically alter their business model. The 13-year-long soft cycle, the longest charted since 1900, shows no signs of reversing any time soon. “Net premiums written (NPW) growth has not exceeded 4.4% once in that time,” Burand says. “Looking forward, growth is not likely to accelerate. Growth is likely to decrease even further. This long and deep soft market has far-reaching impacts.”

To thrive in this extended soft market, hard market agencies must emphasize something these outfits have traditionally failed to do well — proactively expand sales, Burand says. Revving up sales offers a way for hard market agencies to compete and grow in a soft market cycle.

Soft Market vs. Hard Market

In the not-so-distant past, the P&C insurance market typically shuttled between soft and hard markets. Each cycle exhibited vastly different characteristics: soft market agencies offered lower premiums and relaxed underwriting standards, which enabled them to grow and outpace hard market agencies during a soft market.

Hard market agencies, meanwhile, followed the opposite path, sticking to more stringent underwriting standards and charging above-market prices. During tougher times, when the industry registers a greater number of insolvencies and downgrades, hard market agencies kept their accounts — at higher premiums — because they worked with carriers still able to underwrite in a hard market. That meant hard market agencies weren’t forced to compete for clients; clients came to them.

“[Hard market agencies] generally also made much more contingency money because hard market agencies tended to be better upfront underwriters,” Burand explains.

Inevitably, a soft market swings to a hard market partly due to soft market agencies’ overly lax underwriting. Huge underwriting losses due to catastrophic events or an extended economic slump with low interest rates also shift a market from soft to hard. This leads to a “hard” correction that is ultimately reflected in higher rates and less coverage written.

A Soft Market Forever?

But several factors have interrupted the soft-market-then-hard market historical pattern. Typically, a soft market morphed into a hard market when industry profits and surpluses dipped. Yet, as Burand points out, carriers have racked up profits every year since 2002, with the average profit during the past 20 years reaching $37 billion on both pretax and net income basis.

At the same time, insurers amassed a record-high surplus level in 2016. “With so much surplus, and so much profit, the probability of the market remaining soft, even getting more soft, is far higher than the probability of it turning hard,” Burand predicts.

Burand further cites new predictive modeling and behavioral pricing formulas that, in essence, negate the upfront underwriting and data agencies once provided to the carrier. This puts agencies at disadvantage, particularly hard market ones.

Technology, too, plays a role in this fundamental shift in the insurance market. Water leak sensors, worker safety wearables, and auto telematics significantly reduce claims and boost insurers’ bottom lines. “The issue is, when claims decrease, premiums eventually decrease, [yet] companies need growth,” Burand says.

For hard market agencies not accustomed to pushing sales and aggressively sourcing new clients, growing in an extended soft market presents a unique challenge. “They have to reinvent themselves,” Burand says. “If an agency cannot generate material organic growth, it probably will not survive.” Now will be a time for these agencies to seek out new methods of drawing in new business, or risk succumbing to unpredictable market forces.

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