Obstacles or Opportunity?

The insurance industry is coping with some serious issues. Pessimists probably view these issues as obstacles. But I’m an optimist and contend that the circumstances represent an enormous opportunity for agents who are positioned to take advantage of them.

For the last three years, insurance companies have been struggling to stop the red ink flowing from automobile insurance. As gasoline prices got cheaper, Americans started driving more. Inevitably, as people drive more, the more that wrecks will occur. Insurance rates are determined by the severity and frequency of wrecks. Modern equipment on motor vehicles, such as back-up sensors, cost more to repair or replace, which affects insurance payouts, which affects customer insurance premiums.

Meanwhile, commercial property losses have been mounting, too, and liability claims have been slowly eroding profits. For several years we’ve experienced weather that nobody understands. Weather patterns have changed dramatically.

In Oklahoma, for example, we are not having as many tornadoes and hail storms we’ve grown accustomed to having each year. Instead, those storms are moving to the east and south of us. Tornadoes, hurricanes, hail and floods have become more widespread and more catastrophic over the last five years, and the West has had more disastrous fires. That level of destruction was not anticipated when insurance rates were set.

These factors have combined to drive up claims costs for personal and commercial insurers. A typical insurer needs eight cents to 10 cents on each dollar of premium to turn a profit. However, claims have grown more expensive, costing insurers $1.06 to $1.10 per dollar of premium to cover. As a result, insurers have had to raise their rates – and we’re probably not quite through with those hikes yet. This has led to a substantial increase in premiums.

This has led to a substantial increase in premiums. Today, less property insurance is available in Oklahoma. Insur- ance is harder to acquire, and what insurance is available costs more.  In the U.S. we’ve been in a “soft” market for property insurance for about two decades, but now we’re entering a “hard” market in commercial insurance. This market provides an amazing opportunity but it may also represent a danger. This will be the first hard market in commercial lines since about 2002, so it’s certainly unusual.

Here’s what’s going to happen between 2020 and 2021: Carriers are going to seek and insist on rate increases and are going to non-renew marginal business. Insurance is impacted by supply and demand like every other product; with less capital to invest, or supply, carriers will restrict what and how much they write. Carriers are also going to shrink their underwriting appetite. This means they’ll stop writing some kinds of business. Carriers will cancel contracts for agencies that aren’t profitable, or who are marginally profitable or who don’t give them the flow of business they want.

Insurance buyers will start shopping their coverage more than they typically do. This will increase workload in agencies and will lead to lower retention rates impacting profitability. Also, agency loss ratios will be somewhat impacted as the new business runs higher loss ratios. This risk may be mitigated by higher premiums, but only if the book is well managed. This takes additional time and money. Most of those things represent a business risk to an insurance agency. They also represent an enormous opportunity for agents who are positioned to take advantage of them.

A hard market is the best time to get into the commercial lines business or to grow a commercial lines book of business. Simply put, there will be a lot of volatility in the market driven by all these things I’ve talked about, and especially by frustrated insurance buyers shopping their insurance. One more thing that will drive buyer behavior is that the underlying rating basis for their coverage continues to go up due to a strong economy, which magnifies the rate increases they experience.

Here are some things for agents to think about in terms of positioning yourself to maximize the opportunity that the hard market presents. Play defense: Get in front of this issue with your clients. Tell them what’s coming and what you’re going to do to minimize the impact on them. Shop all of your clients with all of your available carriers and give every client options.

Consolidate your commercial lines into fewer carriers. This protects you. Increase your marketing to commercial lines prospects. They’re going to be frustrated, angry, confused or some other negative thing as this hits. Lots of agents are lazy and won’t be doing the right things for their customers. Take advantage of the opportunity.

(Tony Caldwell is the chief executive officer of One Agents Alliance (OAA), which partners with 181 insurance agencies in Oklahoma, and other states. He also is a former member of the Oklahoma House of Representatives.