The End is Near...
Posted by Robert Phelan on Tue, Mar 30, 2010 @ 03:02 PM
Anyone who has been buying commercial insurance for more than ten years knows that it is a cyclical business. Although the cycles aren't always the same, we usually have a sharp turn upward (the 9/11/01 catastrophe was the last time) followed by 5 to 10 years of softening prices. Since the softening started sometime in '03, we are now in the 8th year of a soft market. Insurance pricing usually gets craziest toward the end of a cycle and I'm just back from the insane asylum with late-breaking news.
But first for some context. I need to tell this story but I can't name names. However, I can say that the world of insurance agents & brokers is separated into two groups. The first group is comprised of organizations like mine; local and/or regional businesses that live in the community, go to rotary and serve their neighbors and friends. The second category is commonly referred to as the "national brokers". They are national or international in the scope of their operations and focus on large national/multi-national companies like themselves. From time to time, the national brokers go local and that's where my story gets interesting.
In a one week period this month, I witnessed two of the largest international insurance brokers acting as irresponsibly as a first year trainee. They proposed an annual program of insurance to substantial mid-sized companies (paying $300,000 to $500,000 per year for insurance) on a single sheet of paper. Both were at a significant discount to market and neither broker provided any information about what they were covering and services being provided. Just a one page premium summary.
It gets better. One of these clients has over $10M in outstanding claim reserves. That is probably more than all the reserves of all the companies in my whole office.
No responsible business owner should ever, ever, ever base their insurance buying decision solely on price. Would you buy a car without driving it? Would you buy a computer if you didn't know the specs of what's inside? Would you buy a TV without looking at the picture and checking the resolution of the picture? No one would base these buying decisions solely on price. Yet, successful business people will buy the one product which secures their economic livelihood and they will base the decision on price alone.
When sellers and buyers of insurance begin to act irrationally, the cycle is nearing its end. The national brokers can't grow but are publically owned and responsible to their stockholders. Most insurance companies are the same. They'll do anything to put another dollar on the books.
Sometime in the next 12 to 18 months profits will collapse, insurance company bankruptcies will be front page news and the cycle will turn. Will you be ready? My next post will explore ways to prepare for the coming hard market.