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Insurance Market Trends And Broker Impact

The Council of Insurance Agents & Brokers (CIAB) conducts a quarterly survey of median rate changes among most major property and casualty lines. The third quarter results updated in this report strongly suggest some pockets of stabilization. WFG Capital Advisors conducts its Rate Trend Report using the CIAB’s survey as its historical source for the development of trends.

Summary

Rate increases for the various lines in general began to moderate after spiking in the first half of 2002. Property rates are showing signs of stabilization in the third quarter of 2003 for lines such as commercial property and auto. Casualty rate increases in the double digit percent range are still being pushed through for lines such as D&O and Medical Malpractice. A common theme among all lines through is a reversion towards single digit increases, which would point to a more stable premium rate environment.

The fundamentals of the property and casualty industry have certainly improved compared to the period surrounding the 9/11 terrorist attacks. These attacks provided an impetus for carriers to push through rate hikes in order to shore up their balance sheets and improve underwriting results. It appears though that the pricing cycle for carriers has peaked.

Carrier Impact

Various financial and industry factors have begun to develop that may hinder future rate increases in the foreseeable future.

Improving Capital Markets

The recent rise in the equity markets provides confidence to investors and businesses alike that economic times are starting to improve. As a result, insurance carriers will start to see the financial markets open up, allowing them easier access to raise more capital through means such as offerings of trust preferred securities or stock. As these companies raise more capital, they can become more aggressive in trying to attain new business within the lines they currently compete in or expand to different markets. This increased aggressiveness will likely put a ceiling on any further premium increases due to the increased competition.

Rising Interest Rates

As the economy improves, interest rates should begin to rise and therefore help to increase these companies’ investment income. Companies choosing to increase market share by holding the line on premium increases now should have a cushion from their rising investment income, thereby allowing them to maintain their financial result if they choose to go this route.

Conversely, carriers may face surplus depletion if they opt to follow the market on stabilizing product rates before any material changes in the economy or interest rates occur.

Increased Industry Competition

Now that carriers in general have improved their operational and financial statures with the help of the hard market, they can turn their focus to growing their revenue base and market share. Carriers could begin to cherry-pick competitors’ profitable customers by offering more favorable terms. Pressure on premium pricing will certainly escalate competitive quoting, pushing rate concessions to maintain the most profitable accounts.

Demand-side Pressures

Customers looking to cut costs are exploring different alternatives in order to rein in risk management and insurance costs. Customers may choose to more aggressively shop quotes, or explore greater self-insurance in an attempt to stabilize costs. This will further curtail the price increases carriers can continue to apply.

These factors increase the odds that premiums will begin to stabilize through the first half of 2004. While this does not necessarily mean that a soft market is imminent, future rate increases are likely going to be tempered if they occur at all. Unless an unforeseen, major catastrophic event suddenly shrinks capacity or an economic downturn in the capital markets begins to erode carrier surplus, a return to the rate increases seen in 2002 is unlikely to occur.

Carriers who are convinced that product rate stabilization will have long-term negative implications to their financial position may consider merger or disposition. The risk to many carriers lies in stagnant investment portfolio performance while having to trim product rates in order to maintain market share.

Brokerage Impact

The related effect on the brokerage market will be that they will not be able to sustain revenue “lift” on premium rate increases that they could during the previous years.

There are five main avenues brokers should focus on in order to confront the market obstacles that lie ahead.

Organic Growth

Increasing revenues from the current customer base by offering additional services or by cross-selling ancillary products. Investments in sales and marketing infrastructure could also serve as a means to create additional new revenue opportunities. If the firm possesses a scalable back office platform with plentiful markets, investments in sales would be an appropriate consideration.

Operating Efficiency

Using technology and assessments of staffing proficiency, if appropriate, are necessary to improve productivity and margins.

Joint Venturing

Partnering with peer firms can create a formidable model for many brokers. As with acquisitions, there are numerous synergies that can be made available through the formation of a strategic alliance. Partnering can be an attractive alternative to sale because the owners do not typically relinquish control of their business. This strategy can also serve as a precursor to a succession plan.

Acquisitions

With capital costs remaining very low, employment of an acquisition strategy in order to gain economies of scale and synergies from a business combination may be a very viable option for many brokers.

Agency Sale

If this has been a consideration but delayed, it would be advisable to explore a possible relationship with a transaction partner that can provide capitalization, access to more markets, and a scalable operation. This initiative may also minimize an agency owner’s personal financial risk in the event that rates begin to soften.

Insurance brokers must prepare for a different environment in the year ahead in anticipation of the effects of the insurance pricing cycle. We encourage all agents to consider the above options more closely while evaluating their near and long-term strategies.

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From Market Trends, November 2003, a publication of WFG Capital Advisors LP. Reprinted with permission.

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February 2004